Investment is the employment of funds with an aim of achieving additional income or growth in

value. It is the allocation of monetary resources to assets that are expected to yield some gain over a
period of time. In general terms, investment means the use of money with the hope of making more
money. In finance, investment means the purchase of a financial product or other item of value with
an expectation of favourable future returns. Investment of hard earned money is a crucial activity of
every human being.

Investment refers to the concept of deferred consumption, which involves purchasing an asset e.g.
giving a loan or keeping funds in a bank account with the aim of generating future returns. Various
investment options are available, offering differing risk-reward trade-offs. An understanding of the
core concepts and a thorough analysis of the options can help an investor create a portfolio that
maximizes returns while minimizing risk exposure.

Investment is a commitment of a person’s funds to derive future income in the form of interest,
dividends, rent etc. It is the commitment of funds which have been saved from current consumption
with the hope that some benefits will accrue in future. Thus, it is a reward for waiting for money. So
the first step to investment is savings. In common usage, saving generally means putting money
aside, for example, by putting money in the bank or investing in a pension plan. In a broader sense,
saving is typically used to refer to economizing, cutting costs, or to rescuing someone or something.
In terms of personal finance, saving refers to preserving money for future use - typically by putting it
on deposit – this is distinct from investment where there is an element of risk. Saving is a desire to
reserve certain portion of income for future needs. Research findings reveal that saving rate for
household is affected not only by their ability to save but also their willingness to save.

According to Donald E. Fischer and Ronald J. Jordanan investment is a commitment of funds made
in the expectation of some positive rate of returns. If the investment is properly undertaken, the
return will be commensurate with the risk the investor assumes”.

According to F. Amling - Investment means the purchase by an individual or institutional investor of

a financial or real asset that produces a return proportion to the risk assumed over some future
investment period.
CONCEPTS OF INVESTMENT

1) 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 producer’s 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.

2) 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 pa
per such as shares and debentures. People invest their funds in shares, debentures, fixed deposits,
national saving certificates, life insurance policies, provident fund etc. 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.
The economic and financial concepts of investment are related to each other because investment is
a part of the savings of individuals which flow into the capital market either directly or through
institutions. Thus, investment decisions and financial decisions interact with each other. Financial
decisions are primarily concerned with the sources of money where as investment decisions are
traditionally concerned with uses or budgeting of money.

INVESTMENT OBJECTIVES

An investment is a sacrifice of current money or other resources for future benefits. Numerous
avenues of investment are available today: Deposit money in a bank account or purchase a long-
term government bond or invest in the equity shares of a company or contribute to a provident fund
account or buy a stock option or acquire a plot of land or invest in some other form.

Investment refers to acquisition of some assets. It also means the conversion of money into claims
on money and use of funds for productive purposes, for securing some objectives like income,
appreciation of capital or capital gain, or for further production of goods and services with objective
of securing profits.

Investment Activity involves the use of funds or savings for further creation of assets or acquisition
of existing assets. The essential quality of an investment is that it involves “Waiting for a reward”. It
involves the commitment of resources which have been saved or put away from current
consumption in the hope that some benefits will accrue in future.

There are personal objectives which are given due consideration by every investor while selecting
suitable avenues for investment. Personal objectives may be like provision for old age and sickness,
provision for house construction, provision for education and marriage of children and finally
provision for dependents including wife, parents or physically handicapped member of the family.
Investment Avenue selected should be suitable for achieving both the financial and personal
objectives
By investing, an investor commits the present funds to one or more assets to be held for some time
in expectation of some future returns in terms of interest (revenue) or capital gain. The investor has
a large number of investment outlets. The investor may choose the particular investment outlet
after analysing the advantages and disadvantages provided by them. For this decision making
process, investment management is required. Investment management involves analysis and
selection of investments. For an individual investor as well as for other investors, Investment
management is a part of overall financial decision making. An investor should draw an overall
financial plan stating that how much total funds to be invested, how much to be invested in real
assets, etc. Such a financial plan should include decision whether to buy or construct a house, as it
is a major investment decision for an individual. Other aspects to be considered may be how much
to invest in life policies or future endowment funds e.g. provident funds etc. Once a financial plan is
prepared, an investor would be interested is constructing and managing the optimum combination
of the investment alternatives. The objective of construction of such combination is to enhance the
wealth of the investor. The combination of investment is known as portfolio and the practice of
including several investment alternatives in the portfolio is known as diversification which aims at
reducing the risk of the investor. There are different methods of classifying the investment avenues.

A major classification is physical investment and financial investments. Investments are physical, if
savings are used to acquire physical assets, useful for consumption or production. Many times
physical assets are not useful for further production of goods or to create income for example
consumer durables, gold, silver etc. But most of the financial assets, barring cash are used for
production or consumption, or further creation of assets useful for production of goods and services.
Investing is a wide spread practice and many have made their fortunes in the process. The starting
point in this process is to determine the characteristics of the various investments and then
matching them with the individuals need and preferences. All personal investing is designed in order
to achieve certain objectives. These objectives may be tangible such as buying a car, house etc. and
intangible objectives such as social status, security etc. Similarly; these objectives may be classified
as financial or personal objectives. Financial objectives are safety, profitability, and liquidity.
Personal or individual objectives may be related to personal characteristics of individuals such as
family commitments, status, dependents, educational requirements, income, consumption and
provision for retirement etc. Diversification of funds is an important principle of investment for
earning higher rate of interest. Every investor has certain specific objective to achieve through his
long term or short term investment. Such objectives may be monetary/financial or personal in
character.

The objectives can be classified on the basis of the investors approach as follows:

a) Short Term High Priority Objectives: Investors have a high priority towards achieving certain
objectives in a short time. For example, a young couple will give high priority to buy a house. Thus,
investors will go for high priority objectives and invest their money accordingly.

b) Long Term High Priority Objectives: Some investors look forward and invest on the basis of
objectives of long term needs. They want to achieve financial independence in long period. For
example, investing for postretirement period or education of child etc. investors, usually prefer a
diversified approach while selecting different types of investments.

c) Low Priority Objectives: These objectives have low priority in investing. These objectives are not
painful. After investing in high priority assets, investors can invest in these low priority assets. For
example, provision for tour, domestic appliances, etc.
d) Money Making Objectives: Investors put their surplus money in these kinds of investment. Their
objective is to maximize wealth. Usually, the investors invest in shares of companies which provide
capital appreciation apart from regular income from dividend.

Every investor has common objectives with regard to the investment of their capital. The
importance of each objective varies from investor to investor and depends upon the age and the
amount of capital they have and their expectations. These objectives may vary according to

A. Lifestyle – Investors want to ensure that their assets can meet their financial needs over their
lifetimes.

B. Financial Security – Investors want to protect their financial needs against financial risks at all
times.

C. Return – Investors want a balance of risk and return that is suitable to their personal risk
preferences.

D. Value for Money – Investors want to minimize the costs of managing their assets and their
financial needs.

E. Peace of Mind – Investors does not want to worry about the day-to-day movements of markets
and their present and future financial security. Achieving the sum of these objectives depends very
much on the investor having all their assets and needs managed centrally, with portfolios planned to
meet lifetime needs, with one overall investment strategy ensuring that the disposition of assets will
match individual needs and risk preferences.

ELEMENTS OF INVESTMENTS

Elements of investments are Risk and Return relationship, Time, Liquidity and Tax savings. The three
key aspects of any investment are time, risk and return. The sacrifice takes place now and is certain.
The benefit is expected in the future and tends to be uncertain. In some investments (like
government bonds, LIC, FD) the time element is the dominant attribute. In other investments (like
stock options) the risk element is the dominant attribute. In yet other investments (like shares,
mutual funds) both time and risk are the dominant attributes.

The Elements of Investments are:

a) 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.

b) 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 a precise statistical term. However, the risk can be quantified. The
investment process should be considered in terms of both risk and return. Present consumption is
sacrifice that has to be borne is certain but the return in the future may be uncertain. This attribute
of investment indicates the risk factor.

The risk is undertaken with a view to reap some return from the investment. Investment means
some monetary commitment. A person’s commitment to buy a flat or house for his personal use is
an investment from his point of view. This cannot be considered as an actual investment as it
involves sacrifice but does not yield any financial return.

Risk is another factor which needs careful selection of the avenue for investment. Risk is a normal
feature of every investment as an investor has to part with his money immediately and has to collect
it back with some benefit in due course. The risk may be more in some investment avenues and less
in others. Risk connected with the investment are, liquidity risk, inflation risk, market risk, business
risk, political risk etc. Thus, the objective of an investor should be to minimize the risk and to
maximize the return out of the investment made.

c) 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.

1. Period of Investment: It is one major consideration while selecting avenue for investment. Such
period may be

a) Short Term (up to one year) – To meet such objectives, investment carry minimum or no risk are
suitable.

b) Medium Term (1 year to 3 years) – Investment avenues that offers better returns and may carry
slightly more risk can be considered.

c) Long Term (3 years and above) – As the time horizon is adequate, investor can look at investment
that offers best returns and are considered more risky.

d) 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. The investor
may want his money back at any time. Therefore, the investment should provide liquidity to the
investor.

e) Tax Saving: The investors should get the benefit of tax exemption from the investments. There are
certain investments which provide tax exemption to the investor. The tax saving investments
increases the return on investment. Therefore, the investors should also think of saving income tax
and invest money in order to maximize the return on investment.

CLASSIFICATION OF INVESTORS

Investors can be classified into three categories. They are:

a) Risk Averters

b) Risk Moderates

c) Risk Takers

Risk Averters: As the term indicates, risk averters do not invest in risky assets. These investors prefer
to invest in Government securities, Life insurance policies and Unit Trust Certificates.

Risk Moderates: Risk Moderates (Risk neutrals) are willing to pay for making an investment provided
they get return of an equal value. They invest in common stocks and life policies.
Risk Takers: Risk TAKERS chief aim is getting higher return for their investments. They believe in high
return for a greater risk. They prefer to invest in common bonds and convertible securities.

INVESTMENT ALTERNATIVES

Wide varieties of investment avenues are now available in India. An investor can himself select the
best avenue after studying the merits and demerits of different avenues. Financial advertising,
newspaper supplements on financial matters and investment journals offer guidance to investors in
the selection of suitable investment avenues. Few years before there were only limited a number of
options for investments like bank deposits and post office schemes. Only few rich and adventurous
investors had knowledge about Stock market and Securities. Now, the modern investment trend has
a different scenario with various options of investment and best return for the investors.

The following investment avenues are popular and used extensively in India:

1) Investment in Shares: Shares are considered to be risky investments but at the same time, they
are most liquid investments due to the presence of stock markets.

2) Postal Savings Schemes: Post Office Monthly Income Scheme is a low risk saving investment.
National Savings certificates are offered by the Post office as long term investments.

3) PPF: Public Provident Fund is a long term saving instrument with a maturity period of 15 years.

4) Investment in Intermediaries such as mutual funds: Mutual funds are an easy and tension free
investment option and it automatically diversifies the investments.

5) Deposits in Companies: Fixed deposit, etc. These are non-marketable securities.

6) Life Insurance Investment: Life insurance is an investment for security of life and includes
different life policies such as whole life policy, endowment policy, annuity plans and so on.

7) Bullion: The bullion offers investment opportunities in the form of gold, silver, precious metals
and antiques.

8) Investment in Real Estates: Every investor has some part of their portfolio invested in real assets

9) Investment in Debentures and Bonds of Companies and Government: Bonds are long term
investment options with a fixed stream of cash flows and considered to be relatively less risky.

There are some avenues/investment schemes where tax benefits are available. Such schemes are
called Tax Savings Schemes of Investment. A tax payer can take the benefit of such schemes and
bring down his total tax liability. The basic purpose of such schemes is to encourage investment in
certain investment avenues. In some schemes, the entire investment is made tax free, i.e. it is
deducted from yearly taxable income. The „Investor‟ can be an individual, a government, a pension
fund, or a corporation. Similarly, this definition includes all types of investments, including
investments by corporations in plant and equipment and investments by individuals in stocks, bonds,
commodities, or real estate. In all cases, the investor is trading a known rupee amount today for
some expected future stream of payments that will be greater than the current outlay.

Every individual investor possesses different mind-set when they decide about investing in a
particular investment avenue such as stocks, bonds, mutual funds, fixed deposit, real estate, LIC,
bullion etc. in each life cycle stage, every individual desires his hard earned money to be invested in
most secure and liquid avenue. However, the decision varies for every individual depending on their
risk taking ability and the purpose for which investment is to be done. Each individual investor
selects the investment option for certain time period looking at their personal financial goals.
Investment behaviour of an individual investor reveals how he/she wants to allocate the surplus
resources to investment alternatives available. The investment behaviour consists of why they want
to invest, how much of their disposable income they want to invest, for how many year/months they
want to invest and most importantly the timing of such investment. In every life cycle stage, saving
objective by an individual always changes. Such changes occur not only due to the age of investors,
but also due to the income level category, where they fall.