SAPM Module -1 Basics of Investment
Introduction:-
An investment is an asset or item acquired with the goal of generating income or appreciation.
Appreciation refers to an increase in the value of an asset over time. When an individual
purchase a good as an investment, the intent is not to consume the good but rather than to use
it in future to create wealth. An investment always concern to out lay if some assets today-time,
Money,or effort in hope of a greater payoff in the future than what was originally put in.
Meaning:- Investment is application of money for earning more money.
Investment involves employment of funds with the aim of achieving additional income.
Definition:- “A commitment of funds made in the expectation of some positive rate of
return”
“A sacrifice of current money or other resources for future benefits”.
“Investment defined as commitment of funds made in the expectation of some
positive rate of return. If the investment is properly undertaken, the return will
commensurate with the risk the investor assumes.”- Fisher & Jordan
Characteristics/features /Elements of Investment
Risk Factor - Risk is an inherent characteristic of every investment. Risk refers to loss of principal
amount, delay or non-payment of capital or interest, variability of return etc. Every investment
differs in terms of risk associated with them. However, less risky investments are the most
preferred ones by investors.
Return - Return refers to the income expected from investment done. It is the key objective for
doing investment by investors. Investment provides benefits to peoples either in the form of
regular yields or through capital appreciation.
Safety - It refers to the surety of return or protection of principal amount without any loss.
Safety is an important feature of every investment tool that is analyzed before allocating any
fund in it.
Income Stability - Income stability refers to the regularity of income without any fluctuations.
Every investor wants to invest in such assets which provide return consistently.
Liquidity - Liquidity refers to how quickly an investment can be sold or converted into cash. It
simply means easiness with which investment can be sold in the market without any loss. Most
of the investors want to invest in liquid assets.
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SAPM Module -1 Basics of Investment
Marketability - This refers to the easy transferability or salability of an asset. Those listed on a
stock market are more easily marketable than those that are not listed. Public limited
companies will have their share more easily transferable than those of private limited
companies.
Tax shelter - The investor may plan his investment according to his own tax status as well as the
available tax incentives on the given investment opportunities. eg: If any investor invest his
money in NSC he would be entitled for tax rebate u/s 80c of income tax act 1961. Like wise,
investment in mutual fund upto certain specific amount also provides tax rebate under the
same section.
Objectives of Investment
1. Income - The major objectives of every investment is to earn income in the form of dividend
yield or interest. Suitable securities are those whose price are relatively stable but still pay
reasonable and expected return onn investment.
2. Capital preservation - It is a strategy for protection of money you have available to invest by
choosing insured fixed income investment that promise return of principle.
3. Achieving sustainable long term growth - The major objectives of an investor to achieve good
rate of return and sustain in a same level for long term in life so by investing in regular income
securities and individual can sustain for long term growth.
4. Time horizon - an investor time horizon is a period where one expects to hold an investment
for specific goal. The longer time horizon is more aggressive or riskier portfolio,an investor can
build. The shorter time horizon more conservative and risk less the investor may want to adopt.
5. Generating additional source of income - An investing in different attributes and investor is
investing to get additional source for his income. It creates wealth and also by investing in
different aspects it helps to reduce the risk of facing survival problem in case of unfortunate
loss of sole source of income.
6. Retirement benefits - This is an investment of employee where he invest to get certain
benefits so called pension retirement gratuity, provident fund, leave encashment etc where an
investor get his returns at his old age and he is far away with financial tension.
7. Future needs - The future is been said as uncertain in nature how the needs occur it may be
of medical needs financial crises and many other to fulfill those an investor objects to invest in
different portfolio and over come with those needs.
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SAPM Module -1 Basics of Investment
8. Minimize the risk & Maximise the return - The major objectives of an individual is to minimize
the risk & uncertainity and get good returns and rewards in monetory [Link] is been said as
an booming objectives of the investment management.
Types of Investors
1. Individual Investors:- A retail investor, also known as an individual investor, is a
nonprofessional investor who buys and sells securities or funds that contain a basket of
securities such as mutual funds and exchange traded funds (ETFs). Retail investors execute their
trades through traditional or online brokerage firms or other types of investment
[Link] investors purchase securities for their own personal accounts and often trade in
dramatically smaller amounts as compared to institutional investors.
2. Institutional Investors:- An entity pools money from various investors and individuals making
the sum a high amount which is further provided to investment managers who invest such huge
amounts in various portfolio of assets, shares, and securities, which is known as institutional
investors and it includes entities like insurance companies, banks, NBFC, financial
institutions,mutual funds, private equity funds, investment advisors, hedge funds, pension
funds, university endowments, etc having competitively higher creditworthiness and solvency.
3. Passive Investors:- Passive Investors are those investors who are ready to leap into investing
with low maintenance costs. It is the most common starting point for financial security, mainly
supported by financial institutions, educational services, and websites. They often invest over a
long time, adopting a buy and hold strategy, and generally depend on expertise like brokers,
money managers, financial planners for their investment strategy since they lack the required
knowledge and skill.
4. Active-Investors:- An active investor is an investor who takes more hand-on-approach
intending to earn higher returns. He may dedicate his time and effort to save money, thereby
making their money hard for them.
Difference between Investment, Trading, Speculation
Comparison Investment Speculation Trading
Meaning The purchase of an Speculation is an act Trader buys stocks
asset with the hope of of conducting risky with an objective in
getting returns is financial transactions short term.
called investment. in the hope of
substantial profit.
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Basis for decision Fundamental factors Technical charts and Technical analysis
performance of market psychology
company
Time horizon Long term (more than Short term (1 day -1 Short term (1 day -1
12 months) year) week)
Risk involved Moderate Highest Higher
Intend to profit Change in value Change in price Change in price
Fund's Investor use his own Borrowed fund Own fund
fund
Expected returns Moderate rate of High rate of return High ROR
return
Income Stable Uncertain & erratic High return
Behaviour of Conservative and Daring and careless Confident & risk
participants caution takers
Example Stocks, Bonds, mutual Foreign currencies, Stocks, commodities.
funds etc. Future and option
trading.
Constraints/limitation of investment
Investment constraints refer to the limitations or restrictions that affect an investor’s ability to
achieve their financial goals. These constraints can be categorized into several key areas:
1. **Time Horizon**: The duration for which an investment is intended to be held. A longer
time horizon typically allows for more risk-taking, while a shorter time horizon may require
more conservative investments.
2. **Risk Tolerance**: The degree of variability in investment returns that an investor is willing
to withstand. This can be influenced by the investor's financial situation, psychological comfort
with risk, and investment objectives.
3. **Liquidity Needs**: The need for cash or easily accessible funds. Investments must be
chosen based on how quickly and easily they can be converted to cash without significant loss
of value.
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4. **Legal and Regulatory Constraints**: Laws, regulations, and guidelines that must be
adhered to. This can include tax considerations, fiduciary responsibilities, and specific legal
restrictions on certain types of investments.
5. **Tax Considerations**: The impact of taxes on investment returns. Different investments
are taxed differently, and investors must consider how these taxes affect their net returns.
6. **Unique Circumstances and Preferences**: Individual factors such as ethical considerations,
personal preferences, or specific financial obligations that might affect investment choices. This
could include preferences for socially responsible investing or avoiding certain industries.
7. **Financial Goals**: The specific objectives that the investor aims to achieve, such as saving
for retirement, funding education, or purchasing a home. The nature and timeline of these
goals can significantly influence investment strategy.
Investment process
Steps Involved in Investment Process There are five main steps involved in investment process.
They are:
1. Investment Policy - The first stage determines and involves personal financial affairs and
objectives before making investments. It may also be called preparation of the investment
policy stage. The investor has to see that he should be able to create a emergency fund, an
element of liquidity and quick convertibility of securities into cash. This stage may, therefore;
be considered appropriate for identifying investment assets and considering the various
features of investments
2. Investment Analysis - Investment Analysis: When a individual has arranged a logical order of
the types of investments that he requires on his portfolio, the next step is to analyze the
securities available for investment. He must make a comparative analysis of the type of industry,
kind of security and fixed vs. variable securities. The primary concerns at this stage would be to
form beliefs regarding future behavior or prices and stocks, the expected returns and
associated risk.
3. Valuation of Securities - The third step is perhaps the most important consideration of the
valuation of investments. Investment value, in general, is taken to be the present worth to the
owners of future benefits from investments. The investor has to bear in mind the value of these
investments. An appropriate set of weights have to be applied with the use of forecasted
benefits to estimate the value of the investment assets. Comparison of the value with the
current market price of the asset allows a determination of the relative attractiveness of the
asset. Each asset must be valued on its individual merit. Finally, the portfolio should be
constructed.
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SAPM Module -1 Basics of Investment
4. Portfolio Construction Step - Portfolio Construction: Under features of an investment
programme, portfolio construction requires knowledge of the different aspects of securities.
These are briefly recapitulated here,consisting of safety and growth of principal, liquidity of
assets after taking into account the stage involving investment timing, selection of investment,
allocation of savings to different investments and feedback of portfolio as given below.
5. Portfolio Evaluation - While evaluating securities, the investor should realize that
investments are made under conditions of uncertainty. These cannot be a magic formula which
will always work. The investor should be concerned with concepts and applications that will
satisfy his investment objectives and constantly evaluate the performance of his investments. If
need be, the investor may consider switching over to alternate proposals.
Process/ Steps involved in investment
Step 1: Setting financial goals
Setting clear financial goals is the cornerstone of any successful Investment journey. Short-term
goals like purchasing a car and long-term objectives such as retirement planning must be
defined and prioritised. These goals act as guiding stars, shaping your Investment strategies and
providing direction.
Through meticulous goal-setting, individuals create a roadmap, ensuring that their Investments
align with their aspirations, whether it's funding a dream holiday or securing a comfortable
retirement. Clear goals provide the purpose and motivation needed to navigate the intricate
world of Investments, turning dreams into tangible financial achievements.
Step 2: Assessing risk tolerance
Understanding your risk tolerance is pivotal in making Investment decisions. It refers to your
ability to endure fluctuations in the value of your Investments. Assessing your risk tolerance
involves evaluating your comfort level with market uncertainties.
Are you conservative, moderate, or aggressive in your risk appetite? By gauging your
psychological and financial resilience, you can tailor your Investment portfolio accordingly.
Conservative Investors prefer stability, while aggressive ones seek high returns despite higher
risks. This step ensures that your Investments align with your temperament, making your
financial journey not just profitable but also emotionally secure.
Step 3: Creating a budget and emergency fund
A strong financial foundation starts with disciplined budgeting and building an emergency fund.
Budgeting helps in tracking income and expenses, ensuring surplus funds for Investments.
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Simultaneously, having an emergency fund safeguards Investments from unexpected events
such as medical emergencies or sudden job loss.
The emergency fund acts as a safety net, preventing the need to liquidate Investments during
crises, thus preserving long-term goals. Creating a budget cultivates financial discipline,
enabling systematic Investments, while an emergency fund provides:
1) Financial security 2) Reinforcement in your ability to stay invested during market
fluctuations 3) Surety that your Investments stay on course to meet your goals
Step 4: Diversifying Investment portfolio
Diversification is the golden rule of Investments. It refers to spreading Investments across
different asset classes, such as stocks, bonds, mutual funds, and real estate. This strategy
mitigates risks by reducing the impact of poor performance in any single Investment.
Diversifying ensures that a downturn in one sector doesn’t devastate your entire portfolio,
balancing potential losses.
For instance, when stocks underperform, bonds might flourish, maintaining overall stability.
Diversification aligns Investments with risk tolerance and financial goals, ensuring a resilient
portfolio. By not putting all your financial resources into one category, you safeguard your
Investments, enhancing your chances of steady, long-term growth.
Step 5: Conducting research and analysis
Informed decisions are the bedrock of successful investing. Conducting thorough research and
analysis is imperative before making Investment choices. Fundamental analysis delves into a
company's financial health, while technical analysis studies market trends. Staying updated on
economic indicators and market dynamics enables anticipation of trends.
Informed Investors can identify promising opportunities, avoiding impulsive decisions. Research
ensures an understanding of potential risks and rewards, leading to prudent choices.
Continuous analysis aids in tracking Investments, ensuring they align with goals. With
comprehensive knowledge, Investors can navigate the ever-changing market landscape, making
well-informed decisions that pave the way for sustainable financial growth.
Step 6: Making informed Investment decisions
Professional guidance and continuous monitoring are pivotal in making informed Investment
decisions. Seeking advice from financial experts provides nuanced insights tailored to your
specific needs. Regularly monitoring Investment performance is essential, ensuring they align
with your goals. Adapting strategies to market changes and evolving life goals is critical.
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Whether it’s seeking expert advice or using online tools, informed decisions are the result of
meticulous evaluation and adaptation. By staying vigilant and flexible, Investors can respond to
market dynamics, ensuring that their Investments remain aligned with their objectives, even
amidst economic fluctuations, securing their financial future.
Step 7: Regularly reviewing and rebalancing the portfolio
Investment strategies need periodic review and adjustment. Regular portfolio reviews help
gauge performance against goals. Rebalancing involves adjusting asset allocation to maintain
the desired risk and return levels. Life events like marriage or nearing retirement may
necessitate changes in the Investment approach.
Adapting the portfolio ensures it remains effective in fulfilling objectives. By responding to
changing circumstances, Investors maximise opportunities and minimise risks. Regular reviews
and rebalancing not only safeguard Investments against market volatility but also optimise their
potential. This step ensures that Investments remain relevant, aligning with evolving goals,
ultimately securing a stable and prosperous financial future.
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