Chapter 1

Investment Scenario
Savings and Investment Two sides of a coin

What is Investment?
Investment is the employment of funds on assets
with the aim of earning income or capital
appreciation
Investment has 2 attributes
Time
Risk
Present consumption is scarified to get a return in
the future
Investment is a placement of capital in
expectation of deriving profit

Investment Objectives

Main objective are increasing the Rate of return &

reducing the Risk
Liquidity

Investment could be converted into cash without much

loss of time

It depends on marketing & trading facility

Hedge against inflation

Rate of return should ensure a cover against the

inflation
Safety

Investment avenue should be under the legal &

regulatory frame work along with the safety of the
principal

Investment Attributes
To enable and a reasonable comparison of various investment avenues,
the investor should study the following attributes.
Rate of return: The rate of return comprises of two parts i.e annual
income and capital gain or loss.
Risk: The risk of an investment refers to the variability of the rate of
return. It is the deviation of the outcome of an investment from its
expected value.
Marketability: It is desirable that an investment instrument be marketable.
Taxes: Some investment instruments provide tax benefits while other not.
Convenience: The degree of ease with which an investment can be
made and managed.

INVESTMENT CONSTRAINT
Liquidity
Age
Need for regular income
Time horizon
Risk Tolerance
Tax Liability

speculation
Involves buying & selling activities
with the expectation of getting profit
from the price fluctuations.
Interested in getting abnormal return
Speculator is more interested in the
market action & its price movement
Line b/w speculation & investment is
very thin

INVESTMENT VS. SPECULATION

Investor

Speculator

Time
horizon

Plans for a longer time

horizon. His holding period
may be from one year to few
years.

Plans for a very short

period. His holding
period varies from few
days to months.

Risk

Assumes moderate risk.

Willing to undertake
high risk.

Return

Likes to have moderate rate of Like to have high

return associated with limited returns for assuming
risk.
high risk.

Decision

Considers fundamental factors

and evaluates the
performance of the company
regularly.

Consider inside
information, hearsays
and market behavior.

Funds

Uses his own funds and avoids

borrowed funds.

Uses borrowed funds to

supplement his
personal resources.

Safety

He chooses the investment

alternative which has high
degree of safety. Here safety
is primary and return is

Focuses more on return

than the safety.

Security is a generic term that refers to a debt or

equity IOU issued by a borrower or issuer.
- Debt security or bond an IOU promising
periodic payments of interest and/or principal
from a claim on the issuer's earnings
- Equity or stock an IOU promising a share in
the ownership and profits of the issuer

Economic vs. Financial Investment

Financial Investment

A financial investment allocates resources into a financial

asset, such as a bank account, stocks, mutual funds,
foreign currency and derivatives.

financial investments are purchases of financial claims.

This type of investment may or may not yield a return.

Economic Investment

An economic investment puts resources in something that

may yield benefits in excess of its initial cost.
Though these resources still include money, investments
can also be made in time, assistance and mentoring.
Assets are not limited to financial instruments. It also
include buying or upgrading machinery and equipment or
adding to a labor force.
For example: Training given to the employees.

Investment Process:
Investment Process

Investme
nt Policy

Investible
fund
Objectives
Knowledge

Analysis

Market
Industry
Company

Valuation

Intrinsic
value
Future value

Portfolio
Construction

Diversificatio
n
Selection
and allocation

Portfolio
Evaluation

Appraisal
Revision

Stages of the Investment Process

NON-MARKETABLE FINANCIAL ASSETS

BANK DEPOSITS
POST OFFICE TIME DEPOSITS (POTDs)
MONTHLY INCOME SCHEME OF THE POST
OFFICE (MISPO)
KISAN VIKAS PATRA (KVP)
NATIONAL SAVINGS CERTIFICATE
COMPANY DEPOSITS
EMPLOYEES PROVIDENT FUND SCHEME
PUBLIC PROVIDENT FUND SCHEME

FINANCIAL MARKETS
Market where entities
cantradefinancialsecurities,commodities
at lowtransaction costs and at prices that
reflectsupply and demand.
Securities include stocks and bonds, and
commodities include precious metals or
agricultural goods.

KINDS OF FINANCIAL
MARKET

MONEY MARKET
As per RBI A market for short terms
financial assets that are close substitute
for money, facilitates the exchange of
money in primary and secondary market.
A mechanism that deals with the
lending and borrowing of short term
funds.
Asegment of the financialmarket in
which financial instruments with high
liquidity and very short maturities are
traded.

MONEY MARKET
INSTRUMENTS
TREASURY BILLS -- It is an IOU of the
government, a promise to pay the stated amount after
expiry of the stated period from the date of issue.
They are issued at discount to the face value and at
the end of maturity the face value is paid
CERTIFICATES OF DEPOSITS-- These are short
term deposits issued by banks which are transferable
from one party to other.
COMMERCIAL PAPER -- It represents short term
unsecured promissory notes issued by firms that are
generally considered to be financially strong. It
usually has a maturity period of 90 days to 180 days.
REPOS

BONDS OR FIXED INCOME

SECURITIES
Government dated Securities
Savings Bonds
PSU Bonds
Private Sector Debentures
Preference Shares

Bonds or debenturesBonds or
debentures represent long term debt
instruments. This generally comprises of
periodic interest payments over the life of
the instrument and principal payment at the
time of redemption.
Diff b/w bonds & debentures is
Long-term debt securities issued by the
Government of India or any of the State
Governments or undertakings owned by
them or by development financial
institutions are called as bonds.
Instruments issued by other entities
are called debentures.

Types of Debentures
Secured & Un secured debentures
Unsecured have no charges on any specific
assets of the company
Secured carry a fixed or floating charge on
the assets of the company.
Convertible & Non Convertible Debentures
Convertible debentures are the ones which
can be converted into equity shares at the
option of the debenture holders.
Registered & Bearer Debentures
Based on transferability
Bearer/Unregistered are freely negotiable &
can be transferred by simple endorsement
Registered can be transferred only through
Transfer Deeds.

Preference Shares
So called because these have preference over equity
shares in the matter of distribution of post tax
profit,
Have a prior claim on the assets of the company in
the event of liquidation.
In terms of risk, these are less risky then equities,
but more risky than secured debentures
Preference shares are entitled to a fixed dividend,
and cumulative preference share retain their
retrospective claim on dividend when the company
is not in a position to declare any dividend.
Sometimes these shares are convertible into equity
shares after a stated number of years,
When preference shares are redeemable, the
company pays off the shareholder on a certain date,
or issues equity shares of the value,
But when they are irredeemable, the shareholder
gets the fixed dividend in perpetuity or as long as
the company lasts.

Participants and Instruments In Debt Markets

The Structure of Indian Debt Market

Equity Shareholders
They are the owners of the company,
sharing its risks, profits, and losses.
They have a residual claim on the earnings
and assets of a company.
They are paid their share of the companys
profits after all other claims are met, and in
the event of the liquidation of the company
they share whatever is left of the company
after all its creditors have been paid.
They enjoy limited liability, i.e., liability only
to the extent of their shareholding.
Only equity shareholders are entitled to vote
at the companys meetings, thus controlling
the management.
If the company prospers, it is the equity
shareholders who is the greatest gainer.

CLASSIFICATION OF EQUITY SHARES

BLUE-CHIP SHARES

GROWTH SHARES
INCOME SHARES
CYCLICAL SHARES
DEFENSIVE SHARES
SPECULATIVE SHARES
SWEAT EQUITY
Share issued at a discount to employees and directors
Shares issued for consideration other than cash such as intellectual
property, etc

MUTUAL FUND SCHEMES

Mutual Funds A mutual fund represents a vehicle for
collective investment. When an investor invests in a
scheme he becomes owner to the extent of the units
held by him.
Classified as
Open ended & closed ended
On basis of objective classified as
Growth schemes & income scheme
Equity Schemes
Balanced Schemes
Debt Schemes

INSURANCE POLICIES
Endowment Assurance sum assured payable on the
date of maturity or death
Whole Life Assurance-- sum assured payable on the
death & premium payable throughout life
Money Back Plan
Unit Linked Plan
Term Assurance

FINANCIAL DERIVATIVES
A derivative is an instruments whose value depends on the
value of some underlying asset.
Futures A futures contract is an agreement between two
parties to exchange an asset for cash at a predetermined
future date for a price that is specified today.
Options An option gives its owner the right to buy or sell
an underlying asset on or before a given date at a
predetermined price.

REAL INVESTMENT
Land and House Property
Residential House
Commercial Property
Agricultural Land
Suburban Land

Gold and Silver

Precious Stones
Art Objects

Warrant (QP)
Warrant entitles the holder to buy stock of
the company at a specified price, which is
usually higher than the stock price at time
of issue.
They are usually attached to a debenture or
a bond

Sources of Economic and Industry data :

1)CSO
2)The report of economic survey, which is an input
to the Central Govt.s Budget.
3)Weekly Statistical Statements, Monthly Bulletin,
Annual Reports of R.B.I.
4)Non Govt. organizations like CMIE and
Commerce Research Bureau who collect and
present the data related to economy and
industries in capsule form

Sources of Market Data

1)Stock Exchanges Daily Official List
2)Official year
exchanges

book/Directory

of

the

stock

3)Business Newspapers and magazines

4)Reports, Periodical newsletters of the brokers.

Sources of Company Data

Annual Report of the company

Official Directory of the stock exchanges

Business Newspapers and magazines like Outlook

profit, Dalal Street, Capital Market etc.

Reports, Periodical newsletters of the brokers like The

Horizon of Kotak Securities Ltd.

Kotharis Economic and Investment Guide of India

The Company News and Notes, a monthly publication

of The Department of Company Affairs

Sources of International economic data

1) International Financial Statistics of IMF
1) Moodys and Standard and Poors manuals
1) Capital International Perspective, a Geneva
Publication
4) International Newspapers and periodicals.

New ways to serve the customers:.

CIMM It is the database of a well known research
organization, called as The Center for Monitoring Indian
Economy. It provides both qualitative and quantitative
information.
CLINE-OLE -- This package is designed and marketed
by Capital Market which gives detailed information about
economy, industry and companies.
VANS This package gives detailed information and the
access to the articles and news published in the
magazines and newspapers.

Investment Information (QP)

International Affairs
Newspapers, Magazines
Financial Institutions World Bank, IMF, ADB

National Affairs

CSO
Economic Survey
Explanatory memorandum on Budget
RBI reports
Non Government eg. CMIE

Industry Data
Newspapers, Magazines
CMIE
BSE Directory of Information

Investment Information contd

(QP)
Company Data

Annual reports
BSE Directory of Information
News papers
Office of Registrar of companies
Company News and Notes Department of company
affairs

Market Data

Stock Exchanges
BSE Directory of Information
RBI reports
News papers
Brokerages