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Introduction of study

Investment is the sacrifice of certain present value for the uncertain future reward.it entails
arriving at numerous decisions such as type, mix, amount, timing, grade etc. of investment and
disinvestment. Further, such decision-making has not only to be continuous but rational too.
Broadly speaking, an investment decision is a tradeoff between risk and return. All investment
choices are made at points of an time in accordance with the personal investment ends and in
contemplation of an uncertain future. Since investment in securities are revocable, investment
ends are transient and investment is fluid, the reliable bases for reasoned expectations become
more and more vague as one conceives of the distant future. Investors in securities will,
therefore, from time to time, reappraise and re-evaluate their various investment commitment in
the light of new information, change expectations and ends.

Investment choices or decision are found to be the outcome of three different but related classes
of factors. The first may be describe as factual or information premises. The factual premises of
investment decision are provided by many streams of data which taken together, represent to an
investor the observable environment and generals as well as particular features of the securities
and firms in which he may invest. The second class of factors entering into investment decisions
may be described as expectation premises.

Meaning of investment

investment or investing, like value is a word of many interpretations. there are basically
three concepts of investment : (1) economic investment- that is, an economist`s definition of
investment ; (2) investment in a more general or extended sense, which is used by the man of
the street (3) the sense in which we are going to be very much interested, namely, financial
investment. Let us briefly review these type of investment to get a feel of some of the
characteristics they possess

Definition of investment

Economic sense

investment means the net additions to the economics capital stock which consist of goods and
services(capital formation) investment is the net addition made to the nations capital stock that
consist of goods and services that are used in the capital stock means an increase in the building
equipments or inventories. These capital stock are used to produce other goods and services.

Financial sense

investment is a commitment employment of funds made in the expectation of some positive rate
of returns.it the investment is property undertaken, the return will commensurate with the risk
that the investor assumes Donald E. Fischer and Ronald J.Jarden

Investments and Speculation

Speculation is a separate activity from making an investment. Investing involves the purchase of
assets with the intent of holding them for the long-term, while speculation involves attempting to
capitalize on market inefficiencies for short-term profit. Ownership is generally not a goal of
speculators, while investors often look to build the number of assets in their portfolios over time.

Investment alternatives in India

Non marketable financial assets: These are such financial assets which gives moderately high
return but can not be traded in market.

* Bank Deposits
* Post Office Schemes
* Company FDs
* PPF

Equity Shares:
Equity shares also known as Ordinary shares. Equity shares represent the ownership position in a
company. The shareholders of equity shares are the legal owner of the company. Equity shares
are the source of the permanent capital since they do not have a maturity date. Shareholders are
entitled for dividend. The amount or rate of dividend is not fixed: the companys board of
directors decides it. An ordinary share is known as
variable income security. Authorized Share Capital represents the maximum amount of capital,
which a company can raise from shareholders. The portion of the authorized share capital, which
has been offered to shareholders, is called Issued Share Capital. Subscribed Share Capital
represents that part of the issued share capital, which has been accepted by shareholders. The
amount of subscribed share capital actually paid up by shareholders to the company is called
Paid-Up Share Capital. The companys earnings, which have not been distributed to shareholders
and have been retained in the business, are called Reserves and Surplus.

Features of Equity Shares:


1. Maturity: Equity shares provide permanent capital to the company and cannot be redeemed
during the life time of the company
2. Claims on Income: Equity shareholders have a residual claim on the income of a company.
They have a claim on income left after paying dividend to preference shareholders.
3. Claim on Assets: Ordinary shareholders have a residual claim on the companys assets in the
case of liquidation.
4. Right to control: Ordinary shareholders have the legal power to elect directors on the board.
Ordinary shareholders are able to control management of the company through their voting
rights and right to maintain proportionate ownership.
5. Voting rights: Ordinary shareholders are required to vote for election of directors and change
in the memorandum of association. An ordinary shareholder has votes equal to the number of
shares held by him. Shareholders may vote in person or by proxy. A proxy gives a designated
person right to vote on behalf of a shareholder at the companys annual general meeting.

* Blue chip shares- Shares of large, well established, financially strong companies with an
impressive record of earnings and dividends.

* Growth shares-Shares of companies that have fairly entrenched positions in a growing market
and which enjoy an above average rate of growth as well as profitability.

* Income shares-Share of companies that have fairly stable operations, relative limited growth
opportunities, and high dividend payout ratios.

* Cyclic shares Share of companies that have a pronounced cyclicality in their operations.
* Defensive shares- Shares of companies that are relatively unaffected by the ups and downs in
general business conditions.

* Speculative shares- Shares of companies that tend to fluctuate widely because there is a lot of
speculative trading in them.

Preference shares:
Preference share dividend has to be paid before any dividend payment to ordinary equity shares
Preference shares have fixed dividends. Also preference dividends are not tax deductible.
Preference over Equity. this kinds of shares only issues existing shareholders they have full
rights to asking for company process and details which is practically possible one at the same
time they have rights to windup the company that is power full share holders

Features of Preference Shares:


Fixed Dividends
Preference shareholders cannot claim on the residual earnings and residual assets.
at the time of liquidation also, these shares would be paid before equity shares.
No Share in Earnings
Preference share dividend is paid out of the profits left after all expenses and even taxes. It
requires that all past unpaid preference dividend be paid before any ordinary dividends are paid.
Dividend from PAT Like debt, preference shares also have fixed maturity date.

Debenture
A company may raise long term finance through public borrowings. These loan are raise by the
issues of debentures. A debenture is a document under the company seal which provides for the
payment of principal sum and interest thereon at regular intervals, which is usually secured by a
fixed or floating charges on the company`s property or undertaking and which acknowledges a
loan to the company

Fully-convertible debentures (FCDs):


FCDs are converted into shares as per the terms of the issue, with regard to the price and time of
conversion.
Non -convertible debentures (NCDs):
NCDs are pure debentures without a feature of conversion. They are repayable on maturity. The
investor is entitled for interest and repayment of principal.
Bonds :
A company needs funds to expand into new markets, while governments need money for
everything from infrastructure to social programs. The solution is to raise money by issuing (or
other debt instruments) to a public market. Thousands of investors then each lend a portion of the
capital needed. Really, a bond is nothing more than a loan for which you are the lender. The
organization that sells a bond is known as the issuer

Bonds: 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.

Money market instrument: 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

Mutual Funds- 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. The different types of schemes are
* Balanced Funds
* Index Funds
* Sector Fund
* Equity Oriented Funds

Life insurance: Now-a-days life insurance is also being considered as an investment avenue.
Insurance premiums represent the sacrifice and the assured sum the benefit. Under it different
schemes are:

* Endowment assurance policy


* Money back policy
* Whole life policy
* Term assurance policy

Real estate: One of the most important assets in portfolio of investors is a residential house. In
addition to a residential house, the more affluent investors are likely to be interested in the
following types of real estate:

* Agricultural land
* Semi urban land
* Farm House

Precious objects: Investors can also invest in the objects which have value. These comprises of:

* Gold
* Silver
* Precious stones
* Art objects

Financial Derivatives: These are such instruments which derive their value from some other
underlying assets. It may be viewed as a side bet on the asset. The most important financial
derivatives from the point of view of investors are:
* Options
* Future

Mutual Funds

A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is invested by the fund manager in different types of
securities depending upon the objective of the scheme. These could range from shares to
debentures to money market instruments. The income earned through these investments and the
capital appreciations realized by the schemes are shared by its unit holders in proportion to the
number of units owned by them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified, professionally managed
portfolio at a relatively low cost. The small savings of all the investors are put together to
increase the buying power and hire a professional manager to invest and monitor the money.
Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

Types of mutual funds:

Open ended schemes

An open-end fund is one that is available for subscription all through the year. This type of
Mutual funds does not have a predefined maturity period. The key feature is liquidity. Direct
dealing is another noticeable feature. One can easily buy and sell units at Net Asset Value related
prices.

Close ended schemes

Here maturity period is predefined usually ranging from 2 to 15 years. Investment can be done
directly in the scheme at the time of the initial issue and units can be brought and sold whenever
units are listed in the stock exchanges.
Types of Schemes

1. Equity/growth oriented Funds: Equity schemes are those that invest predominantly in equity
shares of companies. An equity scheme seeks to provide returns by way of capital appreciation.
As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these
schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns.

2. Balanced Funds: The aim of balanced funds is to provide both growth and regular income.
Such schemes periodically distribute a part of their earning and invest both in equities and fixed
income securities in the proportion indicated in their offer documents.

3. Index Funds: An Index Fund is a mutual fund that tries to mirror a market index, like Nifty or
BSE Sensex , as closely as possible by investing in all the stocks that comprise that index in
proportions equal to the weight age of those stocks in the index.

4. Income/debt oriented Funds: These schemes invest mainly in income-bearing instruments


like bonds, debentures, government securities, commercial paper, etc. These instruments are
much less volatile than equity schemes. Their volatility depends essentially on the health of the
economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such
schemes also depends on bond ratings.

1) Equity Funds

As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share
prices fluctuating daily, such funds show volatile performance, even losses. However, these
funds can yield great capital appreciation as, historically, equities have outperformed all asset
classes. At present, there are four types of equity funds available in the market. In the increasing
order of risk, these are:

a) Index funds
These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or
the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index
they track, both in terms of composition and the individual stock weightages. For instance, an
index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate
the performance of the benchmarked index to near accuracy. Index funds don't need fund
managers, as there is no stock selection involve

To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the
Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex
was at 3.457, your investment would be worth Rs 34,570, which works out to an annualized
return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualized return to
16.2 per cent. Obviously, lower the tracking error, the better are the index funds.

b) Diversified funds

Such funds have the mandate to invest in the entire universe of stocks. Although by definition,
such funds are meant to have a diversified portfolio (spread across industries and companies), the
stock selection is entirely the prerogative of the fund manager. This discretionary power in the
hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-
picking by a fund manager can enable the fund to deliver market-beating returns; on the other
hand, if the fund manager's picks languish, the returns will be far lower. Returns from a
diversified fund depend a lot on the fund manager's capabilities to make the right investment
decisions. A portfolio concentrated in a few sectors or companies is a high risk, high return
proposition.

c) Tax-saving funds

Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section
88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, one can
claim a tax exemption of 20 per cent from his taxable income. One can invest more than Rs
10,000, but then he won't get the Section 88 benefits for the amount in excess of Rs 10,000. The
only drawback to ELSS is that one has to lock into the scheme for three years.
In terms of investment profile, tax-saving funds are like diversified funds. The one difference is
that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits
from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get
dictated by redemption compulsions.

d) Sector funds

The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT
or FMCG. A sector fund's NAV will zoom if the sector performs well; however, if the sector
languishes, the scheme's NAV too will stay depressed. Barring a few defensive, evergreen sectors
like FMCG and pharm, most other industries alternate between periods of strong growth and
bouts of slowdowns. The way to make money from sector funds is to catch these cyclesget in
when the sector is poised for an upswing and exit before it slips back.

Difference between direct equity and mutual funds

A mutual fund is the ideal investment vehicle for today's complex and modern financial scenario.
Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and
other assets have become mature and information driven. Price changes in these assets are driven
by global events occurring in faraway places. A typical individual is unlikely to have the
knowledge, skills, inclination and time to keep track of events, understand their implications and
act speedily. An individual also finds it difficult to keep track of ownership of his assets,
investments, brokerage dues and bank transactions etc.

Investing in Mutual Fund is convenient because of two basic reasons. All investment carry risks,
especially equity investment that bears larger risks, their returns are more volatile and uneven. To
cut down the risk one needs to put money in several instruments rather than in one or two
products. A Mutual Fund can effectively spread its investments across various sectors of the
economy and amongst several products. Risk diversification is the Key. Secondly 'where to
invest and where not to', is a specialized business. One may not have the expertise, time and
resources of a well-managed funds.

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