"Net investment" deducts depreciation from gross investment.

Net fixed investment is

the value of the net increase in the capital stock per year.

· Investment according to International Business: A foreign direct investment (FDI) is

an investment made by a firm or individual in one country into business interests
located in another country. Generally, FDI takes place when an investor establishes
foreign business operations or acquires foreign business assets in a foreign company.

1.3 OBJECTIVES OF INVESTMENT

People make investment for a variety of purposes. The objectives of investments
should be understood before initiating the process of investment. Selection of investments
should rather be based on research of various factors. The fundamental consideration for
investment should be a growth-oriented company with substantial future potential.

The major objectives of investment in securities are as follows:

1) Income: The major objective of every investment is to earn income in the form of
dividend, yield or interest. Suitable securities are those whose prices are relatively stable
but still pay reasonable dividends or interest, such as blue-chip companies. The
investment should earn reasonable and expected return on the investments.

2) Capital Appreciation: The other important objective of investments is appreciation in

the capital invested over a period of time. Capital appreciation can be achieved in the
following three ways:

a) Conservative Growth: Investors who seek to achieve conservative growth seek to

build an investment portfolio that will make money over the long term by capital
appreciation known as wealth building over time.

b) Aggressive Growth: Investors who seek to achieve short term and long-term capital
gains opt for aggressive growth in stocks.

c) Speculation: An investor with speculation as an objective wants to maximize returns

by buying and selling shares and securities so often solely to make profit from short
term price fluctuations.

3) Forms of return: The returns expected from securities may be of two types:

a) Periodic Cash Receipts: Cash dividends are payable as and when the board of
directors of the company decides to distribute the after-tax earnings of the company to

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 the shareholders. In case of debentures, bonds, bank deposits etc. the coupon rate is
payable at the end of each specified period?

b) Capital Gain: The second component of return is the change in the price of
investment called the capital gain or loss. This element of return is the difference
between the purchase price and the price at which the asset can be sold. The
combination of periodic cash receipts and capital gain made on investments constitute
the total return on particular investment.

4) Safety and Security of Funds: Another important consideration in making investments

is that the funds so invested should be safe and secure. The investment should be capable
for redemption as and when due.

5) Risk: The level of risk depends on the object of investment. An investor who expects
greater return should be prepared to take greater risk by careful planning and periodical
review of the market situation, the investor can minimize his risk on the investments.

6) Liquidity: The liquidity of investments is another consideration to be kept in mind by

the investor. Before making the investment, the investor should consider the degree of
liquidity required. Certain securities are capable of being sold in the readily available
market and some securities may not be so liquid. The investors generally prefer securities
which ensure liquidity and marketability.

7) Tax Considerations: Before making the investments, the investor should also take into
consideration the provisions of income tax, capital gains tax, wealth tax and gift tax Acts,
to minimize his tax burden and avail all tax exemptions available to him.

The investor should also keep in mind considerations like the extent of inflation,
diversification of portfolios, degree of risk and risk coverage, growth rate etc., to achieve
their objectives of investment.

1.4 IMPORTANCE OR NEED OF INVESTMENT

In order to enhance future wealth by generating income, each individual has to make
two separate decisions. The first is savings decision. It is concerned with the choice of how
much of one’s wealth to consume now and how much to consume later. The second is
investment decision, which relates to the choice of portfolio or a collection of assets in which
to place one’s savings. The savings decision determines how much to invest in securities,
whereas, investment decision determine in which securities or assets to invest the savings.

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 Investments are both important and useful in the context of present-day conditions.
The following factors have made investments increasingly important.

1) Longer Life Expectancy: Investments have become significant, as working people (men
and women) retire between the age of 60 and 65. Also the trend shows longer life
expectancy. Savings from the current earnings must be invested in such a way that the
principal and income will be adequate for a greater number of retirement years. So
increase in working population, proper planning for life span and longevity have ensured
the need for balanced investments.
2) Increasing Rates of Taxation: Taxation is one of the crucial factor which introduces an
element of compulsion in a person’s savings. There are various forms of savings outlets
in our country in the form of investments in National Savings Certificates (NSC),
Development Bonds, Post Office Cumulative Time Deposit Schemes, Life Insurance,
Unit Trust Certificates etc. All these help in bringing down the tax level by offering
deductions in personal income.
3) Interest Rates: The level of interest rate is another factor for a sound investment plan.
Interest rates may vary— (i) between one investment and another, (ii) between risky and
safe investments, (iii) due to different benefit schemes offered by the investments. The
investor decides whether he is getting an acceptable return commensurate with the risks
that are taken, as stability of interest is as important as receiving a high rate of interest.
4) Inflation: In the years of rising prices, the investor will search an outlet which gives him
a high rate of return in the form of interest to cover any decrease due to inflation. Besides
high rate of interest, it should not unduly increase his taxation burden. Otherwise the
benefit derived from interest will be compensated by an increase in taxation.
5) Income: Another factor is the general increase in employment opportunities which gave
rise to both men and women working force in India every year. More incomes and more
avenues for investment have led to the ability and willingness of working population to
save and invest their funds.
6) Investment Channels: The growth and development of the country leading to greater
economic activity has led to the introduction of a vast array of investment outlets. Some
of the instruments available are corporate stock, provident fund, life insurance, fixed
deposits. Unit Trust schemes and so on. The investor in his choice of investment will
have to try and achieve a proper mix between high rate of return and stability of return to
reap the benefits of both.

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1.5 ELEMENTS OF INVESTMENT
The Elements of Investments are as follows:

1) 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.
2) 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.
3) 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.
4) 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 wants his money back any time. Therefore, the
investment should provide liquidity to the investor.
5) 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.

1.6 FINANCIAL AND ECONOMIC INVESTMENT

There are two concepts of investments: - Economic Investment and Financial Investments

1) Economic Investment: The concept of economic investment means an addition to the

capital stock of the society or it refers to investing in new additions or new replacements
to the capital stock of the business entity. The word capital stock refers to everything that
is used in the production of other goods or inventory. The term investment implies the
formation of new and productive capital in the form of new construction and producer’s

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 durable instrument such as plant and machinery. Thus, investment in new factories,
houses, retail stores, construction equipment, and wireless networks are good examples
of economic investment. The economic investment also includes an addition to a
workforce or Human capital that could help or improve the profitability of the business
entity.

The ultimate purpose of economic investment is to improve the productive capacity of

the business entity. Addition to capital stock or improvements in existing capital stock
increases the efficiency of production. When your machinery produces more inventory,
you can optimize your sales and profits. Thus, an investment, in economic terms, means
an increase in building, equipment, and inventory.

2) Financial Investment: In contrast, financial investment is a far broader concept. It

includes economic investment and much more. This includes an allocation of monetary
resources to assets that are expected to yield some gain or return over a given period of
time. Financial investment refers to either buying an asset or building an asset with the
objective of financial gain.

The financial investments include both investments either on new assets or old assets. It
does not distinguish between new assets and old assets. Financial investment refers to
investment in assets you expect to yield some sort of dividend over a period. It involves
investment either in financial assets (such as stocks, bonds, and futures contracts) or real
assets (such as land, factories, construction equipment, and retail stores). 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.

Table 1.1 Comparison between Economic Investment and Financial Investment

Economic Investment Financial Investment

1) Economic investment includes new addition

1) Financial investment include investment
or new replacement to capital stock either on new assets or used assets

2) It is the investment on real assets 2) It is the investment on both real assets and
financial assets
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3) The goal is to improve the productive capital
3) The goal of the financial investment is the
of the business entity financial gain

4) It matters if the purchase of an asset adds or

4) It does not matter if the purchase of an asset
replaces to capital stock adds or replaces to capital stock.

5) Economic investment is not the broader

5) Financial investment is broader concept. It
concept than financial investment includes economic investment and more

6) Purchases of new land, factories and retail6) New or old land, factories and retail stores
stores are examples of economic investment are examples of financial investment.

7) Economic investment does not include

7) Purchase of shares, bonds and future
investment on shares and bonds contracts are also examples of this
investment

1.7 FEATURES OF INVESTMENT

The following are the features of investment.

1) Safety of Principal: Every investment is subject to fluctuations in its price which is

caused due to changing market conditions. An investment tool is termed as adequate if
it ensures the safety of the principal to investors. It should possess an ability of
redemption as and when required as per the needs of the person. Proper evaluation of
distinct economic and industry trends should be done before deciding the type of
investments.

2) Capital Appreciation: Capital appreciation is an important feature of every investment

tool. Every investment is expected to rise in its value over a period of time which is a
key determinant for making deploying funds in it. Investors should properly forecast
which assets are expected to appreciate in the future and make timely purchases of
them.

3) Stable income: Investors invest their funds in such assets that provide stable income.
Regularity of income is consistent with a good investment program. The income should
not only be stable but also adequate as well.

4) Liquidity and Collateral value: A liquid investment is one which can be converted
into cash immediately without monetary loss. Liquid investments help investors meet
emergencies. Stocks are easily marketable only when they provide adequate return
through dividends and capital appreciation.