Inverstement Analysis and portfolio management It covers key element, nature, scope, components, speculations and gambling, financial assets and financial services, Investment avenue, money market, foreign exchange market.
- 1. Investment Analysis and Portfolio Management Unit – I Meaning of Investment: Investment refers to the process of committing money or capital to an asset or venture with the expectation of generating income or profit in the future. In simple terms, investment is using your money today in order to earn more money in the future, typically by buying assets like: Shares (equity) Bonds or debentures Real estate Mutual funds Fixed deposits Gold Key Elements of Investment: 1. Sacrifice of current money or resources (e.g., saving instead of spending) 2. Expectation of future benefits (returns, profits, or appreciation) 3. Involves risk (returns are not always guaranteed) 4. Time horizon (returns are generally expected after a certain period) Nature of Investment: 1. Productive Use of Funds: Investment involves using savings to generate future income or wealth. 2. Future-Oriented: It is made with an expectation of return in the future, not for immediate consumption. 3. Risk Involvement: Every investment carries some degree of risk, from low (bank deposits) to high (stock markets).
- 2. 4. Return Expectation: Investors expect capital appreciation (increase in value) or income (dividends, interest). 5. Time Horizon: Investments are made for varying durations – short-term, medium-term, or long-term. 6. Market-Driven: Investments are influenced by factors like inflation, interest rates, economic conditions, etc. Scope of Investment: 1. Financial Assets: o Shares, Bonds, Debentures, Mutual Funds, Bank Deposits o Offer income through interest, dividends, and capital gains. 2. Real Assets: o Real Estate, Gold, Commodities o Provide value appreciation and sometimes income (rent). 3. Portfolio Management: o Creating a mix of different assets to balance risk and return. 4. Risk Management: o Using strategies like diversification, hedging, and insurance to manage investment risk. 5. Speculative Investments: o High-risk investments made to earn quick profits (e.g., derivatives, cryptocurrencies). 6. Personal and Institutional Investment: o Individuals invest for personal goals. o Institutions (banks, insurance firms) invest as part of large-scale fund management. 7. Domestic and International Investment: o Investment within one's country or in foreign assets/markets.
- 3. Difference Between Speculation and Gambling Basis Speculation Gambling Meaning Buying/selling assets to earn profit based on market trends Wagering money on outcomes purely based on chance/luck Risk Calculated risk based on analysis or prediction Unpredictable risk, purely based on luck Knowledge/Skill Involves market knowledge, timing, and analysis Requires no skill, relies only on chance Intent Profit from price changes in assets Profit from winning a bet or game Legality Generally legal in regulated markets Often illegal or heavily regulated in many countries Time Horizon May be short- or medium-term Instant outcome or short-term Examples Buying shares expecting a price rise Betting on cards, lottery, horse races Outcome Control Can be partially controlled through strategy No control over the outcome Components of Indian Financial System There are four main components of the Indian Financial System. This includes: 1. Financial Institutions 2. Financial Assets 3. Financial Services 4. Financial Markets Let’s discuss each component of the system in detail. 1. Financial Institutions The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised either directly or indirectly via the Financial Markets.
- 4. The main functions of the Financial Institutions are as follows: A short term liability can be converted into a long term investment It helps in conversion of a risky investment into a risk-free investment Also acts as a medium of convenience denomination, which means, it can match a small deposit with large loans and a large deposit with small loans The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two. The financial institutions can further be divided into two types: Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage companies fall under this category. They cannot ask for monetary deposits but sell financial products to their customers. Further, Financial Institutions can be classified into three categories: Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc. Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB, PNB, etc. Non Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD, SIBDI, etc. 2. Financial Assets The products which are traded in the Financial Markets are called Financial Assets. Based on the different requirements and needs of the credit seeker, the securities in the market also differ from each other. Some important Financial Assets have been discussed briefly below:
- 5. Call Money – When a loan is granted for one day and is repaid on the second day, it is called call money. No collateral securities are required for this kind of transaction. Notice Money – When a loan is granted for more than a day and for less than 14 days, it is called notice money. No collateral securities are required for this kind of transaction. Term Money – When the maturity period of a deposit is beyond 14 days, it is called term money. Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities with maturity of less than a year. Buying a T-Bill means lending money to the Government. Certificate of Deposits – It is a dematerialised form (Electronically generated) for funds deposited in the bank for a specific period of time. Commercial Paper – It is an unsecured short-term debt instrument issued by corporations. 3. Financial Services Services provided by Asset Management and Liability Management Companies. They help to get the required funds and also make sure that they are efficiently invested. The financial services in India include: Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing debit/credit cards, opening accounts, etc. Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages, etc. are all a part of the Insurance services Investment Services – It mostly includes asset management Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange services The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing payments and settlements and lending and investing.
- 6. 4. Financial Markets The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called a financial market. The financial market can be further divided into four types: Capital Market – Designed to finance the long term investment, the Capital market deals with transactions which are taking place in the market for over a year. The capital market can further be divided into three types: (a)Corporate Securities Market (b)Government Securities Market (c)Long Term Loan Market Money Market – Mostly dominated by Government, Banks and other Large Institutions, the type of market is authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly liquid instruments. The money market can further be divided into two types: (a) Organised Money Market (b) Unorganised Money Market Foreign exchange Market – One of the most developed markets across the world, the Foreign exchange market, deals with the requirements related to multi-currency. The transfer of funds in this market takes place based on the foreign currency rate. Credit Market – A market where short-term and long-term loans are granted to individuals or Organisations by various banks and Financial and Non-Financial Institutions is called Credit Market
- 7. Investment Avenue Investment Avenue refers to the different options or channels available to an individual or institution for investing money to earn returns. In simple terms, it is the place or method where you can invest your savings to grow your wealth over time. Types of Investment Avenues 1. Financial Investment Avenues These involve investing in financial instruments: Equity Shares – Ownership in a company with high return potential but higher risk. Debentures/Bonds – Fixed-income securities issued by companies/government. Mutual Funds – Pooled investments managed by professionals. Fixed Deposits (FDs) – Low-risk, fixed return deposits in banks. Public Provident Fund (PPF) – Long-term government-backed savings with tax benefits. National Savings Certificate (NSC) – Fixed return government savings option. 2. Non-Financial Investment Avenues These involve physical or tangible assets: Real Estate – Investment in land, buildings, or rental properties. Gold and Silver – Traditional store of value and hedge against inflation. Commodities – Investing in oil, metals, agricultural goods (via commodity markets). Collectibles – Art, antiques, rare coins (highly illiquid and risky). Choosing the Right Investment Avenue Depends On: Your financial goals Risk tolerance Return expectations
- 8. Time horizon Liquidity needs Example: If you are risk-averse and want safe returns, a PPF or bank FD is suitable. If you want higher returns and can take risks, stocks or mutual funds are better.