INTRODUCTION TO INVENSTMENT

Investing involves allocating money into financial assets with the expectation of generating
returns over time. The term ‘investing’ could be associated with different activities, but the
common target in these activities is to ‘employ’ the money (funds) during the time period
seeking to enhance the investor’s wealth. Funds to be invested come from assets already owned,
borrowed money and savings. By foregoing consumption today and investing their savings,
investors expect to enhance their future consumption possibilities by increasing their wealth.
However, it is always useful to make a distinction between real and financial investments. Real
investments usually involve some kind of tangible assets, such as land, machinery, factories, etc.
Financial investments involve contracts in paper or electronic form, such as stocks, bonds, etc

Investment activity involves the use of funds or savings for acquisition of assets & further
creation of assets. Investment is an employment of funds on assets in the aim of earning income
or capital appreciation.

Definition of Investment

“Investment analysis is the study of financial securities for the purpose of successful investing.
“An investment is the purchase of goods that are not consumed today but are used in the future to
create wealth”.
“An investment is a commitment of funds make in the expectation of some positive rate of
return”. Example – equity shares, preference share and debentures etc.
According to oxford dictionary “investment is defined as the action or process of investment
money for profit”.
According to keyness “investment is define as the addition of the value of the capital equipment
which has resulted from the productive activity of the period”.

“Investment is a commitment / employment 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 that the investor assumes”. - Donald E. Fischer and Ronald J. Jordan

Financial investment is the allocation of money to assets that are expected to yield some gain
over a period of time.
Characteristics of Investment

 Safety of principal (e.g. gilt edged securities)

 Liquidity (e.g. CPs and CDs)
 Income stability (e.g. Debentures)
 Capital appreciation (e.g. equity)
 Tangibility (e.g. land and buildings)

Investment refers to investing money in financial physical assets and marketing assets. Major
investment features are risk, return, safety, liquidity, marketability, concealability, capital growth,
purchasing power, stability and the benefits.

 Risk Risk refers to the loss of principal amount of an investment. It is one of the major
characteristics of an investment. The risk depends on the following factors: When investment
maturity period is longer; investor will take larger risks.• Government or Semi-Government bodies
issue securities, which have lesser risks.• In the case of the debt instrument or fixed deposit, the
risk of above investment is less due to their secured and • fixed interest payable. For instance,
debentures. In the case of ownership instrument like equity or preference shares, the risk is more
due to their unsecured • nature and variability of their return and ownership character. The risk of
degree of variability of returns is more in the case of ownership capital as compared to debt capital.
• The tax provisions would influence the return of risk. Return Return refers to expected rate of
return from an investment. Return is an important characteristic of investment.
 Return is the major factor which influences the pattern of investment that is made by the investor.
Investor always prefers high rate of return for his investment. Safety Safety refers to the protection
of investor principal amount and expected rate of return.
 Safety is also one of the essential and crucial elements of investment. Investor prefers his capital’s
safety. Capital is the certainty of return without loss of money or it will take time to retain it. If
investor prefers less-risk securities, he chooses Government bonds. In cases, where investor prefers
high rate of returns, investor will choose private securities, whose safety is low.
 Liquidity Liquidity refers to investments ready to be converted into cash. In other words, it is
available immediately in the cash form. Liquidity means that investment is easily realisable, saleable
or marketable. When the liquidity is high, then the return may be low. For example, UTI units. An
investor generally prefers liquidity for his investments and safety of funds through a minimumrisk
and maximum-return investment.
 Marketability Marketability refers to buying and selling of securities in market. Marketability
means transferability or saleability of an asset. Securities listed in a stock market are more easily
marketable than which are not listed. Public Limited Companies’ shares are more easily
transferable than those of private limited companies. Concealability Concealability is another
essential characteristic of the investment.
 Concealability means investment to be safe from social disorders, government confiscations or
unacceptable levels of taxation. Property must be concealable and should leave no record of
income received from its use or sale. Gold and precious stones have long been esteemed for these
purposes, because they combine high-value with small bulk and are readily transferable.
 Capital growth Capital growth refers to appreciation of investment. Capital growth has today
become an important character of investment. Capital appreciation, also known as capital growth,
refers to the increase in the value of an investment over time. It tells you how much profit you
would pay taxes on, if you sold the investment that day. Investors and their advisers are constantly
seeking ‘growth stock’ in the right industry; bought at the right time. Purchasing power stability It
refers to the buying capacity of investment in market.
 Purchasing power stability has become one of the import traits of investment. Investment always
involves the commitment of current funds with the objective of receiving greater amounts of future
[Link] Analysis and Portfolio Management.
 Stability of income It refers to constant return from an investment. Another major characteristic
feature of the investment is the stability of income. Stability of income must look for different paths
just as the security of the principal. Every investor must always consider stability of monetary
income and stability of the purchasing power of income.
 Tax benefits Tax benefit is the last characteristic feature of the investment. Planning an investment
programme without considering the tax burden may be costly to the investor. There are actually
two problems: One concerned with the amount of income paid by the investment.• Another is the
burden of income tax upon that income.•
ATTRIBUTES OF INVESTMENT

1. Return:

The primary goal of investing can come in forms like capital appreciation, dividends,
interest, or rent often expressed as a percentage over a specific time period higher potential
returns usually come with higher risk.

2. Risk:

The possibility of losing some or all of the invested capital. Types include market risk, credit
risk, inflation risk, liquidity risk. Generally inversely related to return potential. Can be
mitigated through diversification

3. Liquidity:

Ease of converting the investment to cash without significant loss of value, Ranges from
highly liquid (e.g. stocks) to illiquid (e.g. real estate). Affects ability to access funds quickly
if needed

4. Time horizon:

Expected length of time to hold the investment can be short-term, medium-term, or long-term

Influences choice of investment vehicle and risk tolerance.

5. Tax implications:

How investment gains are taxed (e.g. capital gains, ordinary income). Tax-advantaged
accounts like IRAs or 401(k)s can offer benefits Some investments (e.g. municipal bonds)
may offer tax advantages.

6. Volatility:

Degree of price fluctuation over time Higher volatility often associated with higher risk and
return potential Can create opportunities for profit but also increases uncertainty

7. Correlation:

How the investment's performance relates to other assets or market conditions Important for
portfolio diversification. Negatively correlated assets can help reduce overall portfolio risk

8. Minimum investment:

The smallest amount required to invest can vary widely between investment types may
impact accessibility for different investors.
 9. Fees and expenses:

Costs associated with buying, holding, or selling the investment can include management
fees, transaction costs, load fees. Impact overall returns and should be considered when
evaluating investments

10. Regulation and oversight:

Level of government regulation and investor protection Varies by investment type and
jurisdiction Can affect risk and transparency

OBJECTIVES OF INVESTMENT

1. Capital appreciation:
2. Income generation:
3. Wealth preservation:
4. Risk management:
5. Liquidity:
6. Hedge against Inflation
7. Safety
8. Tax Benefit
9. Return
1. Capital appreciation is a rise in an investment's market price. Capital appreciation is the
difference between the purchase price and the selling price of an investment. Occurs
when the market value of an asset rises due to various factors such as company growth,
market conditions, or increased demand.
2. Income generation as an investment objective focuses on creating regular cash flows
from investments. example Dividends from stocks, Interest from bonds and savings
accounts, Rental income from real estate, Royalties from intellectual property.
3. Wealth preservation as an investment objective focuses on protecting and maintaining
the real value of assets over time. A primary aim is to ensure investments grow at a rate
that at least matches or exceeds inflation. This prevents the erosion of purchasing power
over time. This involves safeguarding wealth from potential threats such as market
volatility, economic downturns, or legal liabilities.
4. Risk management in investment refers to the process of identifying, assessing, and
controlling potential financial losses. Recognizing different types of risks (market risk,
credit risk, liquidity risk, etc.). Analyzing potential scenarios that could lead to losses.
 Spreading investments across various asset classes, sectors, and geographic regions.
Balancing high-risk and low-risk investments in a portfolio
5. Liquidity in investment refers to the ease and speed with which an asset can be
converted into cash without significantly affecting its market value. It's a crucial
objective for many investors. An asset's liquidity is determined by how quickly it can be
sold and how stable its price remains during the sale. Liquid markets tend to be more
efficient and have lower volatility.
6. Hedge against Inflation The rate of return should ensure a cover against the inflation. •
The return thus earned should assure the safety of the principal amount, regular flow of
income and be a hedge against inflation
7. Safety Investment done with Government assure more safety than with the private party
8. Tax Benefit Investment may be undertaken to reduce the income tax burden. E.g.
Savings bond, Provident Fund, Insurance etc.
9. Return Rate of return could be defined as the total income the investor receives during
the holding period expressed as a percentage of the purchasing price at the beginning of
the holding period. Return = End period value - Beginning period value + Dividend.

INVESTMENT CONSTRAINTS

Investment constraints are restrictions or limitations placed on investment decisions and portfolio
management. These constraints can be imposed by various factors, including regulatory
requirements, client preferences, or internal policies. Here's a detailed explanation of common
investment constraints:

1. Liquidity constraints:

Restrictions on how quickly investments can be converted to cash without significant loss in
value. Limits investments in illiquid assets like private equity or certain real estate. Example:
A mutual fund may need to maintain a certain percentage of assets in cash or highly liquid
securities to meet potential redemptions.

2. Time horizon constraints:

Limitations based on the expected duration of the investment. Influences the types of assets
chosen and the level of risk taken. Example: A pension fund with long-term obligations may
invest more heavily in stocks, while a short-term investor might prefer bonds or money
market instruments.

3. Regulatory constraints:

Legal restrictions imposed by government bodies or regulatory agencies. Limits certain types
of investments or enforces diversification requirements. Example: The Employee Retirement
Income Security Act (ERISA) in the US sets standards for pension and health plans in private
industry.
4. Tax constraints:

Considerations related to the tax implications of investment decisions. Influences investment

choices to optimize after-tax returns. Example: High-income investors might prefer
municipal bonds for their tax-exempt status.

5. Unique circumstances/preferences:

Specific requirements set by individual investors or institutions. Can limit or exclude certain
types of investments based on personal or organizational values. Example: Socially
responsible investing (SRI) constraints that exclude tobacco or firearms companies.

6. Legal and regulatory constraints:

Restrictions imposed by laws, regulations, or governing documents. Limits investment

options and strategies. Example: A trust may have specific instructions in its charter about
permissible investments.

7. Risk tolerance constraints:

Limitations based on the investor's willingness and ability to accept potential losses.
Determines the overall risk profile of the portfolio. Example: A conservative investor might
limit equity exposure to 30% of their portfolio.

8. Currency constraints:

Restrictions on investments in foreign currencies or the need to hedge currency risk. Limits
international diversification or requires additional risk management. Example: A US-based
pension fund might limit non-USD investments to 20% of the portfolio.

9. Concentration constraints:

Limits on the amount that can be invested in a single security, sector, or asset class. Enforces
diversification and reduces specific risk. Example: A mutual fund might have a rule limiting
any single stock to no more than 5% of the portfolio.

10. Ethical or ESG constraints:

Restrictions based on and governance factors. Excludes certain investments or prioritizes

others based on ethical considerations. Example: An endowment fund might avoid investing
in fossil fuel companies due to environmental concerns.
 11. Size constraints:

Limitations based on the size of the investment or the investee company. Can restrict
investments to certain market capitalizations or deal sizes. Example: A small-cap fund might
only invest in companies with market caps under $2 billion.

12. Leverage constraints:

Restrictions on the use of borrowed money or derivatives to amplify returns. Limits potential
returns but also reduces risk. Example: A conservative pension fund might prohibit the use of
leverage entirely.

Understanding and managing these constraints is crucial for effective portfolio management.
Investment managers must balance these restrictions with the goal of achieving optimal returns
for their clients.