IPM

Unit1
Investment
PROF.P.NIVETHA

Meaning of Investment
• Investment is putting money into
something with the expectation
that it will generate income or
the value will appreciate in
future or profit.
• It involves the commitment of
resources which have been
saved or put away from current
consumption in the hope some
benefits will accrue in future.
• Investment involves long term
commitment of funds and
waiting for a reward in the
future.
Meaning
of
Investment

Meaning of Investment
• 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.
Financial
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.
Economic
meaning

Characteristics of Investment
•Return
•Risk
• Safety
•Liquidity
Characteri
stics of
Investmen
t

Types of Investments
Securities: stocks, bonds, options
Real Property: land, buildings
Tangible Personal Property: gold, artwork,
antiques
Securities
or
Property
Direct: investor directly acquires a
claim
 Indirect: investor owns part of a
portfolio
Direct or
Indirect

Types of Investments
Debt, Equity or
Derivative
Securities
• – Debt: investor lends funds in exchange
for interest
• income and repayment of loan in future
(bonds)
• – Equity: represents ongoing ownership in
a business or
• property (common stocks)
• – Derivative Securities: neither debt nor
equity; derive
• value from an underlying asset (options)
• Low Risk or
High Risk
• – Risk: chance that actual investment
returns will differ from those expected

Essential features of an Investment
• Safety of
principal
• Liquidity
• Stable income
• Capital growth
• Legality
• Tax implications
Essential
features of
an
Investment

Investment and speculation
• Investment and speculation involve purchase
of assets like shares and securities.
Traditionally, investment is distinguished from
speculation with respect to three factors, viz.,
risk, capital gain and time period.
Investment
and
speculation
If a person buys a stocks for its dividend, he
may be termed as an investor. If he buys with
the anticipation of a price rise in the future and
the hope of selling it again, he would be termed
as speculator. The dividend line between
speculation and investment is very thin because
people buy stocks for dividends and capital
appreciation.
Ex:

Investment and Gambling:
A gamble is usually a very short-
term investment in a game or
chance. Gambling is different from
speculation and investment.
Typical example of gambling are
horse races, card games, lotteries
etc. The time horizon involved in
gambling is shorter than in
speculation and investment.
Earning an income from gambling
is a secondary factor. Risk and
return trade-off is not found in
gambling and negative outcomes
are expected.
Investment
and
Gambling:

Factors affecting investment
1. Interest rates (the cost of
borrowing)
2. Economic growth (changes in
demand)
3. Confidence/expectations
4. Technological developments
(productivity of capital)
5. Availability of finance from
banks.
6. Others (depreciation, wage
costs, inflation, government
policy)
Factors
affecting
investment

Investment Avenues in India.
These are shares of company and can be traded
in secondary market. Investors get benefit by
change in price of share and dividend given by
companies. Equity shares represent ownership
capital.
Equity
shares
Bonds are the instruments that are considered
as a relatively safer investment avenues.
G sec bonds
GOI relief funds
Govt. agency funds
PSU Bonds
RBI BOND
Debenture of private sector co.
E Bonds
These are shares of company and can be traded
in secondary market. Investors get benefit by
change in price of share and dividend given by
companies. Equity shares represent ownership
capital.
Equity
shares
E Bonds

A derivative is a contract between two or
more parties whose value is based on an
agreed-upon underlying financial asset (like a
security) or set of assets (like an index).
Common underlying instruments include
bonds, commodities, currencies, interest
rates, market indexes and stocks.
By convention, the term "money market" refers
to the market for short-term requirement and
deployment of funds. Money market instruments
are those instruments, which have a maturity
period of less than one year.
•T-Bills
•* Certificate of Deposit
•* Commercial Paper
Money
market
instrument:
Financial
Derivatives

Now-a-days life insurance is also being
considered as an investment avenue.
Insurance premiums represent the sacrifice
and the assured sum the benefit.
•A mutual fund is a trust that pools together
the savings of a number of investors who
share a common financial goal. The fund
manager invests this pool of money in
securities, ranging from shares, debentures to
money market instruments or in a mixture of
equity and debt, depending upon the objective
of the scheme.
SIP
SWP
Mutual
Funds
Life
Insurance

Reductions Of Tax Liability.
Minimisation Of Litigation.
Productive Investment.
Economic Stability.
Tax Planning Can Be Define As An
Arrangement Of One’s Financial And
Business Affairs By Taking Legitimately In
Full Benefit Of All Deductions, Exemptions',
Allowances An Rebates So That Tax Liability
Reduces To Minimum.
Meaning Of
Tax Planning
Objective Of
Tax Planning :

Up to Date Knowledge Of Tax Laws
And Awareness Of Judgments Made
Through Various Decisions Of The
Courts.
Tax Planning Should Not Just Comply
Legal Provisions As Stated But Should
Be Within The Framework Of Law.
Its Helps To Deal With The Burden of
Direct And Indirect Taxation During
Inflations.
Helps In Proper Expenses Planning, Capital
Budget Planning, Sales Promotion Planning
Etc.
Importance Of
Tax Planning :
Essentials Of
Tax Planning :

Wrong method of investment
 Wrong timing of investment
 Wrong quality of investment
interest rate risk
Maturity period or length of
investment
Terms of lending
 National and international factors
 Natural calamities.
According to dictionary meaning : The
existence of volatility in the occurrence of an
expected incident is called risk .Higher the
unpredictability greater is the risk.
Risk:
Causes Of
Risk:

Unsystematic risk
Business risk
Financial risk
 Default credit risk
Systematic risk
Market risk
 Interest rate risk
 Purchasing power risk
Types Of Risk
Types Of Risk
:

Systematic risk
Systematic risk refers to that portion of
variation in return caused by factors that
affect the prices of all securities .This risk
cannot be avoided or ignore .The effect of
return causes the prices of all individual
securities to move in the same directions
.systematic risk arises due to the following
factors:
Systematic risk
Types Of :

Systematic risk
Market risk : Variations in
prices sparked off due to real
social, political and economic
events is referred to as market
risk .Market risk arises out of
changes in demand and supply
pressures in the market
following the changing flow of
news or expectations .
Interest rate risk :Generally
price of securities tend to
move inversely with changes
in the rate of interest. The
market activity and investor
perceptions are influenced by
changes in the interest rate
which turn depend on the
nature of stocks, bonds, loans
etc maturity of the periods and
the credits worthiness of the
issuer of the securities.
Purchasing power risk :
uncertainty of purchasing power
is referred to as risk due to
inflation. Inflation arouses
optimism since all the prices
group and that lead to higher
incomes. But the effect of this
hike in incomes increases and
cost of production due to wage
rise, rise in prices of raw
material etc. There is a
possibility of prices of desired
goods and services going up due
to inflation .

Un Systematic risk
Unsystematic risk can be termed as the risks
generated in a particular company or industry
and may not be applicable to other industries
or economy as a whole. For example, the
telecommunication sector in India is going
through disruption, most of the large players
are providing low-cost services which are
impacting the profitability of small players
with small market share.
Un Systematic
risk
Types Of :

Types of Unsystematic Risk:
Business risk :
• Business risk can be internal as
all as external. Internal risk is
caused due to improper product
mix ,non availability of raw
materials, absence of strategic
management etc. External risk
arises due to change in
operating conditions caused by
conditions thrust upon the firm
which are beyond its control
• eg; business cycle, government
controls, international market
conditions etc.
Financial risk : This
risk is associated with
the capital structure of
a company. A company
with no debt financing
has no financial risk.
The extent of financial
risk depends on the
leverage of the firms
capital structure.
Default risk :The
credit risk deals with
the probability of
meeting with a
default. It is primarily
the probability that a
buyer will default.
Proper management
can reduce the
chances of non
payment of loan .

Advantages:
• It is strictly related to the particular business or the industry
and does not impact the economy as a whole.
• By diverting the portfolio or the business one can avoid the
risk and does not have the bad effect of the entire economy in
case of systematic risks.
• Unlike systematic risks, the factors are majorly internal and
can be removed by taking internal measures.

Disadvantages:
• While even if the entire economy is going fine, a series of
unsystematic risk can act as a hazard to the particular industry
or to the business.
• Sometimes due to geopolitical crisis, the risks cannot be
avoided and it takes a long time to settle.
• Change of demand, change in preference of consumer taste
may happen when the product is not available to the consumer
• Any kind of risk is unacceptable to the economy, be it
systematic or unsystematic. The overall impact of the situation
becomes negative to the common masses.

Limitations:
• The scale of operation is lower compared to the systematic
risk; thus, the involvement of the government is also less.
• Because of its nature, the policymakers neglect the situations
and does not comes under the limelight
• The persons involved with the hazards are less in number
compare to the systematic risks and thus monetary
compensation is also less or nil in case of unsystematic risks.

Tools For measuring Risk
• Standard deviation
• Beta
• VaR
• CVaR

Standard Deviation:
• Standard deviation is used in making an investment decision to
measure the amount of historical volatility
• Associated with an investment relative to its annual rate of
return.
• It indicates how much the current return is deviating from its
expected historical normal returns.
• Formula for SD:

Beta:
• Beta measures the amount of systematic risk an individual
security or an industrial sector has relative to the whole stock
market.
• If a security's beta is equal to 1, the security's price moves in
time step with the market.
• Beta=1
• Beta<1
• Beta>1

Value at risk:
• Value at risk is a statistical measure used to assess the level of
risk associated with a portfolio or company.
• The VaR measures the maximum potential loss with a degree
of confidence for a specified period.

Conditional value at risk:
• CVaR is another risk measure used to assess the tail risk of an
investment.
• This measure is more sensitive to events that happen in the tail
end of a distribution—the tail risk.

Return
• Return, also called return on investment, is the
amount of money you receive from an
investment.
• For every dollar you put into an investment,
the investments earns two dollars. This money
that the investment earns is considered your
return.

Formula for return
where, R = rate of return
Dt = cash dividend at the end of time period t,
Pt = the price of security at the time period t;
Pt-1 = the price of security at time period t-1

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