Meaning of Investment
Investment refers to the process of allocating money or financial resources into various assets with
the aim of earning future income, profit, or growth in value. It involves sacrificing current
consumption in order to achieve higher benefits in the future.
In simple terms, investment means putting money to work so that it generates additional income
over time.
The main objective of investment is wealth creation, financial security, and meeting future
financial goals.
Meaning of Investment Management
Investment management refers to the process of managing money and financial assets in a
systematic and professional way to achieve specific financial goals. It involves planning, selecting,
and controlling investments to maximize returns while minimizing risk.
In simple terms, investment management means deciding where, when, and how to invest money
so that it grows over time and meets future financial needs such as education, retirement, or wealth
creation.
Definitions of Investment
1. General Definition
Investment is the commitment of funds to one or more assets that will be held over a period of
time with the expectation of earning returns.
2. Financial Definition
Investment is the allocation of money in financial assets such as stocks, bonds, or deposits with
the objective of earning income or capital appreciation.
3. Economic Definition
Investment is the creation of new capital assets like machinery, buildings, or infrastructure that
contribute to production and economic growth.
Attributes of Investment
Return (Income)
Return is one of the most important attributes of any investment, as it represents the gain or profit
earned from the invested amount. It is the primary motive behind making an investment decision.
Returns can be regular, such as interest from fixed deposits or rent from property, or they can be
irregular, such as capital gains from shares. The level of return usually depends on the type of
investment and the associated risk. For instance, investing in equities may yield higher returns
compared to bank deposits, but the returns are less predictable. Therefore, investors must carefully
evaluate the expected returns before investing their money.
Risk
Risk refers to the uncertainty associated with the returns of an investment. It indicates the
possibility of losing part or all of the invested capital or earning lower-than-expected returns. Every
investment carries some degree of risk, but the level varies depending on the nature of the asset.
Generally, there is a direct relationship between risk and return, meaning higher returns are usually
associated with higher risk. For example, government securities are considered low-risk
investments because they are backed by the government, whereas stocks and cryptocurrencies
involve higher risk due to market fluctuations. Understanding risk is essential for making informed
investment decisions.
Safety (Security of Capital)
Safety refers to the protection of the original amount invested, also known as the principal.
Investors often prefer investments that ensure the safety of their capital, especially when they are
risk-averse. Safe investments typically offer lower returns but provide assurance that the invested
amount will not be lost. For instance, bank fixed deposits and government bonds are considered
safe investments because they guarantee repayment of principal along with interest. On the other
hand, investments like stocks or startups may not guarantee safety, as their value can fluctuate
significantly.
Liquidity
Liquidity is the ease with which an investment can be converted into cash without significant loss
of value. Highly liquid investments allow investors to access their money quickly in times of need,
while less liquid investments may take time to sell. Liquidity is an important consideration,
especially for individuals who may require funds urgently. For example, shares traded on the stock
exchange are highly liquid because they can be sold instantly during market hours. In contrast, real
estate is less liquid, as it may take months to find a buyer and complete the transaction.
Marketability
Marketability refers to the ability of an investment to be bought and sold easily in the market. It is
closely related to liquidity but focuses more on the existence of a ready market for the asset.
Investments with high marketability can be quickly traded without much difficulty. For example,
publicly traded shares and bonds have high marketability because they are listed on stock
exchanges and have active buyers and sellers. On the other hand, assets like antique items or
specialized machinery may have low marketability due to limited demand.
Tax Benefits
Certain investments provide tax advantages, which can increase the overall return for the investor.
Governments often encourage investments in specific schemes by offering tax deductions or
exemptions. These benefits reduce the taxable income of individuals and help in saving taxes. For
example, investments in Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS),
and life insurance policies qualify for deductions under income tax laws in India. Tax benefits
make such investments attractive, especially for individuals looking to reduce their tax liability.
Capital Appreciation
Capital appreciation refers to the increase in the value of an investment over time. It is a key
objective for investors who aim to grow their wealth in the long run. Unlike regular income, capital
appreciation is realized when the asset is sold at a higher price than its purchase cost. For instance,
if a person buys land for ₹5 lakhs and sells it after a few years for ₹10 lakhs, the difference
represents capital appreciation. Investments in real estate, stocks, and mutual funds often provide
opportunities for capital growth.
Stability of Income
Stability of income refers to the consistency and predictability of returns generated by an
investment. Some investments provide fixed and regular income, while others may have
fluctuating returns. Investors who prefer certainty often choose investments with stable income
streams. For example, fixed deposits and government bonds offer stable and predictable returns,
whereas shares may provide variable dividends depending on the company’s performance.
Stability is particularly important for individuals who rely on investment income for their daily
expenses.
Investment vs Speculation
Basis Investment Speculation
Long-term commitment of funds for steady Short-term activity to earn quick
Meaning
returns profits
Time Period Long-term Short-term
Risk Level Moderate Very high
Return Stable and regular Uncertain and fluctuating
Objective Wealth creation and safety of capital Quick profit
Basis of
Analysis and research Guesswork, trends, or rumors
Decision
Capital Safety Relatively safe Highly uncertain
Market Highly sensitive to market
Less affected by short-term changes
Behavior fluctuations
Example Buying shares for long-term growth Buying stocks for quick price rise
Economic Investment vs Financial Investment
Basis Economic Investment Financial Investment
Investment in real or physical assets that Investment in financial
Meaning
create goods and services instruments or assets
Financial (paper/electronic)
Nature Real (tangible) assets
assets
Basis Economic Investment Financial Investment
Purpose Increase production and economic growth Earn income and wealth
Impact on
Directly increases GDP and national income Indirect impact on economy
Economy
Capital Does not directly create capital
Leads to capital formation
Formation formation
Varies (low to high depending on
Risk Level Generally moderate
instrument)
High liquidity (especially shares,
Liquidity Low liquidity
bonds)
Building factories, machinery, Shares, bonds, mutual funds,
Examples
infrastructure bank deposits
Features of a Good Investment
1. Adequate Return
A good investment should provide a reasonable and satisfactory return to the investor. The main
purpose of investing money is to earn income or profit, so the returns should justify the amount of
money and time invested. Returns may be in the form of interest, dividends, rent, or capital gains.
For example, investing in shares may give higher returns compared to a savings account, but the
investor must ensure that the returns are consistent and meet their financial goals.
2. Safety of Capital
Safety of capital means that the principal amount invested is protected from loss. A good
investment should ensure that the chances of losing money are minimal. This is especially
important for conservative investors who prefer stability over high returns. Investments such as
government bonds and bank deposits are considered safe because they guarantee repayment of the
invested amount.
3. Risk Minimization
Every investment carries some level of risk, but a good investment should have controlled or
manageable risk. Investors should avoid highly risky investments unless they are willing to bear
potential losses. Risk can be reduced through proper planning and diversification. For instance,
instead of investing all money in one stock, spreading it across different assets reduces overall risk.
4. Liquidity
Liquidity refers to the ease with which an investment can be converted into cash without significant
loss of value. A good investment should provide sufficient liquidity so that the investor can access
funds in case of emergencies. For example, shares and mutual funds are highly liquid, while real
estate is less liquid as it takes time to sell.
5. Marketability
Marketability means the ability to buy or sell an investment easily in the market. Investments with
high marketability have an active market with many buyers and sellers. This ensures that the
investor can quickly exit the investment when needed. For example, shares listed on stock
exchanges are highly marketable compared to assets like antiques.
6. Stability of Income
A good investment should provide stable and regular income over time. This is important for
individuals who depend on investment income for their daily needs. Stable income investments
reduce uncertainty and provide financial security. For example, fixed deposits and bonds provide
fixed interest at regular intervals.
7. Tax Benefits
Certain investments offer tax advantages, which increase the effective return of the investor. These
benefits may include deductions, exemptions, or rebates under tax laws. For instance, investments
in PPF, ELSS, and life insurance policies qualify for tax deductions in India. Such benefits
encourage people to invest more while also saving on taxes.
8. Capital Appreciation
Capital appreciation refers to the increase in the value of an investment over time. A good
investment should have the potential to grow in value, helping the investor build wealth in the long
run. For example, stocks and real estate often increase in value over the years, providing capital
gains when sold.
9. Inflation Protection
A good investment should generate returns that are higher than the rate of inflation. Inflation
reduces the purchasing power of money over time, so investments must grow at a rate that
maintains or increases real value. For example, if inflation is 6% and an investment gives only 4%
return, the investor actually loses value in real terms.
10. Legality & Transparency
A good investment must be legal, trustworthy, and transparent. It should be regulated by proper
authorities and provide clear information about returns, risks, and terms. Investors should avoid
fraudulent or unregulated schemes that promise unrealistic returns. Transparency ensures that
investors can make informed decisions.
Investment Process
1. Setting Investment Objectives
The first step in the investment process is to clearly define financial goals. These goals may include
earning regular income, saving for retirement, buying a house, or funding education. Setting clear
objectives helps in choosing suitable investment options and planning effectively.
2. Assessing Risk Profile
Investors must evaluate their ability and willingness to take risks. Some investors prefer low-risk
investments, while others are willing to take higher risks for better returns. Factors such as age,
income, financial responsibilities, and personal preferences influence risk tolerance.
3. Analyzing Financial Position
Before investing, individuals should assess their financial situation, including income, expenses,
savings, and liabilities. This helps in determining how much money can be invested without
affecting daily needs or emergency requirements.
4. Selecting Investment Avenues
After understanding goals and risk tolerance, investors choose appropriate investment options such
as shares, bonds, mutual funds, or real estate. The choice depends on factors like expected return,
risk level, liquidity, and time horizon.
5. Portfolio Construction
Portfolio construction involves allocating funds among different investment options. A well-
balanced portfolio includes a mix of assets to reduce risk and maximize returns. For example,
combining stocks, bonds, and fixed deposits creates a diversified portfolio.
6. Executing the Investment
This step involves actually investing money in the selected assets. It includes opening accounts,
purchasing securities, or investing in schemes. Proper execution ensures that the investment plan
is implemented effectively.
7. Monitoring the Investment
Investments should be regularly monitored to track their performance. Market conditions and asset
values change over time, so it is important to review whether the investments are performing as
expected.
8. Review and Revision
Based on performance and changes in financial goals or market conditions, investors may need to
modify their portfolio. This may involve selling underperforming assets or investing in new
opportunities.
9. Diversification
Diversification means spreading investments across different assets to reduce risk. It ensures that
losses in one investment are balanced by gains in others. For example, investing in different
industries reduces the impact of a downturn in one sector.
10. Evaluation of Returns
The final step is to evaluate the actual returns earned from investments and compare them with
expected returns. This helps investors understand the effectiveness of their investment decisions
and improve future strategies.
Financial Instruments
Financial instruments are legal documents or contracts that represent a financial asset for one party
and a financial liability for another. They are used for investment, borrowing, lending, and risk
management in financial markets. These instruments can be traded in financial markets and help
in the efficient allocation of funds in an economy.
Example: Shares, bonds, treasury bills, commercial papers, etc.
Money Market Instruments
Meaning
Money market instruments are short-term financial instruments with a maturity period of less than
one year. They are used to meet short-term liquidity needs of governments, banks, and
corporations.
Types of Money Market Instruments
1. Treasury Bills (T-Bills)
Treasury Bills are short-term financial instruments issued by the government to meet its short-term
financial requirements. They are considered one of the safest investments because they are backed
by the government. T-Bills do not pay interest in the traditional sense; instead, they are issued at a
discount and redeemed at their face value on maturity. The difference between the purchase price
and the face value represents the investor’s return. They usually have maturities of 91 days, 182
days, or 364 days. Due to their safety and liquidity, they are widely used by banks and financial
institutions.
2. Commercial Paper (CP)
Commercial Paper is an unsecured short-term promissory note issued by large corporations with
strong credit ratings to meet their immediate financial needs, such as working capital requirements.
Since it is unsecured, only financially sound companies can issue it. It is issued at a discount and
redeemed at face value, similar to Treasury Bills. The maturity period generally ranges from a few
days up to one year. Commercial Paper offers higher returns compared to T-Bills but involves
slightly higher risk due to the absence of government backing.
3. Certificate of Deposit (CD)
A Certificate of Deposit is a short-term negotiable instrument issued by banks and financial
institutions. It represents a deposit made by an investor for a fixed period at a predetermined
interest rate. CDs are issued in large denominations and can be traded in the secondary market
before maturity, making them relatively liquid. They are considered safe investments as they are
issued by regulated financial institutions. The maturity period typically ranges from a few months
to one year.
4. Call Money / Notice Money
Call money refers to short-term funds borrowed and lent between banks for a period of one day,
while notice money is borrowed for a slightly longer duration (up to 14 days). These instruments
are used by banks to maintain their required cash reserves and manage short-term liquidity
mismatches. The interest rate in the call money market fluctuates based on demand and supply
conditions. This market plays a crucial role in maintaining liquidity in the banking system.
5. Repurchase Agreements (Repo)
A repurchase agreement, commonly known as a repo, is a short-term borrowing arrangement
where one party sells securities (usually government securities) to another party with an agreement
to repurchase them at a predetermined price on a future date. It is essentially a secured loan, as the
securities act as collateral. Repos are widely used by banks and the central bank to manage liquidity
in the economy. The difference between the sale and repurchase price represents the interest
earned.
Features of Money Market Instruments
1. Short-term duration (less than 1 year)
2. High liquidity (easy to convert into cash)
3. Low risk (especially government instruments)
4. Lower returns compared to capital market
5. Used for liquidity management
6. Highly marketable and tradable
7. Mostly issued in large denominations
Meaning of Capital Market
The capital market is a financial market where long-term funds are raised and invested. It deals
with financial instruments that have a maturity period of more than one year, such as shares,
debentures, and bonds.
Types of Capital Market Instruments
1. Equity Shares (Stocks)
Equity shares represent ownership in a company. When an investor purchases equity shares, they
become a part-owner of the company and are entitled to a share of its profits in the form of
dividends. Equity shareholders also benefit from capital appreciation if the value of the shares
increases over time. However, they bear higher risk because returns are not fixed and depend on
the company’s performance. Equity shares are suitable for long-term investors seeking growth and
wealth creation.
2. Preference Shares
Preference shares are a type of share that provides certain preferential rights over equity shares.
Preference shareholders receive a fixed rate of dividend and have priority over equity shareholders
in the payment of dividends and during the liquidation of the company. However, they generally
do not have voting rights. These shares are less risky than equity shares but offer lower returns.
They are suitable for investors who prefer stable income with relatively lower risk.
3. Debentures / Bonds
Debentures and bonds are long-term debt instruments issued by companies or governments to raise
funds. Investors who purchase these instruments are essentially lending money to the issuer in
exchange for periodic interest payments and repayment of the principal at maturity. These
instruments are considered safer than equity shares because they provide fixed returns and have a
defined maturity period. Government bonds are highly secure, while corporate bonds carry slightly
higher risk depending on the issuer’s creditworthiness.
4. Mutual Funds
Mutual funds are investment vehicles that pool money from multiple investors and invest it in a
diversified portfolio of assets such as shares, bonds, or other securities. They are managed by
professional fund managers who make investment decisions on behalf of investors. Mutual funds
help in reducing risk through diversification and are suitable for investors who lack expertise in
managing investments. They offer different types of schemes, such as equity funds, debt funds,
and balanced funds, depending on the investor’s risk preference.
5. Public Deposits
Public deposits are funds raised by companies directly from the public for a fixed period at a
specified rate of interest. These deposits are similar to bank fixed deposits but are offered by
companies to meet their long-term financial needs. They usually offer higher interest rates
compared to bank deposits but involve higher risk, as they are not as secure as bank deposits.
Investors must carefully evaluate the credibility of the company before investing in public
deposits.
6. Exchange Traded Funds (ETFs)
ETFs are similar to mutual funds but traded on stock exchanges like shares. They track indices,
commodities, or sectors and offer liquidity and diversification.
7. Derivatives (Futures and Options)
These are contracts based on underlying assets like shares or indices. They are used for hedging
risk or speculation and are actively traded in capital markets.
8. Government Securities (G-Secs)
These are long-term bonds issued by the government for funding development projects. They are
considered very safe and provide fixed returns.
Features of Capital Market Instruments
1. Long-term duration (more than 1 year)
2. Higher returns potential
3. Higher risk (especially equity)
4. Used for capital formation
5. Less liquidity compared to money market (but tradable)
6. Wide variety of instruments
7. Suitable for wealth creation
Basis Money Market Instruments Capital Market Instruments
Time Period Short-term (≤ 1 year) Long-term (> 1 year)
Purpose Liquidity management Capital formation
Risk Low Higher
Return Lower Higher
Examples T-bills, CP, CD Shares, bonds, mutual funds
Liquidity Very high Moderate
Market Participants Banks, institutions Individuals, institutions
Meaning of Derivatives
Derivatives are financial instruments whose value is derived from (depends on) an underlying
asset. The underlying asset can be shares, bonds, commodities, currencies, interest rates, or market
indices
Derivatives are mainly used for hedging risk, speculation, and arbitrage. They help investors
protect themselves from price fluctuations or earn profits by predicting market movements.
Example:
If a derivative is based on a stock, its value will increase or decrease depending on the price of that
stock.
Features of Derivatives
1. Derived Value
The value of a derivative is derived from an underlying asset such as stocks, commodities, or
currencies. Any change in the price of the underlying asset directly affects the value of the
derivative.
2. Contractual Agreement
Derivatives are contracts between two or more parties. These contracts specify terms such as price,
quantity, and future date of transaction.
3. Leverage
Derivatives allow investors to control a large position with a relatively small amount of money
(margin). This increases the potential for higher returns but also increases risk.
4. Hedging Tool
Derivatives are widely used to reduce or manage risk. For example, a farmer can use derivatives
to lock in the price of crops to avoid losses due to price fluctuations.
5. Speculation
Investors use derivatives to speculate on price movements and earn profits. However, speculation
involves high risk and uncertainty.
6. Standardization
Many derivatives, especially exchange-traded ones, are standardized in terms of contract size,
maturity, and settlement procedures.
7. High Risk and High Return
Due to leverage and market volatility, derivatives involve high risk but also offer the possibility of
high returns.
8. Settlement at Future Date
Most derivatives involve agreements to buy or sell assets at a future date, making them forward-
looking instruments.
9. Traded on Exchanges or OTC
Derivatives can be traded on organized exchanges (like futures and options) or over-the-counter
(customized contracts between parties).
Types of Derivatives
1. Forward Contracts
A forward contract is an agreement between two parties to buy or sell an asset at a predetermined
price on a specified future date. These contracts are customized and traded over-the-counter
(OTC), meaning they are not standardized or traded on exchanges. They carry higher risk due to
lack of regulation.
Example:
A farmer agrees to sell wheat at ₹2,000 per quintal after 3 months.
2. Futures Contracts
Futures are standardized contracts traded on stock exchanges. They involve an agreement to buy
or sell an asset at a predetermined price on a future date. Unlike forwards, futures are regulated
and involve lower risk due to standardization and clearing mechanisms.
Example:
Buying a stock futures contract expecting the price to rise.
3. Options Contracts
Options give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined
price within a specified time.
• Call Option – Right to buy
• Put Option – Right to sell
Options involve a premium paid by the buyer and provide flexibility with limited risk.
Example:
Buying a call option to purchase shares if the price increases.
4. Swaps
Swaps are agreements between two parties to exchange cash flows in the future based on different
financial variables.
• Interest Rate Swap – Exchange of fixed and floating interest payments
• Currency Swap – Exchange of cash flows in different currencies
Swaps are usually traded in OTC markets and are used by large institutions.