INVESTMENT MANAGEMENT

UNIT-1

The money a person earns is partly spent and the rest saved for meeting future expenses. Instead
of keeping the savings idle he may like to use savings in order to get return on it in the future.
This is called Investment.

“Investment may be defined as an activity that commits funds in any financial/marketable or

physical form in the present with an expectation of receiving additional return in the future.”

For example, a Bank deposit is a financial asset, the purchase of gold is a physical asset and the
purchase of bonds and shares is marketable asset.

Features:

There are three basic features common to all types of investment:

1. There is a commitment of present funds.
2. There is an expectation of some return or benefits from such commitment in future, and
3. There is always some risk involved in respect of return and the principal amount invested

OBJECTIVES OF INVESTMENT:

1. RETURN: Investors expect a good rate of return from their investments. Return from
investment may be in terms of revenue return or income (interest or dividend) and/or in
terms of capital return (capital gain i.e. difference between the selling price and the
purchasing price). The net return is the sum of revenue return and capital return.
For example, an investor purchases a share (Face Value FV Rs.10) for Rs.130. After one
year, he receives a dividend of Rs.3 (i.e. 30% on FV of Rs.10) from the company and
sells it for Rs.138. His total return is Rs.11, i.e., Rs.3 + Rs.8. The normal rate of return is
Rs.11 divided by Rs.130 i.e., 8.46%
a) Expected Return: The expected return refers to the anticipated return for some future
period. The expected return is estimated on the basis of actual returns in the past periods.
 b) Realized Returns: The realized return is the net actual return earned by the investor
over the holding period. It refers to the actual return over some past period.
2. . RISK: Variation in return i.e., the chance that the actual return from an investment would
differ from its expected return is referred to as the risk. Measuring risk is important because
minimizing risk and maximizing return are interrelated objectives.
3. LIQUIDITY: Liquidity, with reference to investments, means that the investment is saleable
or convertible into cash without loss of money and without loss of time. Different types of
investments offer different type of liquidity. Most of financial assets provide a high degree of
liquidity. Shares and mutual fund units can be easily sold at the prevailing prices. An investor
has to build a portfolio containing a good proportion of investments which have relatively high
degree of liquidity.
4. SAFETY: An investor should take care that the amount of investment is safe. The safety of an
investment depends upon several factors such as the economic conditions, organization where
investment is made, earnings stability of that organization, etc. Guarantee or collateral available
against the investment should also be taken care of. For ex,
 Bonds issued by RBI are completely safe investments as compared with the bonds of a
private sector company.
 Accordingly, it is more safer to invest in preference shares than of equity shares of a
company, the reason being that in case of company liquidation, order of payment is
debenture holders, preference share holds and then equity share holders
5. TAX BENEFITS: Investments differ with respect to tax treatment of initial
investment, return from investment and redemption proceeds. For example, investment in
Public Provident Fund (PPF) has tax benefits in respect of all the three characteristics.
Equity Shares entails exemption from taxability of dividend income but the transactions
of sale and purchase are subject to Securities Transaction Tax or Tax on Capital gains.
Sometimes, the tax treatment depends upon the type of the investor.
6. REGULARITY OF INCOME: The prime objective of making every investment is to
earn a stable return. If returns are not stable, then the investment is termed as risky. For
example, return (i.e. interest) from Savings a/c, Fixed deposit a/c, Bonds & Debentures
are stable but the expected dividends from equity share are not stable. The rate of
dividend on equity shares may fluctuate depending upon the earnings of the company.
CHARACTERISTICS OF INVESTMENT:
1. RETURN
2. RISK
3. SAFETY
4. LIQUIDITY
5. TIME HORIZON

INVESTMENT & SPECULATION:

In speculation, there is an investment of funds with an expectation of some return in the
form of capital profit resulting from the price change and sale of investment. Speculation
is relatively a short term investment. The degree of uncertainty of future return is
definitely higher in case of speculation than in investment.
In case of investment, the investor has an intention of keeping the investment for some
period whereas in speculation, the investor looks for an opportunity of making a profit
and “exitout” by selling the investment
INVESTMENT ALTERNATIVES: One may invest in:

Physical assets like real estate, gold/jewellery, commodities etc. and/or

Financial assets such as fixed deposits with banks, small saving instruments with post offices,
insurance/provident/pension fund etc. or

Marketable assets - securities market related instruments like shares, bonds, debentures,
derivatives, mutual fund etc

INVESTMENT PROCESS : Investment process of securities as follows:

1. Investment Policy: The government or the investor before proceeding into investment,
formulates the policy for the systematic functioning. The essential ingredients of the
policy are the investible funds, objectives and the knowledge about the investment
alternatives and market.
a) Investible funds: The entire investment procedure revolves around the availability of
investible funds. The fund may be generated through savings or borrowings. If the funds
are borrowed, the investor has to be extra careful in the selection of investment
alternatives. The return should be higher than the interest he pays. Mutual funds invest
their owner’s money in securities.
b) Objectives: The objectives are framed on the premises of the required rate of return,
need for regularity of income, risk perception and the need for liquidity. The risk taker’s
 objective is to earn high rate of return in the form of capital appreciation, whereas the
primary objective of the risk averse (person not interested in taking risk) is the safety of
the principal.
c) Knowledge: The knowledge about the investment alternatives and markets plays a
key role in the policy formulation. The investment alternatives range from security to real
estate. The risk and return associated with investment alternative differ from each other.
Investment in equity is high yielding but has more risk than in fixed income securities.

2. Security Analysis: After formulating the investment policy, the securities to be bought
have to be scrutinized through the market, industry and company analysis.

Market Analysis: The general economic scenario is reflected in the stock market. The growth in
gross domestic product and inflation are reflected in the stock prices. The recession in the
economy results in a bear market. The stock prices may be fluctuating in the short run but in the
long run they move in trends i.e. either upwards or downwards. Industry Analysis: The
industries that contribute to the output of the major segments of the economy vary in their
growth rates and their overall contribution to economic activity. Some industries grow faster than
the GDP and are expected to continue in their growth. For example, IT industry has higher
growth rate than the GDP in 1998. The economic significance and the growth potential of the
industry have to be analysed. Company Analysis: The Company’s earnings, profitability,
operating efficiency, capital structure and management have to be analysed. These factors have
direct bearing on the stock prices and the return of the investors. Appreciation of the stock value
is a function of the performance of the company. Company with high product market share is
able to create wealth to the investors in the form of the capital appreciation.

[Link]: The valuation helps the investor to determine the return and risk expected from an
investment in the common stock.

Intrinsic Value: Intrinsic value is the present value of securities of all future cash
inflows by using simple discounting models.
 Future Value: Future value of the securities could be estimated by using a simple
statistical technique like trend analysis. The analysis of the historical behaviour of the
price enables the investor to predict the future value

[Link] of Portfolio: A portfolio is a combination of securities. The portfolio is

constructed in such a manner to meet the investor’s goals and objectives.

Diversification: The main objective of diversification is the reduction of risk in the loss
of capital and income. A diversified portfolio is comparatively less risky than holding a
single portfolio. Various types of diversification are:
a) Debt – equity diversification
b) Industry diversification
c) Company diversification
Selection: Based on the diversification level, industry and company analyses the
securities have to be selected. Funds are allocated for the selected securities.

5. Evaluation: The portfolio has to be managed efficiently. The efficient management calls for
evaluation of the portfolio

Appraisal: The return and risk performance of the security vary from time to time. The
variability in returns of the securities is measured and compared. The developments in the
economy, industry and relevant companies from which the stocks are bought have to be
appraised. The appraisal warns the loss and steps can be taken to avoid such losses.
Revision: Revision depends on the results of the appraisal. The low yielding securities
with high risk are replaced with high yielding securities with low risk factor. To keep the
return at a particular level necessitates the investor to revise the components of the
portfolio periodically.
Investment avenues:
Bonds:
Economic Investment vs Financial Investment:
Features of Good Investment