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Investment involves making of a sacrifice in the present with the hope of
deriving future benefits. Investment has many meanings and facets. The
two most important features of an investment are current sacrifice and
future benefit.

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We invest in order to improve our future welfare. Funds to be invested come
from assets already owned, borrowed money, and savings or foregone
consumption. By foregoing consumption today and investing the savings, we
expect to enhance our future consumption possibilities. Anticipated future
consumption may be by other family members, such as education funds for
children or by ourselves, possibly in retirement when we are less able to work
and produce for our daily needs. Regardless of why we invest, we should all
seek to manage our wealth effectively, obtaining the most from it. This includes
protecting our assets from inflation, taxes and other factors.

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Investment decisions are premised on an important assumption that
investors are rational and hence prefer uncertainty. They are risk averse
which implies that they would be unwilling to take risk just for the sake of
risk. They would assume risk only if an adequate compensation is
forthcoming. And the dictum of µrationality¶ combined with the attitude of µrisk
aversion¶ imparts to investment their basic nature. The question to be
answered is: how best to enlarge returns with a given level of risk? Or how
best to reduce risk for a given level of return? Obviously, there would be
several different levels of risk and different associated expectations of
return. The basic investment decision would be a trade-off between risk and
return.

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A typical investment decision undergoes a five step procedure which, in
turn, forms the basis of the investment process. These steps are:

1. Determine the investment objectives and policy.

2. Undertake security analysis.

3. Construct a portfolio.

4. Review the portfolio.

5. Evaluate the performance of the portfolio.

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The investor will have to work out his objectives first and then evolve a policy
with the amount of investible wealth at his command. Hence, the objectives of
an investor must be defined in terms of risk and return.

The next step in formulating the investment policy of an investor would be the
identification of categories of financial assets he/she would be interested in.

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This step would consist of examining the risk-return characteristics of
individual securities or groups of securities identified under step one. The
aim here is to know if it is worthwhile to acquire these securities for the
portfolio. And there are two broad approaches to finding out the µmispriced
status¶ of individual securities. One approach is known as µtechnical
analysis¶. The second approach is known as µfundamental approach¶.

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This consists of identifying the specific securities in which to invest and
determining the proportion of the investor¶s wealth to be invested in each.
Portfolio construction address itself to three major problems via., selectivity,
timing, and diversification. The related questions would be: which specific
shares/debentures to buy, when to buy, and how best to combine then in a
way that risk is reduced to a minimum for a given level of expected return.

Cont«.

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As time passes, the investor would discover that securities that once were very
attractive have ceased to be so. Also, new securities with promises of high
returns and relatively low risk have emerged. In view of such developments it
would be necessary for him to review the portfolio. He would liquidate the
unattractive securities and acquire the new stars from the market. In a way, he
repeats the first three steps of the investment process.

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A rational investor would constantly examine his chosen portfolio both for
average return and risk. Measures, for doing so, must be developed. Also,
the calculated risk-return positions must be compared with certain yardsticks
or norms. This step in the investment process, thus, acquires considerable
significance since the tasks involved are quantitative measurement of actual
risk and return their evaluation against objective norms.
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Investment decisions to buy/sell securities taken by individuals and
institutions are carried through a set of rules and regulations. There are
markets ² money and capital ² which function subject to such rules and
established procedures and are, in turn, regulated by legally constituted
authority. Then there are securities or financial instruments, which are the
objects of purchase and sale. Finally, the mechanism which expedites
transfers from one owner to another comprises of a host of intermediaries.
All these elements comprise the investment environment. Investors have to
be fully aware of this environment for making optimal investment decisions.
The three elements of the investment environment viz., instruments,
institutions and markets

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Financial intermediaries perform the intermediation function i.e., they bring
the users of funds and the suppliers of funds together. Many of them issue
financial claims against themselves and use cash proceeds to purchase the
financial assets of others.

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Speculation typically lasts longer than gambles but are briefer than
investments. A speculation usually involves the purchase of a salable asset in
hopes of making a quick profit from an increase in the price of the asset which
is expected to occur within a few weeks or months. Those involved in
speculations are reluctant to refer to this activity as speculation because they
dislike the connotations of the word; they prefer to refer to speculations as
investment activities.
A gamble is usually a very short-term investment in a game of chance. The
holding period for most gambles can be measured in seconds. That is, the
result of so-called investments is quickly resolved by the roll of the dice or the
turn of a card. Such activities have planning horizons that are far too brief to
do the research that should precede any investment activity.

Cont«.
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Speculation is not the same as gambling and the two should never be
confused. The difference between speculation and gambling is that in
gambling, artificial and unnecessary risks are created whereas in speculation
the risks already exist and the question is simple ± who shall bear them?
Gambling is a far cry from the carefully planned research and scientific
procedure which underlies the best speculative practice. The gambler plays
rumours, tips, hunches and other unreliable intuitions which should not play
any but a negative role in the trained speculator¶s process. Speculation is a
reasoned anticipation of future conditions. It does not rely upon hearsay or
labels. It attempts to organise the relevant knowledge as a support for
judgements. It is as legitimate and moral as any other form of risk-taking
business activity.

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For evaluation of investment avenue, the following attributes are relevant:
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Ë Conservation
‡ Aggressive growth
‡ Speculation
Ë Form of return
‡ Periodic cash receipts
‡ Capital gain
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Ë Risk
Ë Liquidity
Ë Tax considerations
Ë Conveyance
Ë Concealability Copyright © 2008, Sudhindra Bhat

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Equity
Preference shares
Debentures
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Ë Government securities
Ë Savings bonds
Ë Private sector debentures
Ë PSU bonds
Ë Preference shares
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Ë Treasury bills
Ë Certificates of deposits
Ë Commercial paper
Ë Repos
Cont«.

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R

 

 
Ë Bank deposits
Ë Post office time deposits (POTD)
Ë Monthly income scheme of the post office (MISPO)
Ë Kisan Vikas Patra (KVP)
Ë National savings certificate
Ë Company deposits
Ë Employees provident fund scheme
Ë Public provident fund scheme

Cont«.

Copyright © 2008, Sudhindra Bhat

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Ë Residential House
Ë Sources of Housing Finance
Ë Features of Housing Loans
Ë Guidelines for Buying a Flat
Ë Commercial Property
Ë Agricultural Land
Ë Suburban Land
Ë Time Share in a Holiday Resort

Cont«.

Copyright © 2008, Sudhindra Bhat

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Ë Gold and Silver
Ë Precious Stones
Ë Art Objects
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Ë Endowment Assurance
Ë Money Back Plan
Ë Whole Life Assurance
Ë Unit Linked Plan
Ë Term Assurance
Ë Immediate Annuity
Ë Deferred Annuity

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Ë Advancements in computing power and Internet technology
Ë More complete and timely information delivery
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Ë Domestic firms compete in global markets
Ë Performance in regions depends on other regions
Ë Causes additional elements of risk
Ë Globalization continues and offers more opportunities
Ë Securitization continues to develop
Ë Derivatives and exotics continue to develop
Ë Strong fundamental foundation is critical
Ë Integration of investments and corporate finance

Copyright © 2008, Sudhindra Bhat

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According to Dr Jeff of the University of Melbourne, identifies three broad
types of investors found operating in the stock market ±
Ë The contrarians
Ë Trend followers and
Ë Hedgers and holders.

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Ë Measured Investor
Ë Reluctant Investor
Ë Competitive Investor
Ë Unprepared Investor
Copyright © 2008, Sudhindra Bhat

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