Unit- 1

INVESTMENT SETTING-FINANCIAL AND ECONOMIC MEANING OF

INVESTMENT-CHARACTERISTICS AND OBJECTIVES OF INVESTMENT-
TYPES OF INVESTMENT-INVESTMENT ALTERNATIVES-CHOICE AND
EVALUATION-RISK AND RETURN CONCEPTS

Investment – An Introduction

When a person is found with extra money, he will either save it or invest it. When the
homemakers keep the excess money they have in a box or a child saves the excess money
given to it in a piggy bank, it is saving. Saving has no extra benefit. It is just an allocation of
the current money available for the future purpose. Whereas investment happen when the
home maker or the kid opens an account in a bank or a recurring deposit in a post office. This
gives value to their money they deposited with the bank or post office. They will get some
extra return for the period they deposited the money with the bank and this extra return is
called interest. Investment is a commitment of funds made in the expectation of some return.

When current income exceeds current consumption desires, people tend to save the excess.
With the excess money they buy a product and keep it for the future which will not have
appreciation when they take it for use in the future. Alternatively, they may give up the
immediate possession of the product and save the money for the future use thinking about the
inflation. This trade off between present consumption for a higher level of future
consumption is saving.

Investment is the current commitment of money for a period of time in order to derive future
payments that will compensate the investors for

1. The time the funds are committed.

2. The expected rate of inflation
3. The uncertainty of the future payments.
Investors can be an individual, an organisation, a pension fund or government.
Investment includes stocks, debentures, bonds, commodities, real estate, plant and
machinery, etc.,

Investment may be classified as the economic investment and financial investment.

 Financial Investment Economic Investment

What? Commitment of funds to derive future Commitment of funds in the new and
income in the form of interest, dividend, productive capital stock to generate
premium pension benefits or appreciation physical assets and industrial
in the value of the initial investment activity.
Examples Shares, debentures, post office savings Buying plant and machinery,
certificates, insurance policies, etc., inventories, construction and so on.

Who Anyone who desires a return and willing to Corporate entities that participate in
invest? accept the risk the capital market

Financial and economic investments are dependant and related. The money invested in financial
investment is converted into physical asset ultimately. Thus real(economic) and financial
investments support each other.
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All investments are made with the objective of driving a return. Return is in the form
of yield and capital appreciation.
Yield is the dividend or interest from the investment and capital appreciation is the
difference between sale price and the actual price when the investment is earlier
made.
The return depends on various factors such as nature of investment, maturity period,
market demand and so on. For a longer period of investment, the investor expects a
high return as the money is parted from them for a long period. The return is also
determined by the market demand and supply of the instrument.

Risks

 Risk is inbuilt in any form of investment. Risk is the fear of loss of investment or
uncertainty in return.
 Some investments are almost without risk such as government securities, bank
deposits and others are more risky.
 The risk is determined by factors such as maturity period, repayment capacity,
nature of return commitment and so on.
o When the time increases, the uncertainty also gets increases.
o The lower the payment capacity, higher is the risk. This is called as
trustworthiness or value generation capacity of the investment.
o The level of ownership commitment to the investment carries a high risk to
the profit as the priority of cash flow is to bond payments rather than to
ownership payments.
Safety
Safety is the certainty of capital without loss of money or time. The safety is
gauged through the reputation established by the borrower of funds. When risk is
low, safety is high.
Liquidity
An investment that is easily saleable or marketable without loss of money and
without loss of money and time is said to possess the characteristics of liquidity.
Bank deposits, national savings deposits, bank deposits and so on are not
marketable. Preference shares and debentures are marketable. Equity shares are
easily marketable.
Risk and Return
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Process of Investment

Investment Process

Investment Analysis Valuation Portfolio Portfolio

Policy Construction Evaluation

*Investible *Market *Intrinsic Value *Diversification *Appraisal

Fund
*Industry *Future Value *Selection and *Revision
*Objectives allocation
*Company
*Knowledge