The basic concepts of investment management, with features, objectives and discussed in this topic.

1. Investment Management
Dr. Mohammed Arif Pasha
Principal
Brindavan College
Bangalore - 560063

2. Investment management
Lesson plan
• Few stories on investment
• Meaning of investment
• Concepts of investment (Savings, gambling, arbitrage and speculation)
• Difference between investment and Speculation
• Types & Objectives of investment
• Motives for savings and investment
• Features of investment program
• Investment decision, factors influencing the same
• Factors favorable for investment
• Investment process
• Types of investors
• Investment constraints
• Activity

3. Fox and the grapes

4. Thirsty crow

5. INVESTMENT
Investment is the
sacrifice of some present surplus
for the future reward.
to meet the future needs.
people irrespective background make investment in
either physical or financial assets.
do not like to keep surplus cash idle it does not return
investment in
financial assets like securities or deposits
or in real assets like properties, gold or other
assets.
a business invests its excess in securities or
project.

6. • all those who invest
– do not benefit from it as investment is a risky activity.
• Investment is an art
– one should have requisite knowledge.
• and careful while investing.
• The degree of risk varies depend on the type of
investment.
– equity shares are attractive but risky
– debt instruments like government bonds give less returns
but are safe.
• To reduce risk and maximize returns,
– knowing alternatives before investing is important.
• Let us know the concepts of investment.

7. Concepts relating to investments
Savings
• Excess of income over expenditure.
• Putting money aside to meet emergency.
• Encourages the investments through financial
intermediation and flow of funds in the capital market.
• The saver has a low risk and short time preference.
• They are bank deposits, post office deposits etc.
• Often called cash investments.
• Best after tax return coupled with low risk and ready
accessibility.
• Return is in the form of interest.
• People save as a precaution for increasing their
wealth.

8. Gambling
• Is a very short term investment in a game of
chance.
• Involves high risk and the expectations of
high returns.
• Consists of uncertainty and high stake for
thrill and excitement.
• Typical examples are horse racing, card
game, lottery etc.
• Based on rumours, tips and hunches.
• Is unplanned, non-scientific and without
knowledge of the exact nature of risk.

9. Characteristics of gambling
• It is a typical, chronic and repetitive
experience.
• The gamblers never stop while winning.
• They enjoy a strange thrill from gambling,
both pleasure and pain.
• They displays optimism without winning the
game
• They risk more than what they can afford.

10. Arbitrage
• A planned method of putting the savings safely into
different investments to get a better return.
• A mechanism to keep ones risk to the minimum by
hedging and taking advantage of price differences.
• A simultaneous purchase and sale of an asset in
order to profit from a difference in the price.
• This takes place on different exchanges or market
places.
• one can be an arbitrageur if he buys and sells
securities in more than one stock exchange to take
advantage of the price differentials in such
exchanges.

11. Speculation
• It is as an involvement of funds of high risk
and more uncertain expectation of returns.
• It is for short period where people buy assets
with the hope to earn profit from a
subsequent price change.
• It is based on the expectation that some
change will occur.
• Stock brokers are as an example who buy
shares to make quick profit by selling when
the prices of such shares shoot up.

12. • Speculation involves a higher level of risk
and more uncertain expectation of returns.
• Specialized knowledge is essential for the
success.
• They feel the market which enables them to
sense the changes.
• A speculator takes action only when things
are higher in his favour, but he may not be
right all the time.
• If he is right half of the time he is hitting a
good average.

13. How Speculation differs from investment?
Basis Speculation Investment
1 Contract type Ownership Creditor
2 Source of income change in market price Earning of enterprise
3 Objective of purchase Tips, hunches etc Higher return
4 Stability of income Uncertain Stable
5 Risk involved High Low
6 Duration Short Long
7 Acquisition On margin Outright purchase
8 Attitude Aggressive Conservative

14. How investment is different from
speculation?
RISK
• In speculation, possibility of incurring a loss in a financial transaction. As
involvement of funds of high risk, the degree of risk cannot be exactly
drawn as it arbitrary. Some carry high risk & some carry low risk.
• Investment involves limited risk and confined to safety avenues. The
amount of risk helps in understanding between the terms investment and
speculation.
Capital gain
• If the motive is only to make profit through price changes, it is speculation.
Buying at low and selling at high making large profit, is speculation.
• But if purchase of securities is preceded by proper investigation and analysis
and review to receive stable return over a period of time, it is termed as
investment.
Time
• A longer-term fund allocation is termed as investment while short-term
holding is for the quick return is called speculation.

15. TYPES OF INVESTORS
• The various investors are:
• Those receive large amount by way of
redundancy or retirement benefit.
• Those who win large amount from lottery
and others sources.
• Small investors.
• People who wish to set aside regular sum of
money to build up funds for future for house
or for holiday.

16. Objective of investment
yield
choice
Minimum
comfort
Capital
appreciation

17. Objectives of investment
Yield
• Higher the yield, higher is the risk taken by the investors.
risk less return is the bank deposit as the risk is least with
safe funds and returns are certain.
Choice
• Those who are risk averse put their funds in bank or post
office deposits, some invest in real assets, and land and
buildings while others invest mostly in gold, silver and
diamonds.
Minimum comforts
• Every investor aims at providing for minimum comforts or a
home, furniture, vehicles, consumer durables and other
household requirements. After satisfying these minimum
needs, he plans for his income, savings in insurance,
pension and provident funds etc. In the choice of these, the
return is subordinated to the needs of the investor.
Capital appreciation
• Savings would be invested in financial assets to get future
incomes and capital appreciation to improve future standard
of living. These may be in stock, capital market investments.

18. Motives behind savings
Precautionary
Transaction
speculative

19. Motives for savings and
investments
• The motives behind savings or investments are:
Precautionary motive
• The world which is full of uncertainty which may arise any time
and to protect from such emergencies, people save or invest
money and take precautions.
Transaction motive
• Transaction motive refers to requirement of cash for the conduct
of day to day activity, and cash being a legal tender, these are
settled through cash. money is needed to meet the daily
requirements which may be inflow or outflow of cash.
Speculative motive
• People make use of the opportunities, from unexpected future.
This is generally done in the stock market where shares are
bought and sold by the brokers to take advantage of the rise or
fall in the value of shares.

20. Features of investment program
• The features of investment program
consist of :
• Liquidity
• Safety of principal
• Tax benefits
• Income stability
• Purchasing power
• Capital growth

21. Investment Decision
Investment decision is based on the
• availability of money and information
• in the economy, industry and company and the
• share prices ruling and expectations of
• the market and of the companies in question.

22. Factors influencing the investment
decisions
1
• Investment decision depends on the mood of
the market.
• share prices depend on the company’s
fundamentals upto 50% and the rest is decided
by the mood of the market and the company’s
performance.
• These expectations depend on the analyst’s
ability to foresee and forecast the future
performance of the company.
• Present prices depends on the flow of returns
in future from the company.

23. 2
• Decision to invest is based on the past
performance, present and the future
expectations of the company’s
performance, both operationally and
financially which will influence the share
prices.

24. 3
• Investment decision depends on
– the investor’s perception on whether the present share
price is fair, over valued or under valued.
• If the share price is
– fair, investor will hold it,
– over valued, will sell it and
– under valued, will buy it.
• some investors may buy as their expectations of
further rise even if prices go high.
• The concepts of overvaluation or undervaluation
is relative to time, space and man.
• What may be overvalued today may undervalued
later following later developments; information or
sentiment and mood of the market scenario and
of the valuation of shares.

25. 4
• The investment decision may also depend
on the
– investor’s preference, mood or fancies.
• He may invest in
– cats and dogs of companies, if he has taken a
fancy or he flooded with money from lottery or
prizes.
• A rational investor would make investment
decisions
– on scientific study of the fundamentals of the
company and in a planned manner.

26. 5
• Investors decision depend on
– hearsay and advice of friends, relatives, sub-
brokers etc. and not on any scientific study of
the company’s fundamentals.
• Due to mushroom growth of companies
and lack of any track record of promoters,
– risk will increase if all investments made on
hunches, hearsay.

27. Factors favorable for investment
• Business activities are affected by social,
economic and political considerations and
• hence it is important that the political and
economic institutions are favorable.
• Generally there are four basic
considerations which foster growth and
bring opportunities for investment. These
are:
– (a) Legal safeguards,
– (b) Stable currency,
– (c) Existence of financial institutions to aid
savings and
– (d) Form of business organizations.

28. INVESTMENT PROCESS
• Preliminary Screening
• Negotiating Investment: It needs an agreement
between the venture capitalist and management
to have a MoU. Then, venture capitalist will the
viability of the market to estimate its potential.
they use market forecasts through industry
experts who specialize in estimating the size
and growth rates of markets and segments.
• Approvals and Investment Completed: This
involves due diligence and disclosure of all
relevant business information. Final terms will
be negotiated and the proposal is submitted to
the fund’s board of directors. If approved, legal
documents are prepared.

29. Investment Media
• The various media of investment are as follows:
• Direct investment alternatives
• Fixed principal investment
• Cash, (b) Savings account, (c) Saving certificates, (d)
Government bonds and
• (e) Bonds and debentures
• Variable principal securities
• Equity shares, (b) Convertible debentures or preference
securities
• Non-Security Investments
• Real estate, (b) Mortgages, (c) Commodities, (d) Business
ventures, (e) Art, antiques and other valuables.
• Indirect Investment Alternatives
• Pension fund, (b) Provident fund, (c) Insurance, (d)
Investment companies and
• (e) Unit Trust of India and other trust funds.

30. INVESTMENT PROCESS
• Investment management is a risky and complex activity. The process on
investment involves the following steps:
• Objective specification: Investors will always consider their present income,
safety of principal and capital appreciation. The investing, must consider in each
kind of asset with its specific restrictions with regard to liquidity, maturity and tax.
• Mix of asset: Investment should be made in assets like equity shares, bonds,
fixed income securities, bank deposits. Equity shares yield better returns but
carry risk, while others are less risky but yield less returns. The appropriate mix
of debt and equity generally depends on the risk tolerance of the investor.
• Portfolio formulation strategy: Choose to take a risky investment to earn better
risk adjusted returns or can diversify investment at a pre determined level of risk.
• Selection of securities: Do a fundamental analysis or technical analysis of the
security to select stock. consider credit rating of an instrument, tax shelter, yield
to maturity and liquidity to select bonds or other fixed income securities.
• Portfolio Revision: Revise portfolio by changing composition of securities to
rebalance the portfolio of securities.
• Portfolio evaluation: Evaluate the performance of portfolio from time to time
because risk and return are the key issues. Such an evaluation provides a useful
feedback to improve the quality of portfolio management on a regular basis.

31. Types of investors
• Depending on the attitude towards risk, investors
are classified into three types:
• varying levels of risk bearing investors in the
market.
• Factors like income, tax liability, risk perception,
size of the family, age, education, gender etc.,
influences the investors to take decisions.
• Some investors have affinity for risk while others
are risk averse.
• A person with better income is assumed to have
higher risk bearing capacity.
• The various types of investors are risk takers, risk
neutrals and risk averters.

32. Investment Constraints
• A plan must consider both investment objectives
and constraints.
• Major constraints include
– liquidity,
– time horizon,
– tax concerns,
– legal and regulatory concerns and
– unique circumstances.

33. Liquidity refers to the need for cash in excess of any savings
or new contributions available at a specific point in the future.
A Liquidity needs may be
planned (child’s college funding in 10 years)
or unplanned (a medical emergency)
but both require ready ability to convert investments into cash.
Some assets, such as real estate, may take considerable time to
sell.
Others, such as certificates of deposit, may impose early
withdrawal penalties.

34. • Time horizon typically refers to the time at which an investment
objective must be met.
• Some objectives such as saving for a house may have a short time
horizon,
• while retirement or endowment planning can have long horizons.
Investors must often plan for several time horizons at once.
• The time horizon influences the ability to accept risk and could
modify asset allocation strategy.
• Investors with little tolerance for temporary return fluctuations may
need a different plan than would be suggested by time horizon
alone, and multiple time horizons can further constrain allocation
decisions.

35. • Tax concerns include differences between the tax rates
for different types of investment
• Return (interest versus capital gains or dividends),
estate taxes, differences between current income,
retirement income, tax rates, and the potential for tax
legislation to change.
• Legal and regulatory factors may include limits on the
allocation to specific assets, the ability to access certain
funds and even prohibitions on certain investments.
• Unique circumstances may include social concerns and
specific family needs.

36. Topics for the next class
• Financial instruments
• Money market instruments
• Capital market instruments
• Derivatives