INVESTMENT MANAGEMENT

Introduction
The term ‘investing’ could be associated with different activities, but the common target in these
activities is to ‘employ’ the money (funds) during the time period seeking to enhance the
investor’s wealth. Funds to be invested come from assets already owned, borrowed money and
savings. By foregoing consumption today and investing their savings, investors expect to
enhance their future consumption possibilities by increasing their wealth. However, it is always
useful to make a distinction between real and financial investments. Real investments usually
involve some kind of tangible assets, such as land, machinery, factories, etc. Financial
investments involve contracts in paper or electronic form, such as stocks, bonds, etc.
Investment activity involves the use of funds or savings for acquisition of assets & further
creation of assets.
Investment is an employment of funds on assets in the aim of earning income or capital
appreciation.
Definition of Investment
“Investment analysis is the study of financial securities for the purpose of successful investing.
“An investment is the purchase of goods that are not consumed today but are used in the future to
create wealth”.
“An investment is a commitment of funds make in the expectation of some positive rate of
return”. Example – equity shares, preference share and debentures etc.
According to oxford dictionary “investment is defined as the action or process of investment
money for profit”.
According to keyness “investment is define as the addition of the value of the capital equipment
which has resulted from the productive activity of the period”.

Types of Investment
Real Investment – Purchase of fixed assets
Financial Investment – Purchase of securities

Definition-Economic sense
“Investment means the 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” (Capital formation)
Investment is the net addition made to the nation’s capital stock that consists of goods and
services that are used in the production process. A net addition to the capital stock means an
increase in the buildings, equipments or inventories. These capital stocks are used to produce
other goods & services
Definition–Financial sense
“Investment is a commitment / employment of funds made in the expectation of some positive
rate of return. If the investment is properly undertaken, the return will commensurate with the
risk that the investor assumes”.
- Donald E. Fischer and Ronald J. Jordan
Financial investment is the allocation of money to assets that are expected to yield some gain
over a period of time.

Attributes of Investment/
Safety of principal (e.g. gilt edged securities)
Liquidity (e.g. CPs and CDs)
Income stability (e.g. Debentures)
Capital appreciation (e.g. equity)
Tangibility (e.g. land and buildings)
Investment refers to investing money in financial physical assets and marketing assets. Major
investment features are risk, return, safety, liquidity, marketability, concealability, capital
growth, purchasing power, stability and the benefits.
Risk
Risk refers to the loss of principal amount of an investment. It is one of the major characteristics
of an investment. The risk depends on the following factors:
When investment maturity period is longer; investor will take larger risks.•
Government or Semi-Government bodies issue securities, which have lesser risks.•
In the case of the debt instrument or fixed deposit, the risk of above investment is less due to
their secured and • fixed interest payable. For instance, debentures.
In the case of ownership instrument like equity or preference shares, the risk is more due to their
unsecured • nature and variability of their return and ownership character.
The risk of degree of variability of returns is more in the case of ownership capital as compared
to debt capital. • The tax provisions would influence the return of risk.
Return
Return refers to expected rate of return from an investment. Return is an important characteristic
of investment. Return is the major factor which influences the pattern of investment that is made
by the investor. Investor always prefers high rate of return for his investment.
Safety
Safety refers to the protection of investor principal amount and expected rate of return. Safety is
also one of the essential and crucial elements of investment. Investor prefers his capital’s safety.
Capital is the certainty of return without loss of money or it will take time to retain it. If investor
prefers less-risk securities, he chooses Government bonds. In cases, where investor prefers high
rate of returns, investor will choose private securities, whose safety is low.
Liquidity
Liquidity refers to investments ready to be converted into cash. In other words, it is available
immediately in the cash form. Liquidity means that investment is easily realisable, saleable or
marketable. When the liquidity is high, then the return may be low. For example, UTI units. An
investor generally prefers liquidity for his investments and safety of funds through a minimum-
risk and maximum-return investment.
Marketability
Marketability refers to buying and selling of securities in market. Marketability means
transferability or saleability of an asset. Securities listed in a stock market are more easily
marketable than which are not listed. Public Limited Companies’ shares are more easily
transferable than those of private limited companies.
Concealability
Concealability is another essential characteristic of the investment. Concealability means
investment to be safe from social disorders, government confiscations or unacceptable levels of
taxation. Property must be concealable and should leave no record of income received from its
use or sale. Gold and precious stones have long been esteemed for these purposes, because they
combine high-value with small bulk and are readily transferable.
Capital growth
Capital growth refers to appreciation of investment. Capital growth has today become an
important character of investment. Capital appreciation, also known as capital growth, refers to
the increase in the value of an investment over time. It tells you how much profit you would pay
taxes on, if you sold the investment that day. Investors and their advisers are constantly seeking
‘growth stock’ in the right industry; bought at the right time.
Purchasing power stability
It refers to the buying capacity of investment in market. Purchasing power stability has become
one of the import traits of investment. Investment always involves the commitment of current
funds with the objective of receiving greater amounts of future funds.Investment Analysis and
Portfolio Management 4/JNU OLE
Stability of income
It refers to constant return from an investment. Another major characteristic feature of the
investment is the stability of income. Stability of income must look for different paths just as the
security of the principal. Every investor must always consider stability of monetary income and
stability of the purchasing power of income.
Tax benefits
Tax benefit is the last characteristic feature of the investment. Planning an investment
programme without considering the tax burden may be costly to the investor. There are actually
two problems:
One concerned with the amount of income paid by the investment.•
Another is the burden of income tax upon that income.•

Need and Importance of Investments

An investment is an important and useful factor in the context of present day conditions. Some
factors are very important, while considering these investments. They are outlined below:
 Longer life expectancy or planning for retirement•
 Increasing rates of taxation•
 High interest rates•
 High rates of inflation•
 Larger incomes•
 Availability of a complex number of investment outlets•
Longer life expectancy
Investment decisions have become more significant as most people in India retire between the
ages of 56 to 60. Investment decisions have to be planned to make wise saving decisions. Saving
on their own does not increase wealth; the saving must be invested in such a way that the
principal and income will be adequate for a greater number of retirement years. Longer life
expectancy is one reason for effective savings and further investment activities that help the
investment decisions.
Increasing rates of taxation
When tax rate is increased, it will focus on generating savings by the tax payer. When the tax
payer invests their income in provident fund, pension fund, Unit Trust of India, Life Insurance,
Unit Linked Insurance Plan, National Saving Certificates, Development Bonds, Post Office
Cumulative Deposit Schemes, etc., it affects their taxable income.
Interest rates
Interest rate is one of the most important aspects of a sound investment plan. The interest rate
differs from one investment to another. There may be changes between degree of risk and safe
investments. They may also differ due to different benefit schemes offered by the institutions. A
high rate of interest may not be the only factor favouring the outlet for investment. Stability of
interest is an important aspect of receiving a high rate of interest.
Inflation
Inflation has become a continuous problem. It affects in terms of rising prices. Several problems
are associated and coupled with falling standards of living. Therefore, investor’s careful scrutiny
of the inflation will make further investment process delayed. Investor ensures to check the
safety of the principal amount and security of the investment. Both are crucial from the point of
view of the interest gained from the investments.
Income
Income is another important element of the investment. When government provides jobs to the
unemployed persons in the country, the ultimate result is ensuring income than saving the extra
income. More incomes and more avenues of investment have led to the ability and willingness of
working people to save and invest their funds.
Investment channels
The growth and development of the country leading to greater economic prosperity has led to the
introduction of a vast area of investment outlets. Investment channels mean an investor is willing
to invest in several instruments like corporate stock, provident fund, and life insurance, fixed
deposits in the corporate sector and unit trust schemes.
Objectives of Investment
Maximization of return
Minimization of risk
Hedge against inflation (if the investment cannot earn as much as the rise in price level, the
‘real’ rate of return will be negative)
Safety
Liquidity
Tax Benefit
Return
Rate of return could be defined as the total income the investor receives during the holding
period expressed as a percentage of the purchasing price at the beginning of the holding period.
Return = End period value - Beginning period value + Dividend
x 100
Beginning period value
Risk
• Risk of holding securities is related with the probability of actual return becoming less than the
expected return
• The word “risk” is synonymous with the phrase “variability of return”.
• Investment risk is just as important as measuring its expected rate of return…… because
minimizing risk and maximizing the rate of return are interrelated objectives in the investment
management.
Hedge against Inflation
• The rate of return should ensure a cover against the inflation.
• The return thus earned should assure the safety of the principal amount, regular flow of income
and be a hedge against inflation
Safety
Investment done with Government assure more safety than with the private party
Tax Benefit
Investment may be undertaken to reduce the income tax burden. E.g. Savings bond, Provident
Fund, Insurance etc.
Liquidity
• Marketability of the investment provides liquidity to the investment. The liquidity depends
upon the marketing and trading facility.
• Stocks are liquid only if they command good market by providing adequate return through
dividends and capital appreciation.
Classification of Investment

The classification of investments into various groups is explained in the paragraphs given below:
On the basis of physical investments
Physical investments are as follows:
 House•
 Land•
 Building•
 Gold and silver•
 Precious stones•
On the basis of financial investment
Financial investments are further classified on the basis of:
 Marketable and transferable investments•
 Non-marketable investments•
 Security forms of investment / Marketable investments are as follows:
1. Corporate Bonds /Debentures
(a) Convertible
(b) Non-convertible.
2. Public Sector Bonds
(a) Taxable
(b) Tax Free.
3. Preference Shares
4. Equity Shares - New issue, Rights Issue, Bonus Issue
Non-Security Forms of Investment (non-marketable) /Non-marketable investments are as
follows:
o Bank deposits•
o Provident and pension funds•
o Insurance certificates•
o Post office deposits•
o National saving certificates•
o Company deposits•
o Private company shares, etc.

Classes of Instruments
Instruments traded can be classified on the following:
1. By ownership or debt nature of instruments.
2. By term period to maturity – Short term, Medium-term and long-term.
3. By the issuer’s creditworthiness, government securities or private securities or Post Office
certificate etc.

INVESTMENT ALTERNATIVES
1. Direct Investment Alternatives
Fixed principal investments (e.g. Savings a/c, government bonds)
Variable principal investments (e.g. Preference shares, equity shares)
Non-security investments (e.g. business ventures)
2. Indirect investment alternatives (e.g. PF, Insurance)

INVESTMENT ALTERNATIVES
The investment alternatives range from financial securities to non-security investments.
The financial securities may be negotiable or non-negotiable.
The negotiable securities are transferable. Non-negotiable is not transferable also called as
non-securitized financial investment.
Deposit schemes offered by post office, banks, public provident fund, national savings
scheme are non-securitized financial investments.

NEGOTIABLE SECURITIES
1. Variable income securities
Equity shares, growth shares, income shares, defensive shares, cyclical shares, speculative
shares.
2. Fixed income securities
Preference shares, debentures, bonds, government, money market, treasury bills, commercial
papers, certificate of deposit.
NON-NEGOTIABLE SECURITIES
Deposits: it can earn rate of return
Bank deposits, post office deposits,etc.
Schemes of LIC.
Tax benefits from life insurance.
Mutual funds.
 Real assets.
Real estate.
Arts and antiques.
FINANCIAL ASSETS
Equity shares
Bonds
Preference shares
Non- marketable financial assets
Money market instruments
Mutual funds
Life insurance
Financial derivatives

EQUITY SHARES
• Represents ownership capital
– They elect the board of directors and have a right to vote on every resolution placed before the
company
– They enjoy the preemptive right which enables them to maintain their proportional ownership
• Risk: residual claim over income
• Reward: partners in progress
• The amount of capital that a company can issue as per its memorandum represents authorized
capital
• The amount offered by the company to the investors is called issued capital
• The part of issued capital that is subscribed to by the investors is called subscribed capital /
paid up capital
• Par / Face / Nominal value of a share is stated in the memorandum and written on the share
script
• Issue of shares at a value above its par value is called issue at a premium
• Issue of shares at a value below its par value is called issue at a discount
• The price at which the share currently trades in the market is called the market value
• Blue chip shares: Shares of large, well established and financially strong companies with
impressive record of earnings and dividend
• Growth shares: Shares of companies having fairly strong position in the growing market and
having an above average rate of growth and profitability
• Income shares: Shares of companies having fairly stable operations, limited growth
opportunities and high dividend payouts
• Cyclical shares: Shares of companies performing as per the business cycles
• Defensive shares: Shares of companies relatively unaffected by the ups and downs in the
general economic conditions
• Speculative shares: shares of companies whose prices fluctuate widely because of a lot of
speculative trading being done on them
• Equity shares are commonly referred to as common stock or ordinary shares
• Share capital of a company is divided into a number of small units of equal value called shares.
• The “stock” is the aggregate of a member’s fully paid up shares of equal value merged into one
fund.
• The ‘stock’ is expressed in terms of money and not “as many” shares.
Sweat Equity: The Sweat Equity has two dimensions:
Shares issued at a discount to employees and directors.
Shares issued for consideration other than cash for providing know-how or making available
rights or value additions.
Non-Voting Shares
Non-voting shares carry no voting rights.
The non-voting shares also can be listed and traded in the stock exchanges.
The dividend on non-voting shares would have to be 20% higher than the dividend on the
voting shares.

Right Shares
Shares offered to the existing shareholders at a price by the company are called “right shares”.
If a public company wants to increase its subscribed capital by way of issuing shares after 2
years from its formation date or 1 year from the date of first allotment……the shares should be
offered first to the existing shareholders in proportion to the capital paid up on the shares held by
them at the date of such offer. This is called pre-emptive right.
DEBENTURES
According to Companies Act 1956, “Debenture includes debenture stock, bonds and any other
securities of company, whether constituting a charge on the assets of the company or not”
Debentures are generally issued by the private sector companies as a long-term promissory
note for raising loan capital
BONDS
• They are long term debt instruments issued for a fixed time period
• Bonds are debt securities issued by the government or PSUs
• Debentures are debt securities issued by private sector companies
• They comprise of periodic interest payments over the life of the instrument and the principal
repayment at the time of redemption
• Debt securities issued by the central government, state government and quasi government
agencies are referred to as gilt-edged securities
• Callable bonds are the ones that can be called for redemption earlier than their date of maturity.
This right to call is available with the company
• Convertible bonds are the ones that can be converted into equity shares at a later date either
fully or partly. This option is available with the bond holder
• Coupon rate is the nominal rate of interest fixed and printed on the bond certificate. It is
calculated on the face value and is payable by the company till maturity
PREFERENCE SHARES
• Represents a hybrid security that has attributes of both equity shares and debentures.
• They carry a fixed rate of dividend. However it is payable only out of distributable profits
• Dividend on preference shares is generally cumulative. Dividend skipped in one year has to be
paid subsequently before equity dividend can be paid
• Only redeemable preference shares can be issued
NON-MARKETABLE SECURITIES
These represent personal transactions between the investor and the issuer.
Bank deposits
– There are various kinds of bank accounts – current, savings and fixed deposit
– While a deposit in a current account does not earn any interest, deposit made in others earn an
interest
– Liquidity, convenience and low investment risks are the common features of the bank deposits
– Deposits in scheduled banks are safe because of the regulations of RBI and the guarantee
provided by the Deposit Insurance Corporation on deposits up to Rs 1,00,000 per depositor of
the bank

Company deposits
– Deposits mobilized by companies are governed by the provisions of section 58A of Companies
Act, 1956
– The interest offered on this fixed income deposits is higher than what investors would normally
get from the banks
– Manufacturing and trading companies are allowed to pay a maximum interest of 12.5%.
– The rates vary depending on the credit rating of the company offering the deposit
Post Office Monthly Income Scheme
– Meant for investors who want to invest a lump sum amount initially and earn interest on a
monthly basis.
– Minimum investment is Rs.1000 in multiples of Rs 1,000
– The maximum deposits in all the accounts taken together should not exceed Rs.4 lakhs in a
single account and Rs.8 lakhs in a joint account
– The tenure of the MIS scheme is six years.
MONEY MARKET INSTRUMENTS
• Debt instruments which have a maturity of less than a year at the time of issue are called money
market instruments
• These are highly liquid instruments

Treasury bills
– Issued by GOI
– They are of two durations – 91 days and 364 days
– Are negotiable instruments and can be rediscounted with GOI
– They are sold on an auction basis every week in certain minimum denominations by the RBI
– They do not carry an explicit interest rate. Instead they are issued at a discount to be redeemed
at par. The implicit return is a function of the size of discount and the period of maturity
– They have zero default risk, assured return, are easily available

Certificate of deposits
– Negotiable instruments issued by banks / financial institutions with a maturity ranging from 3
months to 1 year
– These are bank deposits transferable from one party to another
– The principal investors are banks, financial institutions, corporates and mutual funds
– These carry an explicit rate of interest
– Banks normally tailor make their denominations and maturities to suit the needs of the
investors

Commercial papers
– Issued in form of promissory notes redeemable at par by the holder on maturity
– Usually has a maturity period of 90 to 180 days
– They are sold at a discount to be redeemed at par
– CPs can be issued by corporates having a minimum net worth of Rs 5 crores and an investment
grade from credit rating agencies
– Minimum issue size is Rs 25 lacs

MUTUAL FUNDS
• Also known as an instrument for collective investment
• Investment is done in three broad categories of financial assets i.e. stocks, bonds and cash
• Depending on the asset mix, mutual fund schemes are classified as: Equity schemes, hybrid
schemes and debt schemes
• On the basis of flexibility, Mutual fund schemes may be: Open ended or Close ended
– Open ended schemes are open for subscription & redemption throughout the year
– Close ended schemes are open for subscription only for a specified period and can be redeemed
only on a fixed date of redemption
• On the basis of objective, mutual funds may be growth funds, income funds, or balanced funds
• NAV of a fund is the cumulative market value of the assets of the fund net of its liabilities
FINANCIAL DERIVATIVES
• Derivative is a product whose value is derived from the value of the one or more underlying
assets. These underlying assets may be equity, bonds, foreign exchange, commodity or any other
asset
• Derivative does not have a value of its own. Rather its value depends on the value of the
underlying asset.
• Derivatives initially emerged as hedging devices against fluctuations in commodity prices and
commodity linked derivatives remained the sole form of such products. Financial derivatives
emerged post 1970 period.
• Financial derivatives have various financial instruments as the underlying variables
• Futures and Options are two basic types of derivatives
Futures is a transferable contract between two parties to buy or sell an asset at a certain date in
the future at a specified price
– It is a standardized contract with a standard underlying asset, a standard quantity and quality of
underlying instrument and a standard timing of settlement
– It may be offset prior to its maturity by entering into an equal and opposite transaction
– It requires margin payments and follow daily movements
Options are of two types:
– Call option gives the buyer of the option a right but not an obligation to buy a given quantity of
the underlying asset, at a given price, on or before a given future date
– Put option gives the buyer of the option a right but not an obligation to sell a given quantity of
the underlying asset, at a given price, on or before a given future date
REAL ASSETS
Real estate
Precious objects

PROCESS OF INVESTMENT
1. INVESTMENT POLICY
The Government or the investor before proceeding into investment formulates the policy for
systematic functioning
• Determination of Investible wealth (parting)
• Determination of portfolio objectives (returns/appreciation)
• Identification of potential investment assets (market analysis)
• Consideration of attributes of investment assets (risk, return)
• Allocation of wealth to asset categories (tentative)
i. Investible fund: The entire investment procedure revolves around the availability of investible
funds. The fund may be generated thru savings or borrowings. If the funds are borrowed, the
investor has to be extra careful in the selection of investment alternatives. The return should be
higher than the interest he pays.
ii. The objectives are framed on the premises of the required rate of return, need for regularity of
income, risk perception and the need for liquidity. The risk taker objective is to earn high rate of
return in the form of capital appreciation.
iii. Knowledge: The knowledge about the investment alternatives and markets plays a key role in
the policy formulation. The investment alternatives range from Security to Real Estate. The risk
and return associated with the investment alternatives differ from each other. The investor should
be aware of the stock market structure and functions of the brokers
2. INVESTMENT VALUATION:
The valuation helps the investor to determine the return and risk expected from an investment in
the common stock, the intrinsic value of the share and price earning ratio.
Future Value: Future value of the securities could be estimated by using a simple statistical
technique like trend analysis.
• Valuation of stocks
• Valuation of debentures and bonds
• Valuation of other assets
3. INVESTMENT / SECURITY ANALYSIS
• Economic analysis
• Technical analysis
• Efficient Market Approach
After formulating the investment policy, the securities to be bought have to be scrutinized
through the market, industry & company analysis.
Market analysis: The stock market shows the general economic scenario.the growth in gross
domestic product and inflation are reflected in the stock prices. The stock prices may be
fluctuating in the short run but in the long run they move in trends.
Industry analysis: The industries that contribute to the output of the major segments of the
economy vary in their growth rates and their overall contribution to economic activity. Some
industries grow faster than the GDP and are expected to continue in their growth.
Company Analysis: The purpose of company analysis is to help the investors to make better
decisions. The company’s earnings, profitability, operating efficiency, capital structure and
management have to be screened. These factors have a direct bearing on the stock prices and the
return of the investors. Appreciation of the stock value is a function of the performance of the
company.
4. PORTFOLIO CONSTRUCTION
• Determination of diversification level
• Consideration of investment timing (boom/depression)
• Selection of investment assets
• Allocation of investible wealth
• Evaluation of portfolio for feedback
A Portfolio is a combination of securities. The portfolio is constructed in such a manner to meet
the investor’s goals and objectives. The investor should decide how best to reach the goals with
the securities available. Towards this end he diversifies his portfolio and allocates funds among
the securities.
Diversification - The main objective of diversification is the reduction of risk in the loss of
capital and income. There are several ways to diversify the portfolio.
Debt and equity diversification - Both debt instruments and equity are combined to
complement each other
Industry diversification – Industries growth and their reaction to government policies differ
from each other. Hence industry diversification is needed and it reduces risk.
Company diversification – Securities from different companies are purchased to reduce risk.
Selection: Based on diversification level, industry and company analyses, the securities have
to be selected.
5. PORTFOLIO EVALUATION
The efficient management of portfolio consists of portfolio appraisal and revision
Appraisal: The return and risk performance of the security vary from time and time. The
developments in the economy, industry and relevant companies from which the stocks 14
are bought have to be appraised. The appraisal warns the loss and steps can be taken to avoid
such losses.
Revision: Revision depends on the results of the appraisal. The low yielding securities with high
risk are replaced with high yielding securities with low risk factor. To keep the return at a
particular level necessitates the investor to revise the components of the portfolio periodically.
Securities
Security means “a document which represents the investments made by an investor”.
There are two types:
Creditorship Securities (e.g. Preference, bonds & debentures)
Ownership Securities (e.g. Equity Shares)
INVESTMENT AND SPECULATION
“Speculation, is an activity, quite contrary to its literal meaning, in which a person assumes high
risks, often without regard for the safety of his invested principal, to achieve large capital gains.”
The
time span in which the gain is sought to be made is usually very short.
Investment involves putting money into an assets which is not necessarily in order to enjoy a
series
of returns. The investor sacrifice some money today in anticipation of a financial return in future.
He
indulges in a bit of speculation. There is an element of speculation involved in all investment
decisions.
However, it does not mean that all investment are speculative by nature. Genuine investments are
carefully thought out decisions. On the other hand, speculative investments are not carefully
thought-out decisions.
They are based on tips and rumours.
An investment can be distinguished from speculation in three ways–risk, capital gain and time
period. Risk has definite financial meaning it is a possibility of incurring a loss in a financial
transaction.
Investment involves limited risk while speculation is considered as an investment of funds with
high
risk. Speculation involves buying a security at a low price and selling at a high price to make a
capital
gain. Investment involves longer-term allocation of funds, whereas speculation involves holding a security for a
short-term and trading quickly for earning higher gain. Speculation involves a higher level of risk and a more
uncertain expectation of return. Investments are not risk-free but the risk can be calculated. The expected return
is consistent with the risk of investment.