A.D.M.College for Women(Autonomous) Nagapattinam. B.Com V Semester-Major Based Elective 3 Dr.P.Rajeswari ( Assistant Professor of Commerce) Investment Management UNIT - I Investment The income that a person receives may be used for purchasing goods and services that he currently requires or it may be saved for purchasing goods and services that he may require in the future .In other words, income can be what is spent for current consumption. savings are generated when a person or organization abstain from present consumption for a future use .The person saving a part of his income tries to find a temporary repository for his savings until they are required to finance his future expenditure .this result in investment. Meaning of investment: Investment is an activity that is engaged in by people who have savings, i.e. investments are made from savings, or in other words, people invest their savings. But all savers are not investor’s. Investment is an activity which is different from saving. Let us see what is meant by investment. It may mean many things to many persons. If one person has advanced some money to another, he may consider his loan as an investment. He expect to get back the money along with interest at a future date .another person may have purchased on kilogram of gold for the purpose of price appreciation and may consider it as an investment. Thus investment may be defined as “a commitment of funds made in the expectation of some positive rate of return “since the return is expected to realize in future, there is a possibility that the return actually realized is lower than the return expected to be realized. This possibility of variation in the actual return is known as investment risk. Thus every investment involves return and risk. Definition: F. Amling defines investment as “purchase of financial assets that produces a yield that is proportionate to the risk assumed over some future investment period.” According to Sharpe, ”investment is sacrifice of certain present value for some uncertain future values”. NATURE AND SCOPE OF INVESTMENT MANAGEMENT : Nature and scope of investment can be determined from the meaning of financial investments and how it is different from economic investment. It is also determined from the time period and the risk and its differences with speculation, gambling and arbitrage. The nature of scope of investment management is ● To understand the exact meaning of investment ● To find out different avenues of investment ● To maximize return and minimize risk ● To make a programme for investment through evaluating securities, constructing a portfolio and reviewing a portfolio ● To find out a time period for investments to take place ● To evaluate through various techniques to get the best return for the investor Importance of Investments: Investments are important due to increase in life expectancy of a person, planning for retirement income, high planning for additional income due to high rates of taxation and inflationary pressure in an economy, the expectation of continuous stable income in the form of regular dividends, interests and other receipts. The following discussion provides an explanation of these issues. Longer Life Expectancy: Investment decisions have become significant because statistics show that life expectancy has increased with good medical care. People usually retire between the ages of 60 and 65. The income shrinks at the time of retirement because the annual inflow of earnings from employment stops. If savings are invested at the right age and time, wealth increases if the principal sum is invested adequately in different saving schemes. The importance of investment decisions is enhanced by the fact that there is an increasing number of women working in the organizations. Men and women are responsible for planning their own investments during their working life so that after retirement they are able to have a stable income through balanced investments. Taxation: Taxation introduces an element of compulsion in a person’s savings. Every country has different tax saving schemes for bringing down taxation levels of a person. Since investments provide regular and stable income and also give relief in taxation, they are considered to be very important and useful if investments are made by proper planning. Interest Rates: Interest rates vary according to the choice of investment outlet. Investors prefer safe investments with a good return. A risk-less security will bring low rates of return. Government securities are risk- free. However, market risk is high with high rates of return. Before allocations of any amount, the different types of securities must be analyzed to calculate their benefits and their disadvantages. The investor should make his portfolio with several kinds of investments. Stability of interest is as important as receiving a high rate of interest. This book is concerned with determining that the investor is getting an acceptable return commensurate with the risks that are taken. Inflation: In a developing economy, there are rising prices and inflationary trends. A rise in prices has several problems coupled with a falling standard of living. Before funds are invested, they must be evaluated to find the right choice of investments to tide over inflationary situations. The investor will look at different investment outlets and compare the rate of return/interest to cover the risk of inflation. Security and safety of capital is important. Therefore, he/she should invest in those securities that have an assured and regular return. An investor has to consider, the taxation benefit decides the safety of capital and its continuous return. Income: Investment decisions are important due the general increase in employment opportunities and an understanding of investment channels for saving in India. New and well paying job opportunities are in sectors like software technology; business processing offices, call centres, exports, media, tourism, hospitality, manufacturing sector, banks, insurance and financial services. The employment opportunities gave rise to increasing incomes. Higher income has increased a demand for investments and earnings above the regular income of people. Investment outlets can be selected to make investments for supporting the regular income. Awareness of financial assets and real assets has led to the ability and willingness of working people to save and invest their funds for return in their lean period leading to the importance of investments. Investment Outlets: The availability of a large number of investment outlets has made investments useful and important. Apart from putting aside savings in savings banks where interest is low, investors have the choice of a variety of instruments. The question to reason out is which is the most suitable channel? Which investment will give a balanced growth and stability of return? The investor in his choice of investment has the objective of a proper mix between high rate of return and stability of return to get the benefits of both types of investments. Thus, the objectives of investment are to achieve a good rate of return in the future, reducing risk to get a good return, liquidity in time of emergencies, safety of funds by selecting the right avenues of investments and a hedge against inflation. Concepts of Investment: There are two concepts of Investment: Economic Investment: The concept of economic investment means addition to the capital stock of the society. The capital stock of the society is the goods which are used in the production of other goods. The term investment implies the formation of new and productive capital in the form of new construction and producers durable instrument such as plant and machinery. Inventories and human capital are also included in this concept. Thus, an investment, in economic terms, means an increase in building, equipment, and inventory. Financial Investment: This is an allocation of monetary resources to assets that are expected to yield some gain or return over a given period of time. It means an exchange of financial claims such as shares and bonds, real estate, etc. Financial investment involves contracts written on pieces of paper such as shares and debentures. People invest their funds in shares, debentures, fixed deposits, national saving certificates, life insurance policies, provident fund etc. in their view investment is a commitment of funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits and the appreciation of the value of their principal capital. In primitive economies most investments are of the real variety whereas in a modern economy much investment is of the financial variety. Elements of Investment: The Elements of Investments are as follows: ● Return: Investors buy or sell financial instruments in order to earn return on them. The return on investment is the reward to the investors. The return includes both current income and capital gain or losses, which arises by the increase or decrease of the security price. ● Risk: Risk is the chance of loss due to variability of returns on an investment. In case of every investment, there is a chance of loss. It may be loss of interest, dividend or principal amount of investment. However, risk and return are inseparable. Return is a precise statistical term and it is measurable. But the risk is not precise statistical term. However, the risk can be quantified. The investment process should be considered in terms of both risk and return. ● Time: Time is an important factor in investment. It offers several different courses of action. Time period depends on the attitude of the investor who follows a ‘buy and hold’ policy. As time moves on, analysis believes that conditions may change and investors may revaluate expected returns and risk for each investment. ● Liquidity: Liquidity is also important factor to be considered while making an investment. Liquidity refers to the ability of an investment to be converted into cash as and when required.