The document discusses the meaning and attributes of investment, emphasizing the importance of objectives, risk, return, marketability, taxes, convenience, safety, liquidity, and duration. It differentiates between investment and speculation and outlines the features and processes of investment while providing insights into financial market instruments such as money market, capital market, and hybrid instruments. Additionally, it introduces behavioral finance, highlighting its significance in understanding investor psychology and market anomalies.

1. Investment Management
Prof.Dr.G.Nagarajan

2. Meaning of Investment
Financial Meaning:
Investment is the commitment of a person’s
funds to derive future income in the form of
interest, dividend, premiums, pension or
appreciation in the value of their capital.

3. Meaning of Investment
Economic meaning:
• Net additions to the economy’s capital stock
which consists of goods and services that are
used in the production of other goods and
services.

4. Financial Meaning of Investment
• Financial investment involves of funds in
various assets, such as Stock, Bond, Real
Estate, Mortgages etc.

5. Investment Attributes
• Every investor has certain specific objectives
to achieve through his long term/short term
investment.
• objectives may be monetary/financial or
personal in character.
• objectives include safety and security of the
funds invested (principal amount), profitability
(through interest, dividend and capital
appreciation) and liquidity (convertibility into
cash as and when required).

6. • Personal objectives may be like provision for old
age and sickness, provision for house
construction, provision for education and
marriage of children and finally provision for
dependents including wife, parents or physically
handicapped member of the family.
• Investment avenue selected should be suitable
for achieving both the objectives (financial and
personal) decided.
• Merits and demerits of various investment
avenues need to be considered in the context of
such investment objectives.

7. Investment Attributes
To enable the evaluation and a reasonable comparison of
various investment avenues, the investor should study the
following attributes:
Duration of Investment
Risk in Investment
Rate of return
Risk
Marketability
Taxes
Convenience
Safety
Liquidity
Duration

8. Rate of Return
The rate of return on any investment comprises
of 2 parts,
1. Annual Income
2. Capital Gain or Loss.
3. Rate of return = Annual income + (Ending
price - Beginning price) / Beginning price
4. The rate of return on various investment
avenues would vary widely.

9. Risk
• The risk of an investment refers to the variability of the
rate of return.
• Risk is another factor which needs careful consideration
while selecting the avenue for investment.
• The risk in the investment may be related to non-
payment of principal amount or interest thereon.
• Credit risk, liquidity risk, inflation risk, market risk,
business risk, political risk.
• With the help of variance, standard deviation and beta,
the risk can be assessed
• the objective of an investor should be to minimize the
risk and to maximize the return out of the investment
made.

10. Marketability
• investment instrument be marketable, the higher the
marketability the better it is for the investor. An
investment instrument is considered to be highly
marketable when:
• It can be transacted quickly.
• The transaction cost (including brokerage and other
charges) is low.
• The price change between 2 transactions is negligible.
• Shares of large, well-established companies in the
equity market are highly marketable.

11. Taxes
Some of our investments would provide us with tax
benefits. This would also be kept in mind when choosing
the investment avenue. Tax benefits are mainly of 3 types:
• Initial tax benefits. This is the tax gain at the time of
making the investment, like life insurance.
• Continuing tax benefit. Is the tax benefit gained on the
periodic return from the investment, such as dividends.
• Terminal tax benefit. This is the tax relief the investor
gains when he liquidates the investment. For example, a
withdrawal from a provident fund account is not
taxable.

12. Convenience
• Here we are talking about the ease with which an
investment can be made and managed.
• The degree of convenience would vary from one
investment instrument to the other.
Safety
Although the degree of risk varies across
investment types, all investments bear risk.
Investors should also consider whether they could
manage the safety risk associated with an
investment - financially and psychologically.

13. Liquidity
• A liquid investment is one the investor can
easily convert to cash or cash equivalents.
• In other words, a liquid investment is tradable-
there are ample buyers and sellers on the
market for a liquid investment.
• An example of a liquid investment is currency
trading. When you trade currencies, there is
always someone willing to buy when you want
to sell and vice versa.

14. Duration
• Investments typically have a longer horizon than cash and
income options. The duration of an investment-, particularly how
long it may take to generate a healthy rate of return- is a vital
consideration for an investor.
• The investment horizon should match the duration that their
funds must be invested for or how long it would take to generate
a desired return.
• A good investment has a good risk-return trade-off and provides
a good return-duration trade-off as well.
• Given that there are several risks that an investment faces, it is
important to use these attributes to assess the suitability of a
financial instrument or option.

15. PROCESS OF INVESTMENT AND
SPECULATION

16. INVESTMENT V/S SPECULATION
Basis Investment Speculation
Basis of acquisition
Usually by outright
purchase Often on Margin
Marketable Asset Not necessary Necessary
Quantity of risk Small Large
Insider trading analysis Not possible
Based on insider
trading transaction
happen
Stability of Income Very stable Uncertain and erratic
Source of Income Earning of enterprises Change in Market
Price
Length of commitment Long run For a short time
period

22. Features of a good investment
a. Objective fulfillment
An investment should fulfill the objective of the
savers.
Every individual has a definite objective in making
an investment.
When the investment objective is contrasted with
the uncertainty involved with investments, the
fulfillment of the objectives through the chosen
investment avenue could become complex.

23. b. Safety
The first and foremost concern of any ordinary
investor is that his investment should be safe.
That is he should get back the principal at the
end of the maturity period of the investment.
There is no absolute safety in any investment,
except probably with investment in government
securities or such instruments where the
repayment of interest and principal is
guaranteed by the government.

24. c. Return
The return from any investment is expectedly
consistent with the extent of risk assumed by
the investor.
Risk and return go together. Higher the risk,
higher the chances of getting higher return.
An investment in a low risk - high safety
investment such as investment in government
securities will obviously get the investor only
low returns.

25. d. Liquidity
Given a choice, investors would prefer a liquid
investment than a higher return investment.
Because the investment climate and market
conditions may change or investor may be
confronted by an urgent unforeseen
commitment for which he might need funds,
and if he can dispose of his investment without
suffering unduly in terms of loss of returns, he
would prefer the liquid investment.

26. e. Hedge against inflation
The purchasing power of money deteriorates
heavily in a country which is not efficient or not
well endowed, in relation to another country.
Investors who save for the long term, look for
hedge against inflation so that their investments
are not unduly eroded; rather they look for a
capital gain which neutralizes the erosion in
purchasing power and still gives a return.

27. f. Concealabilty
If not from the taxman, investors would like to
keep their investments rather confidential from
their own kith and kin so that the investments
made for their old age/ uncertain future does not
become a hunting ground for their own lives.
Safeguarding of financial instruments
representing the investments may be easier than
investment made in real estate. Moreover, the
real estate may be prone to encroachment and
other such hazards.

28. h. Tax protection
Investment decisions are highly influenced by the tax
system in the country.
Investors look for front-end tax incentives while
making an investment and also rear-end tax reliefs
while reaping the benefit of their investments.
As against tax incentives and reliefs, if investors are
to pay taxes on the income earned from investments,
they look for higher return in such investments so
that their after tax income is comparable to the pre-
tax equivalent level with some other income which is
free of tax, but is more risky.

29. Investment Process
The process of investment includes five stages:
Investment Policy: The policy is formulated on the basis of
investible funds, objectives and knowledge about investment
sources.
Security Analyses: Economic, industry and company analyses are
carried out for the purchase of securities.
Valuation: Intrinsic value of the share is measured through book
value of the share and P/E ratio( earnings per share).
Portfolio Construction: Portfolio is diversified to maximize return
and minimize risk.
Portfolio Evaluation: The performance of the portfolio is
appraised and revised.

33. Financial markets

52. FINANCIAL MARKET
INSTRUMENTS

53. 3 TYPES OF FINANCIAL MARKET
INSTRUMENTS
• Money market instruments.
• Capital market instruments.
• Hybrid instruments.

54. MONEY MARKET
“a market for short-term money and financial assets that
are near substitutes for money. The term short-term
means generally a period upto one year and near
substitutes to money is used to denote any financial
asset which can be quickly converted into money with
minimum transaction cost”.

55. MONEY MARKET INSTRUMENTS
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

56. CALL /NOTICE-MONEY MARKET
• Call/Notice money is the money borrowed or lent on demand
for a very short period.
• When money is borrowed or lent for a day, it is known as Call
(Overnight) Money. Intervening holidays and/or Sunday are
excluded for this purpose. Thus money, borrowed on a day and
repaid on the next working day, (irrespective of the number of
intervening holidays) is "Call Money".
NOTICE-MONEY MARKET
• When money is borrowed or lent for more than a day and up
to 14 days, it is "Notice Money". No collateral security is
required to cover these transactions.

57. INTER-BANK TERM MONEY
• Inter-bank market for deposits of maturity
beyond 14 days is referred to as the term
money market. The entry restrictions are the
same as those for Call/Notice Money except
that, as per existing regulations, the specified
entities are not allowed to lend beyond 14
days.

58. TREASURY BILLS
• Treasury Bills are short term (up to one year) borrowing
instruments of the union government. It is an IOU of the
Government. It is a promise by the Government to pay a stated
sum after expiry of the stated period from the date of issue
(14/91/182/364 days i.e. less than one year.

59. CERTIFICATE OF DEPOSITS
• Certificates of Deposit (CDs) is a negotiable money market
instrument and issued in dematerialized form or as a
Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period.
Guidelines for issue of CDs are presently governed by various
directives issued by the Reserve Bank of India, as amended
from time to time.

60. • CDs can be issued by
• (i) scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and
• (ii) select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within the
umbrella limit fixed by RBI.
• Banks have the freedom to issue CDs depending on their
requirements.
• An FI may issue CDs within the overall umbrella limit fixed
by RBI, i.e., issue of CD together with other instruments viz.,
term money, term deposits, commercial papers and inter-
corporate deposits should not exceed 100 per cent of its net
owned funds, as per the latest audited balance sheet.

61. COMMERCIAL PAPER
• CP is a note in evidence of the debt obligation of the
issuer. On issuing commercial paper the debt
obligation is transformed into an instrument. CP is
thus an unsecured promissory note privately placed
with investors at a discount rate to face value
determined by market forces. CP is freely negotiable
by endorsement and delivery.

62. • A company shall be eligible to issue CP provided –
• (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore;
• (b) the working capital (fund-based) limit of the company
from the banking system is not less than Rs.4 crore and
• (c) the borrowed account of the company is classified as a
Standard Asset by the financing bank/s.
• The minimum maturity period of CP is 7 days. The minimum
credit rating shall be P-2 of CRISIL or such equivalent rating
by other agencies. (for more details visit www.indianmba.com
faculty column)

63. CAPITAL MARKET INSTRUMENTS
• The capital market generally consists of the following
long term period i.e., more than one year period,
financial instruments; In the equity segment Equity
shares, preference shares, convertible preference
shares, non-convertible preference shares etc and in
the debt segment debentures, zero coupon bonds,
deep discount bonds etc.

64. HYBRID INSTRUMENTS
• Hybrid instruments have both the features of
equity and debenture. This kind of instruments
is called as hybrid instruments. Examples are
convertible debentures, warrants etc.

65. CONCLUSION
• In India money market is regulated by Reserve bank
of India (www.rbi.org.in) and Securities Exchange
Board of India (SEBI) [www.sebi.gov.in ] regulates
capital market. Capital market consists of primary
market and secondary market. All Initial Public
Offerings comes under the primary market and all
secondary market transactions deals in secondary
market.

66. • Secondary market refers to a market where securities
are traded after being initially offered to the public in
the primary market and/or listed on the Stock
Exchange. Secondary market comprises of equity
markets and the debt markets. In the secondary
market transactions BSE and NSE plays a great role
in exchange of capital market instruments. (visit
www.bseindia.com and www.nseindia.com ).

67. Nature, Scope, Objectives and
Significance of Behavioural Finance

68. Behavioural Finance: Introduction
Behavioural Finance:
• Behavioural Finance denotes the study of finance based
on credible assumptions about how people behave, often
confirmed by psychological experiments.
• Shefrin (2005) in his book on behavioural asset pricing
states ‘Behavioural finance is the study of how psychology
phenomena impact financial behaviour’.

69. Behavioral Finance: Introduction
Behavioral Finance:
• It is a concept developed with the inputs taken from
the field of psychology and finance.
• It tries to understand various puzzling observations in
stock markets with better explanations.
• The behaviour of individuals, practitioners, markets
and managers is sometimes characterized as
irrational.

70. Behavioral Finance
People in standard finance are rational. People in
behavioral finance are normal.
Meir Statman

71. Behavioral Finance: Introduction
Behavioral Finance:
• Some decisions are simple choices like, which brand
of toothpaste we will use, how hard we will study in
behavioural finance.
• Other decisions such as whether we should buy a
particular stock, how should we invest in tax saving
instruments, etc impact our financial well being.

72. Behavioural Finance: Introduction
Nature
• Behavioral Finance is just not a part of finance.
• It is something which is much broader and wider and
includes the insights from behavioral economics,
psychology and microeconomic theory.
• The main theme of the traditional finance is to avoid all
the possible effects of individual’s personality and
mindset

73. Behavioural Finance: Introduction
Behavioural finance is divide it into two branches.
Micro Behavioral Finance:
– This deals with the behaviour of individual investors.
– In this the irrational investors are compared to rational
investors
Macro Behavioral Finance:
– This deals with the drawbacks of efficient market
hypothesis.
– EMH is one of the models in conventional finance that
helps us understand the trend of financial markets.

74. Behavioral Finance: Introduction
• Behavioral Finance as a Science:
• Science is a systematic and scientific way of observing,
recording, analyzing and interpreting any event.
• Behavioural Finance has got its inputs from traditional
finance which is a systematic and well designed subject
based on various theories.
• On this basis behavioural finance can be said to be a
science .

75. Behavioral Finance: Introduction
• Behavioral Finance as an Art
• In art we create our own rules and not work on rules of
thumb as in science.
• Art helps us to use theoretical concepts in the practical
world.
• Behavioural finance focuses on the reasons that limit the
theories of standard finance and also the reasons for market
anomalies created.
• It provides various tailor made solutions to the investors to
be applied in their financial planning.
• Based on above behavioural finance can be said to be an
art of finance in a more practical manner.

76. Behavioral Finance: Introduction
Scope:
• To understand the Reasons of Market Anomalies: (the effect of any
event, calendar effect etc)
• To Identify Investor’s Personalities: Various new financial instruments
can be developed to hedge unwanted biases created in financial markets.
• Helps to identify the risks and their hedging strategies
• Provides an explanation to various corporate activities: Effect of good or
bad news, stock split, dividend decision etc.
• To enhance the skill set of investment advisors: Done by better
understanding of investor’s goal, maintaining a systematic approach to
advise.

77. Behavioral Finance: Introduction
Objectives
• To review the debatable issues in Standard Finance
• To Protect the interest of stakeholders in unstable
investment scenario
• To examine the relationship between theories of Standard
Finance and Behavioral Finance.
• To analyse the influence of biases on the investment process
because of different personalities in the financial markets.
• To examine the various social responsibilities of the subject.
• To discuss emerging issues in the financial world.

78. Behavioral Finance: Introduction
Objectives
• To discuss the development of new financial instruments to
hedge the conventional instruments against various market
anomalies
• To get the feel of trend of changed events over years, across
various economies.
• To examine the contagion effect of various events.
• An effort towards more elaborated identification of investor’s
personalities.
• More elaborated discussion on optimum Asset Allocation
according to behavioral aspects as well as aspects like age,
gender, income etc of the investor.

79. Behavior
• Trend is holding – Lets Buy
• Good thing I didn’t wait
• I will use this correction to
increase my position
Greed
• Don’t want to sell at a loss,
lets wait for it to recover
• Enough, I am selling it
• Good thing I sold
everything
• I should not have sold
Fear

80. Parameters Large-cap Mid-cap Small-cap
SEBI Definition (Listed
companies in terms
of full market
capitalization)
Top 100 companies in
stock market
Companies ranked
101-250
Companies with
ranking 251 onwards
Market Cap
₹ 20000 crore ₹ 5000- ₹20000
crores
< ₹ 5000 crore
Risk Profile Low Moderate High
Volatility Less volatile Moderate Highly volatile
Liquidity High Moderate Low
Growth Potential and
returns
Steady and Stable
returns
Moderate growth and
returns
Considered to be high
growth with good
returns