INVESTMENT MANAGEMENT

Module 1
Introduction to Investment

Syllabus
Investments – Meaning, Differences between Investment, investment
alternatives; securities markets; securities market institutions;
investment process, Financial Instruments, Trading and Speculation –
Features of a good investment – Investment Process – Investment
Goals

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Investments – Meaning

An investment is an asset or item acquired with the goal of

generating income or appreciation.
Appreciation refers to an increase in the value of an asset over time.
When an individual purchases a good as an investment, the intent is
not to consume the good but rather to use it in the future to create
wealth.

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Differences between savings & Investment
The biggest difference between saving and investing is the level of risk
taken. Saving typically results in you earning a lower return but with
virtually no risk. In contrast, investing allows you the opportunity to
earn a higher return, but you take on the risk of loss in order to do so.

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 The table below summarizes some of the key differences between saving and investing:

Characteristic Saving Investing

Account type Bank Brokerage

Return Relatively low Potentially higher or lower

Varies by investment, but there is

Virtually none on FDIC-insured
Risk always the possibility of losing some or
accounts
all of your investment capital

Savings accounts, CDs, money-market

Typical products Stocks, bonds, mutual funds and ETFs
accounts

Time horizon Short Long, 5 years or more

Difficulty Relatively easy Harder

Protection against inflation Only a little Potentially a lot

Could be, depending on how much you

Expensive? No
buy and realize taxable gains

High, though you may not get the exact

Liquidity High, unless CDs amount you put into the investment
depending on when you cash in

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Investment alternatives

Alternative investments are asset classes that aren’t stocks, bonds, or

cash. These kinds of investments differ from traditional investment
types because they aren’t easily sold or converted into cash. It’s also
common for alternative investments to be referred to as alternative
assets.

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1. Private Equity

• Private equity is a broad category that refers to capital investment

made into private companies, or those not listed on a public
exchange, such as the New York Stock Exchange.
• There are several subsets of private equity, including:
1.Venture capital, which focuses on startup and early-stage ventures
2.Growth capital, which helps more mature companies expand or
restructure
3.Buyouts, when a company or one of its divisions is purchased
outright

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2. Private Debt

• Private debt refers to investments that are not financed by banks

(i.e., a bank loan) or traded on an open market. The “private” part of
the term is important—it refers to the investment instrument itself,
rather than the borrower of the debt, as both public and private
companies can borrow via private debt.
• Private debt is leveraged when companies need additional capital to
grow their businesses. The companies that issue the capital are
called private debt funds, and they typically make money in two
ways: through interest payments and the repayment of the initial
loan.

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3. Hedge Funds

• Hedge funds are investment funds that trade relatively liquid assets
and employ various investing strategies with the goal of earning a
high return on their investment. Hedge fund managers can specialize
in a variety of skills to execute their strategies, such as long-short
equity, market neutral, volatility arbitrage, and quantitative
strategies.
• Hedge funds are exclusive, available only to institutional investors,
such as endowments, pension funds, and mutual funds, and high-
net-worth individuals.

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4. Real Estate

• There are many types of real estate. For example, land, timberland,
and farmland are all real assets, as is intellectual property like
artwork. But real estate is the most common type and the world’s
biggest asset class.
• In addition to its size, real estate is an interesting category because it
has characteristics similar to bonds—because property owners
receive current cash flow from tenants paying rent—and equity,
because the goal is to increase the long-term value of the asset,
which is called capital appreciation.

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 5. Commodities
• Commodities are also real assets and mostly natural resources, such as
agricultural products, oil, natural gas, and precious and industrial
metals. Commodities are considered a hedge against inflation, as
they're not sensitive to public equity markets. Additionally, the value of
commodities rises and falls with supply and demand—higher demand
for commodities results in higher prices and, therefore, investor profit.
• Commodities are hardly new to the investing scene and have been
traded for thousands of years. Amsterdam, Netherlands, and Osaka,
Japan may lay claim to the title of the earliest formal commodities
exchange, in the 16th and 17th centuries, respectively. In the mid-19th
century, the Chicago Board of Trade started commodity futures
trading.

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6. Collectibles
• Collectibles include a wide range of items such as:
a.Rare wines
b.Vintage cars
c.Fine art
d.Mint-condition toys
e.Stamps
f. Coins
g.Baseball cards
• Investing in collectibles means purchasing and maintaining physical items with
the hope the value of the assets will appreciate over time.
• These investments may sound more fun and interesting than other types, but
can be risky due to the high costs of acquisition, a lack of dividends or other
income until they're sold, and potential destruction of the assets if not stored or
cared for properly. The key skill required in collectibles investment is experience;
you have to be a true expert to expect any return on your
investment.

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 7. Structured Products
• Structured products usually involve fixed income markets—those
that pay investors dividend payments like government or corporate
bonds—and derivatives, or securities whose value comes from an
underlying asset or group of assets like stocks, bonds, or market
indices. Examples of structured products include credit default swaps
(CDS) and collateralized debt obligations (CDO).
• Structured products can be complex and sometimes risky investment
products, but offer investors a customized product mix to meet their
individual needs. They're most commonly created by investment
banks and offered to hedge funds, organizations, or retail investors.

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Securities markets

• Security market is a component of the wider financial market where

securities can be bought and sold between subjects of the economy,
on the basis of demand and supply.
• Stocks, bonds, preferred shares, and ETFs are among the most
common examples of marketable securities. Money market
instruments, futures, options, and hedge fund investments can also
be marketable securities.

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Primary and Secondary Markets and Stock Exchanges
•Security markets serve two functions:
•They help companies to raise funds by making the initial sale of their
stock to the public.
•They provide a place where investors can trade already issued stock.
•When you went through your IPO, shares were issued through
a primary market—a market that deals in new financial assets. As
we’ve seen, the sale was handled by an investment banking firm,
which matched you, as a corporation with stock to sell, with investors
who wanted to buy it.

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Functions of Securities Market

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Regulating Securities Markets: The SEC
•Because it’s vital that investors have confidence in the securities markets,
Congress created the Securities and Exchange Commission (SEC) in 1934. The SEC
is charged with enforcing securities laws designed to promote full public
disclosure, protecting investors against misconduct in the securities markets, and
maintaining the integrity of the securities markets (U.S. Securities and Exchange
Commission, 2011).
•Before offering securities for sale, the issuer must register its intent to sell with
the SEC. In addition, the issuer must provide prospective buyers with a prospectus
—a written offer to sell securities that describes the business and operations of
the issuer, lists its officers, provides financial information, discloses any pending
litigation, and states the proposed use of funds from the sale.
•The SEC also enforces laws against insider trading—the illegal buying or selling of
its securities by a firm’s officers and directors or anyone else taking advantage of
valuable information about the company before it’s made public. The intent of
these laws is to prevent insiders from profiting at the expense of other investors.

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SEBI- Securities Exchange Board of India
• SEBI is a statutory body and a market regulator, which controls the
securities market in India.
• The basic functions of SEBI is to protect the interests of investors in
securities and to promote and regulate the securities market.
• SEBI is run by its board of members. The board consists of a
Chairman and several other whole time and part time members.
• The chairman is nominated by the union government.
• The others include two members from the finance ministry, one
member from Reserve Bank of India and five other members are
also nominated by the Centre.
• The headquarters of SEBI is situated in Mumbai and the regional
offices are located in Ahmedabad, Kolkata, Chennai and Delhi.

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Securities Exchange Board of India
• The Securities and Exchange Board of India is the regulatory body for
securities and commodity market in India under the ownership of
Ministry of Finance within the Government of India.
• Founded: 12 April 1992
• Sector: Securities market
• Jurisdiction: India
• Headquarter: Mumbai
• Agency executive: Madhabi Puri Buch (Chairperson)
• Type: Statutory corporation
• Founder: Government of India

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Objectives of SEBI
Following are some of the objectives of the SEBI:
1. Investor Protection: This is one of the most important objectives of
setting up SEBI. It involves protecting the interests of investors by
providing guidance and ensuring that the investment done is safe.
2. Preventing the fraudulent practices and malpractices which are
related to trading and regulation of the activities of the stock exchange
3. To develop a code of conduct for the financial intermediaries such
as underwriters, brokers, etc.
4. To maintain a balance between statutory regulations and self
regulation.

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Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.
It meets the needs of the following groups:
1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.
2. Investors: It provides protection and supply of accurate information that is maintained on a
regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by arranging for
proper infrastructure.

Structure of SEBI
SEBI board comprises nine members. The Board consists of the following members.
1.One Chairman of the board who is appointed by the Central Government of India
2.One Board member who is appointed by the Central Bank, that is, the RBI
3.Two Board members who are hailing from the Union Ministry of Finance
4.Five Board members who are elected by the Central Government of India

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Functions of SEBI
SEBI has the following functions
1. Protective Function
2. Regulatory Function
3. Development Function
The following functions will be discussed in detail
Protective Function: The protective function implies the role that SEBI plays in protecting the investor
interest and also that of other financial participants. The protective function includes the following
activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the insiders of
a company, which includes the directors, employees and promoters. To prevent such trading SEBI has
barred the companies to purchase their own shares from the secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of securities by
either increasing or decreasing the market price of the stocks that leads to unexpected losses for the
investors. SEBI maintains strict watch in order to prevent such malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting fraudulent
activities related to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting online and offline sessions that
provide information related to market insights and also on money management.

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Regulatory Function: Regulatory functions involve establishment of rules and regulations for
the financial intermediaries along with corporates that helps in efficient management of the
market.
The following are some of the regulatory functions.
a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.
b. Regulating the process of taking over of a company.
c. Conducting inquiries and audit of stock exchanges.
d. Regulates the working of stock brokers, merchant brokers.

Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.
1. Training of intermediaries who are a part of the security market.
2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.
3. By making the underwriting an optional system in order to reduce cost of issue.

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Investment Process
An investment process is a set of guidelines that govern the behavior
of investors in a way which allows them to remain faithful to their
investment strategy, that is the key principles which they hope to
facilitate out-performance.

There are 5 investment process steps that help you in selecting and
investing in the best asset class according to your needs and
preferences. Read here is details every notes on process of investing.

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Investment Process
Step 1- Understanding the Client
The first and the foremost step of investment process is to understand the client or the
investor his/her needs, his risk taking capacity and his tax status. After getting an insight of
the goals and restraints of the client, it is important to set a benchmark for the client’s
portfolio management process which will help in evaluating the performance and check
whether the client’s objectives are achieved.

Step 2- Asset Allocation Decision

This step involves decision on how to allocate the investment across different asset classes,
i.e. fixed income securities, equity, real estate etc. It also involves decision of whether to
invest in domestic assets or in foreign assets. The investor will make this decision after
considering the macroeconomic conditions and overall market status.

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Step 3- Portfolio Strategy Selection
Third step in the investment process is to select the proper strategy of portfolio creation.
Choosing the right strategy for portfolio creation is very important as it forms the basis of
selecting the assets that will be added in the portfolio management process. The strategy
that conforms to the investment policies and investment objectives should be selected.
There are two types of portfolio strategy.
a.Active Management Process
b.Passive Management Process
a. Active portfolio management process refers to a strategy where the objective of investing
is to outperform the market return compared to a specific benchmark by either buying
securities that are undervalued or by short selling securities that are overvalued. In this
strategy, risk and return both are high. This strategy is a proactive strategy it requires close
attention by the investor or the fund manager.
b. Passive portfolio management process refers to the strategy where the purpose is to
generate returns equal to that of the market. It is a reactive strategy as the fund manager or
the investor reacts after the market has responded.

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Step 4- Asset Selection Decision
The investor needs to select the assets to be placed in the portfolio management process in
the fourth step. Within each asset class, there are different sub asset-classes. For example, in
equity, which stocks should be chosen? Within the fixed income securities class, which bonds
should be chosen?
Also, the investment objectives should conform to the investment policies because otherwise
the main purpose of investment management process would become meaningless.

Step 5- Evaluating Portfolio Performance

This is the final step in the investment process which evaluates the portfolio management
performance. This is an important investing process step as it measures the performance of
the investment with respect to a benchmark, in both absolute and relative terms. The investor
would determine whether his objectives are being achieved or not.

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Financial Instruments
• Financial instruments are assets that can be traded, or they can also
be seen as packages of capital that may be traded.
• Most types of financial instruments provide efficient flow and
transfer of capital all throughout the world's investors. These assets
can be cash, a contractual right to deliver or receive cash or another
type of financial instrument, or evidence of one's ownership of an
entity.

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Types of Asset Classes of Financial Instruments
Financial instruments may also be divided according to an asset class, which depends on
whether they are debt-based or equity-based.
1. Debt-Based Financial Instruments
Short-term debt-based financial instruments last for one year or less. Securities of this kind
come in the form of T-bills and commercial paper. Cash of this kind can be deposits and
certificates of deposit (CDs).
Exchange-traded derivatives under short-term, debt-based financial instruments can be
short-term interest rate futures. OTC derivatives are forward rate agreements.
Long-term debt-based financial instruments last for more than a year. Under securities, these
are bonds. Cash equivalents are loans. Exchange-traded derivatives are bond futures and
options on bond futures. OTC derivatives are interest rate swaps, interest rate caps and
floors, interest rate options, and exotic derivatives.
2. Equity-Based Financial Instruments
Securities under equity-based financial instruments are stocks. Exchange-traded derivatives
in this category include stock options and equity futures. The OTC derivatives are stock
options and exotic derivatives.

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Trading in Stock market
Stock trading refers to the buying and selling of shares in a particular company; if you own
the stock, you own a piece of the company.
If you own certain stocks and shares of a company, it translates to you owning a piece of the
firm. A professional or an individual who trades on behalf of a financial firm will be known as
a stock trader.
Stock traders are broadly classified into three categories - informed, uninformed, and
intuitive traders.
Highlights of Stock Trading:
1.A new stock trader needs to look up to the strategies and experience of a successful trader.
2.A stock trader plays a vital role in the market since he or she renders the much-needed
liquidity in the market, which in turn helps investors as well as other traders.
3.Often, traders utilise technical analysis for determining how a stock is going to move.
4.Mostly traders are not married to just one style, they combine several strategies into their
trading techniques.

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Speculation & Speculators
In the world of finance, speculation, or speculative trading, refers
to the act of conducting a financial transaction that has substantial
risk of losing value but also holds the expectation of a significant gain
or other major value.
Speculator
A speculator is any entity or individual that attempts to make
opportunistic profits from changes in the prices of financial
instruments over the short term.
Speculators can be banks, entities from the corporate and foreign
sector as well as individuals from the household sector.

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Types of Speculators
Bull
•A bull is a type of speculator who anticipates a rise in the price of securities.
•This type of speculator buys financial securities so that s/he can sell them in the
future at a higher price.
•When the price of securities increases the speculator gains a profit, but when the
price falls the speculator loses.
•A bullish type of speculator in an equity market seeks a capital gain opportunity
by purchasing undervalued stocks in order to resell them in the future when their
true value is reflected in the market.
Bear
•A Bear is a speculator who anticipates a fall in the price of securities.
•By going short, the speculator borrows securities in order to sell them to an
available buyer with the intention of buying them back at a lower price.
•That way the speculator can benefit from the fall in price of the securities when
s/he buys them back to return them to the institution s/he borrowed from.

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Stag
•A stag is a type of speculator that applies for new shares of a company with the
view of selling them at a premium after allotment.
•A stag type of speculator is regarded to be more risk averse than bears or
bulls.
•The word ‘stag’ can also be used to refer to a day trader or speculator who
attempts to gain profits from short term price movements of securities. Such
speculators make use of technical analysis or tape reading for trading decisions.
Lame Duck
•A lame duck is a speculator who is in or near bankruptcy due to bad trades.
•A lame duck is a type of speculator that suffers multiple losses due to his/her
incompetence.
•In some cases, a lame duck can be a bear type of speculator who is not able to
meet his commitments.

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Features of a good investment
1. Safety of principal
Safety of funds invested is one of the essential ingredients of a good investment
program. Safety of principal signifies protection against any possible loss under the
changing conditions. Safety of principal can be achieved through a careful review
of economic and industrial trends before choosing the type of investment.
Diversification refers to an assorted approach to investment commitments.
Diversification may be of two types, namely,
Vertical diversification; and
Horizontal diversification.
Under vertical diversification, securities of various companies engaged in different
stages of production (from raw material to finished products) are chosen for
investment.
On the contrary, horizontal diversification means making investment in those
securities of the companies that are engaged in the same stage of production.

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2. 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.
3. Stable income
Investors invest their funds in such assets that provide stable income. Regularity of income is
consistent with a good investment programme. The income should not only be stable but also
adequate as well.
4. Capital growth
One of the important principles of investment is capital appreciation. A company flourishes
when the industry to which it belongs is sound. So, the investors, by recognizing the connection
between industry growth and capital appreciation should invest in growth stocks. In short, right
issue in the right industry should be bought at the right time.
5. Tax implications
While planning an investment programme, the tax implications related to it must be seriously
considered. In particular, the amount of income an investment provides and the burden of
income tax on that income should be given a serious thought .

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6. Stability of Purchasing Power
Investment is the employment of funds with the objective of earning income or
capital appreciation. In other words, current funds are sacrificed with the aim of
receiving larger amounts of future funds.
7. Legality
The investor should invest only in such assets which are approved by law. Illegal
securities will land the investor in trouble. Apart from being satisfied with the
legality of investment, the investor should be free from management of securities.
In case of investments in Unit Trust of India and mutual funds of Life Insurance
Corporation, the management of funds is left to the care of a competent body.

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Investment Goals
• “A good financial plan is a road map that shows us exactly how the
choices we make today will affect our future.” – Alexa Von Tobel
• Wealth is an integral part of life on the individual, familial, and
societal levels. It can be the difference between living the life of your
dreams and just living life. The best way to make the most of the
wealth that you have is to take a goal-oriented approach towards
investing that results in long-term capital appreciation.
• Investment funds has a set of goals that meet the requirements of
investors and commensurate with the acceptable risk levels. The
fund’s manager follows a specific policy and investment strategy to
achieve these goals. That is why the securities that form the assets of
these funds vary according to its goals and objectives. For example:
when the achievement of a steady income is the goal of the fund’s
investment, the fund’s manager sets the policies and investment
strategies that will determine the securities to form the fund’s assets
to achieve these goals.

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Accordingly, the objectives of investment funds can be generally
classified as the following:
1.Invest to maintain capital.
2.Invest to achieve income.
3.Invest to achieve income and growth.
4.Invest to achieve growth.
5.Invest to achieve high growth.

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