Introduction To Investment

Investment
1
Definition
 Investment involves employment of fundswith the

aim of achieving additional income or growth in
values.
 Lending money to another [interest]

 Purchasing of gold[value appreciation]
 Purchase of insurance plan[promised future
benefits]
The essential quality of an investment is that it involves

1
waiting for a reward..

Different Definitions for Investment
Investment may be defined as……………….
“a commitment of funds made in the expectation

of some positive rate of return” OR
it can be defined as………………..
“a sacrifice of current money or other resources

for future benefits”.
2
Expectation of return is an essential element of
Investment
 Return is expected to be realized in future

 Future is uncertain
 Expected return > realized return - variation
 Variation in income is risk
3
Numerous avenues of investment are available today,
such as,
 Non marketable financial assets

 Bonds
 Mutual fund schemes
 Real Estate

Equity shares

Life insurance policies
Financial derivatives and

Precious objects

4
Financial Meaning of Investment
commitment of a person’s funds to derive future
income or appreciation in the value of their capital.
 Future income may be

Interest
Dividend
Premiums
Pension benefits
Purchasing of shares/debentures
 Post office saving certificates
 Insurance policies

5
Economic Meaning of Investment
net addition to the economy’s capital stock which

consists of goods and services that are used in
the production of other goods and services.
Formation of new and productive capital

New construction
Plant and machinery
Inventories
 All these investments generate physical assets
6
Characteristics of Investment
All investments are characterised by certain features.
 Returns
 Risk
 Safety

Liquidity
Tax Shelter

7
Return
Returns depends upon
 nature of the investment
 the maturity period
 host of other factors
Received return in the form of

Yield[dividend or interest] + capital
appreciation[difference between sales price and
purchase price]
8
Risk
 Risk is inherent in any investment.
 Risk and return of an investment are related.
 the higher the risk, the higher is the return..
 Risks may be
Loss of capital
Delay in repayment
Non-payment of interest
Variability in returns
9
Risk Continues………../
Risk of an investment depends on the following

Factors

Maturity period
 The lower credit worthiness

Nature of the investment eg. Equity shares carry
higher risk and debt instruments bond/debentures
carry lower risk compare with equity.
10
Safety
 Every investor expects to get back his capital on
maturity without loss and without delay
 Safety is another feature which an investor

desires for his investments
 safety implies the certainty of return of capital

without loss of money or time.
11
Liquidity
An investment which is easily saleable or

marketable
 without loss of money
 without loss of time
is said to be possess liquidity.
12
Tax Shelter
Tax benefits are in the following three kinds
Initial tax benefit

Continuing tax benefit

Terminal tax benefit
13
Initial tax benefit
The tax relief enjoyed at the time of making the
Investment.
Continuing Tax benefit

A continuing tax benefit represents the tax shield
associated with the periodic returns from the
Investment.
14
Terminal Tax benefit
Relief from taxation when an investment is realized
or liquidate
Ex:
withdrawal from a public provident fund
account is not subject to tax
15
Objectives of Investment
Each investor tries to maximise his welfare by
choosing the optimum combination of risk and
expected return in accordance with his preference and
capacity.
Investors’ objectives
 Maximisation of return

Minimisation of risk
Hedge against inflation

16
 Savings kept as a cash are barren( unproductive)
 Don't earn anything
 Loses its value due to rise in prices, since

inflation erodes the value of money
Ifthe investment can not earn as much as the

rise in prices, the real rate of return would be
negative
17
Actual return realized from an investment may
different from the expected return – risk
 Government securities- low risk[practically risk

free]
 Debentures and preference shares-medium risk
Equity shares- high risk
18
Attitude towards risk
Some investors are risk averse

Some investors have affinity to risk
 Risk bearing capacity of an investor is a function of his

income
 A person with higher income is assumed to have a
higher risk bearing capacity
Each investor tries to maximise his welfare by choosing the

optimum combination of risk and expected return in
19
accordance with his preference and capacity
 Investment & Speculation
 Investment and speculation are closely related.

 Both involve purchase of assets-shares & securities.
 Risk
 CapitalGain
 Time period
20
Risk
 It refers to the possibility of incurring a loss in a
financial transaction
 High return is associated with higher risk
 Investor : commits his funds in low risk

investment
 Speculator: commits his funds to higher risk

investment to achieve high returns
21
Capital Gain
 Speculator achieve profits through price changes
– capital gains
 He is interested in capital gain rather than

income from an investment
 Purchase of securities proceeded by

proper investigation and analysis to receive
stable income & capital appreciation
22
Capital gain ---continues/
 Speculation associated with buying at lower price

and selling at higher price to make large capital
gain
 Speculator engages in frequent buying and

selling transaction
23
Time period
 Investment is long-term in nature – waiting for
returns at consistent basis
 Speculator is interested in short term trade gain

Through buying and selling of instruments
 Both investment and speculation aim at good

returns but the difference is motives and
methods
Investment some times described as a well

grounded and carefully planned speculation 24
Investment & Gambling
Gambling is quite the opposite of investment.
Typical examples are horse races, card games,
lotteries, etc.
 It consists in taking high risks not only for high

returns, but also for thrill and excitement.
 It is unplanned and non scientific
 In gambling artificial and unnecessary risks are

created fro increasing returns
25
 But an investment is carefully planned, evaluated
 Allocate funds to various investment

Concentrate on safety
Expecting moderate and continuous return for

increasing the returns
26
5 Basic Principles of Investment
• Diversify - do not put all your money in one type
of investment
Investment A Investment B
• Start early
“Compound interest is the ninth wonder of the world. He who understands

it, earns it ... he who doesn't ... pays it.” – Albert Einstein
• Start early
• Start early
• The higher the risk, the higher the potential for
higher yield
• Don’t let market slump change your long-term
investment plan
• Buy when the price is down and sell when the
price is up
Model questions
4. Whatare the characteristics that an investor

would like to have in an investment option?
Explain each of these characteristics.
6. “investment
is well – grounded and carefully
planned speculation” .Discuss
27

Introduction To Investment

Uploaded by

Copyright:

Available Formats

Introduction To Investment

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Introduction To Investment

Uploaded by

Copyright:

Available Formats

Investment

 Investment involves employment of fundswith the

 Lending money to another [interest]

The essential quality of an investment is that it involves

waiting for a reward..

Investment may be defined as……………….

“a commitment of funds made in the expectation

it can be defined as………………..

“a sacrifice of current money or other resources

 Return is expected to be realized in future

 Non marketable financial assets

 Future income may be

net addition to the economy’s capital stock which

Formation of new and productive capital

 All these investments generate physical assets

Received return in the form of

Risk of an investment depends on the following

 Safety is another feature which an investor

 safety implies the certainty of return of capital

An investment which is easily saleable or

is said to be possess liquidity.

Initial tax benefit

Continuing Tax benefit

 Don't earn anything

 Loses its value due to rise in prices, since

Ifthe investment can not earn as much as the

 Government securities- low risk[practically risk

 Debentures and preference shares-medium risk

Equity shares- high risk

Some investors are risk averse

 Risk bearing capacity of an investor is a function of his

Each investor tries to maximise his welfare by choosing the

 Investment and speculation are closely related.

 High return is associated with higher risk

 Investor : commits his funds in low risk

 Speculator: commits his funds to higher risk

 He is interested in capital gain rather than

 Purchase of securities proceeded by

 Speculation associated with buying at lower price

 Speculator engages in frequent buying and

 Speculator is interested in short term trade gain

 Both investment and speculation aim at good

Investment some times described as a well

 It consists in taking high risks not only for high

 In gambling artificial and unnecessary risks are

“Compound interest is the ninth wonder of the world. He who understands

4. Whatare the characteristics that an investor

You might also like