Module 1

Introduction to Investment
 Introduction to investment
• An investment is the allocation of money into an asset or venture with the
expectation of generating a profitable return over time
• A successful investment strategy relies on understanding your personal
financial goals, risk tolerance, and time horizon.
Common reasons for investing include:
Creating wealth,
Outpacing inflation,
Generating passive income,
Planning for retirement,
Achieving major financial goals.
Investment avenues
Investment avenues are the different ways you can invest your money, such
as stocks, bonds, and mutual funds, with each option offering different
levels of risk and potential return.
They can be categorized as
low-risk (like fixed deposits and government bonds),
medium-risk (like diversified mutual funds and real estate, ulip), or
high-risk (like individual stocks), and can be chosen based on your financial
goals and risk tolerance.
Other common avenues include real estate, gold, and various government-
backed schemes like the Public Provident Fund (PPF) or National Pension
System (NPS).
Investment attributes
Investment attributes are the key characteristics or features that help
investors evaluate and compare different investment options. Understanding
these attributes is crucial for making informed investment decisions.
Risk
Return
Liquidity
Time Horizon
Tax Efficiency
Inflation Protection
Income Stability
Diversification
Growth Potential
Investment process
Financial Instruments
Financial instruments are monetary contracts that can be created,
traded, or settled, and they represent a financial asset to one party and a
liability to another.
Financial instruments can be traded on exchanges or over-the-counter
and are used by individuals, businesses, and governments for investing,
raising capital, and managing risk.
Money market instruments include Treasury Bills (T-Bills) issued
by national governments as short-term debt. They are zero-coupon
securities sold at a discount. Other types are Commercial Paper (CP),
which are unsecured notes from large corporations for short-term
funding, and Certificates of Deposit (CDs), which are time deposits from
banks with fixed interest rates.
Capital market instruments are a specific type of
financial instrument used for raising long-term funds, typically
with maturities of more than one year. Equity instruments, Debt
instruments, Hybrid instruments, Pooled investment vehicles.
Derivative instruments
A derivative's value is derived from the performance of an
underlying asset, like a stock, commodity, or currency. They are
often used for risk management or speculation. Futures
contracts, Options contracts, Swaps, Contracts for Difference
(CFDs).
Trading and settlement procedure
Trading procedure
Select a broker: To participate in the market, an investor must register with a
SEBI-licensed broker.
Open a demat account: Investors must open a Demat (dematerialized)
account through a Depository Participant (DP) to hold their shares in an
electronic format. The two primary depositories in India are NSDL and CDSL.
Place an order: The investor places a buy or sell order through their broker's
online platform or by instructing them directly.
Execute the order: The stock exchange's electronic system matches the buy
and sell orders. Once a match is found, the trade is executed.
Confirm the trade: The broker sends a trade confirmation slip and a contract
note to the investor, detailing the executed order
Settlement Procedure
Clearing and netting: The clearing corporation acts as a central
counterparty to guarantee the trades. It nets out all the trades for a given
day to determine the final obligations of each member.
Rolling settlement: The Indian market currently operates on a T+1 rolling
settlement cycle for equities, meaning trades are settled one business day
after the transaction date.
Pay-in: On the settlement day (T+1), the buyer's broker pays the funds to
the clearing corporation, and the seller's demat account is debited with
the shares.
Pay-out: The clearing corporation then pays the seller's broker and credits
the buyer's demat account with the shares
Stock market indicators
Stock market indicators are statistical tools used by investors to analyze
past and current market data and forecast future market movements.
They can be divided into several categories:
Market breadth indicators:
These indicators analyze how broadly market participation is occurring in a
specific trend.
Market sentiment indicators:
These gauge the overall feeling of investors towards the market.
Trend indicators:
These help identify the direction and strength of a market trend.
Indices of the Indian stock market
Indian stock exchanges offer a variety of indices that track different market
segments. The two most prominent are
National Stock Exchange (NSE) indices: Nifty 50: India's benchmark index for
the NSE, comprising 50 of the largest and most liquid stocks across various
sectors. Nifty Bank: Tracks the performance of the most liquid and large-
capitalized Indian banking stocks. Nifty IT: Measures the performance of Indian
information technology companies. Nifty Midcap 100 / Smallcap 100: Tracks
the performance of mid-cap and small-cap companies, respectively.
Bombay Stock Exchange (BSE) indices: S&P BSE Sensex: The benchmark index
of the BSE, consisting of 30 well-established and financially sound companies
across different industries. S&P BSE Bankex: Tracks the performance of the
banking sector on the BSE. S&P BSE Midcap / Smallcap: Tracks the
performance of mid-sized and small-sized companies listed on the BSE. S&P
BSE 500: A broader index that represents the performance of 500 of the largest
companies listed on the BSE
Indian indices are collections of stocks that reflect the overall performance
of a specific market segment. They are calculated using the free-float
market capitalization method.
Benchmark indices:
These are the most prominent and widely tracked indices in India.
Market capitalization indices:
These indices group companies based on their market capitalization.
Sectoral indices:
These track the performance of specific industries within the market.
Mutual Funds
Meaning : A mutual fund collects money from many people (investors)
and invests that total amount in various financial instruments. The fund
is managed by a professional fund manager who decides where to
invest the money to earn returns.
[Link] : The sponsor is the entity that initiates the establishment
of a mutual fund. They are akin to the promoters of a company.
Role : Conceptualizes and sets up the mutual fund. Appoints the initial
trustees and the Asset Management Company (AMC). Contributes at
least 40% of the net worth of the AMC. Registers the mutual fund with
the regulatory authority (e.g., SEBI in India).
2. Trustees : Trustees are the guardians of the mutual fund's assets and
are responsible for protecting the interests of the unit holders.
Role:Hold the property of the mutual fund in trust for the benefit of
the unit holders. Oversee the activities of the AMC to ensure
compliance with regulations and the scheme's objectives. Approve the
appointment of key personnel, auditors, and custodians.
3. Asset Management Company (AMC) : The AMC is responsible for
managing the investments of the mutual fund. It is a company
approved by the regulatory authority (e.g., SEBI in India).
Role : Manages the day-to-day operations of the mutual fund. Makes
investment decisions (buys and sells securities) on behalf of the fund.
Conducts research and analysis to identify investment opportunities.
Floats new schemes (after approval from trustees and regulators).
4. Custodian: The custodian is responsible for the safekeeping of the
mutual fund's assets (securities). Role : Holds the securities (shares,
bonds, etc.) owned by the mutual fund. Ensures the physical or
dematerialized safekeeping of assets. Collects dividends, interest, and
other income on behalf of the fund.
5. Transfer Agents (Registrar and Transfer Agents - R&T
Agents): Transfer agents maintain the records of unit holders. Role:
Process applications, redemptions, and transfers of units. Maintain
records of unit holder transact
6. Unit Holders: The investors who purchase units of the mutual fund
schemes. Rights: Beneficial ownership of the assets of the scheme in
proportion to their holdings. Receive dividends (if declared under the
dividend option).
7. Auditors Role: Conduct independent audits of the mutual fund's financial
statements. Verify compliance with accounting standards and regulations. Provide
an audit report to the trustees, which is included in the annual report.
Appointment: Appointed by the trustees.
8. Regulatory Body (e.g., SEBI in India: The regulatory authority that oversees the
functioning of mutual funds in a particular jurisdiction. Role: Frame regulations and
guidelines for the operation of mutual funds. Register and approve mutual funds,
AMCs, and other participants. Monitor compliance with regulations. Conduct
inspections and investigations. Protect the interests of investors. Take enforcement
actions against violations. Promote the development of the mutual fund industry.
9. Distributors/Brokers/Advisors Role: Distribute mutual fund schemes to investors.
Provide investment advice (in the case of advisors).Earn commissions on the sale of
mutual fund units (in regular plans). Types: BanksIndependent Financial Advisors
(IFAs)Brokerage firmsOnline platforms
10. Other Service Providers Legal Advisors: Provide legal counsel to the mutual
fund, trustees, and AMC. Fund Accountants: Maintain the accounting records of the
fund. Compliance Officers: Ensure that the AMC and the fund comply with
regulations.
Advantages of investing in mutual funds:
Professional Management – Mutual funds are managed by professional fund managers
who have the knowledge and experience to make investment decisions, saving investors
the effort of managing their portfolios themselves.
Diversification – Mutual funds invest in a wide range of securities (stocks, bonds, etc.),
which helps reduce risk by spreading investments across different assets.
Liquidity – Investors can easily buy or sell mutual fund units, offering flexibility and quick
access to their money whenever needed.
Affordability – Mutual funds allow small investors to invest with relatively low amounts,
making it accessible for everyone to participate in the financial markets.
Transparency – Mutual funds regularly publish information about their holdings,
performance, and expenses, allowing investors to stay informed.
Tax Benefits – Some mutual funds, like Equity Linked Savings Schemes (ELSS), offer tax
deductions under Section 80C of the Income Tax Act.
Variety of Options – There are different types of mutual funds (equity, debt, hybrid, etc.)
to suit different risk appetites and financial goals.
Convenience – Mutual fund investments are easy to make and monitor through online
platforms, systematic investment plans (SIPs), and automatic deductions.