2. Attributes of investment by risk types Investment risks 2. Attributes of investment by risk types

Outline Time and risk Portfolio Investment opportunities Rate of return Risk Marketability Tax shelter Convenience Investment vs. Speculation Outline

In its broadest sense, an investment is a sacrifice of current money or other resources for future benefits. Two key aspects of investment: TIME AND RISK The sacrifice takes place now and is certain. The benefit is expected in the future and tends to be uncertain In certain investments, like government bonds, time element is dominant attribute. In others, like stock options, risk element is dominant. Yet, in others, like equity shares, both are important. Time and risk

Portfolio The portfolio is likely to comprise of: Financial assets (bank deposits, bonds, stocks and so on) Real assets (automobile, house and so on) Almost everyone owns a portfolio of investments. May be the result of haphazard decisions or may be the result of deliberate and careful planning. Portfolio

Investment alternatives Non marketable financial assets Bonds Mutual Fund Schemes Real Estate Equity Shares Money Market Instruments Life Insurance Policies Precious Objects Non marketable financial assets: - Bank Deposits Post office deposits Company deposits Providend fund deposits Bonds – Debt Instruments Government Bonds (Gilts) Savings Bonds Government agency bonds PSU Bonds Debentures of private sector companies Preference Shares Mutual Funds – Portfolio of shares and bonds Equity Schemes Debt Schemes Balanced Schemes Gilt Schemes Diversified Schemes Real Estate Residential Land Agricultural Land Semi-urban Land Commercial Property Equity shares – ownership capital Blue chip shares Growth shares Income shares Cyclical shares Speculative shares Money Market Instruments Treasury Bills Commercial Paper (CP) Certificates of Deposits (CD) Life Insurance Endowment assurance policy Money Back Policy Whole life policy Term assurance policy Precious Objects Gold and Silver Precious Stones Art Objects Investment alternatives

Investment Attributes For evaluating an investment avenue, the following attributes are relevant: Rate of Return Risk Marketability Tax Shelter Convenience Investment Attributes

Investment Attributes (contd....) Rate of Return Current Yield Capital Gain/Loss Yield Risk Variance Standard Deviation Beta Marketability Depth Breadth Resilience Tax Shelter Initial Tax Benefit Continuing Tax Benefit Terminal Tax Benefit Convenience Made Looked After Investment Attributes (contd....)

Rate of Return of any investment instrument can be calculated Current Yield Capital Gain/Loss Yield Rate of Return of any investment instrument can be calculated 1. Rate of Return

2. Risk Risk = Variability of the rate of return Common Measures in finance: Variance – squares of deviations of individual returns around their average value Standard Deviation – square root of variance Beta – reflects how volatile the return from an investment is, in response to market swings. 2. Risk

3. Marketability (Liquidity) An investment is highly marketable or liquid if: It can be transacted quickly The transaction cost is low The price change between two successive transactions is negligible Liquidity of a market may be judged in terms of its depth, breadth and resilience 3. Marketability (Liquidity)

3. Marketability (Liquidity)...... Depth: Refers to the existence of buy as well as sell orders around the current market price Breadth: Implies the presence of such orders in substantial volume Resilience: Means that new orders emerge in response to price changes. High marketability is a desired attribute of a good investment instrument. How does one evaluate marketability of non-marketable securities like PF and Bank Loan? If a substantial portion of the accumulated balance can be withdrawn without significant penalty. If loans can be taken against the deposit. A loan (representing a significant portion of the accumulated balance) can be raised at a rate of interest that is only slightly higher than the rate of interest earned on investment itself. 3. Marketability (Liquidity)......

4. Tax Shelter Initial Tax Benefit: Continuing Tax Benefit: Tax relief enjoyed at the time of making investment Eg. Investment in Providend Fund Continuing Tax Benefit: Tax shield associated with the periodic returns from the investment Eg. Dividend income and income from certain other sources are tax-exempt, upto a certain limit, in the hands of receipient. Terminal Tax Benefit: Relief from taxation when an inveswtment is realized or liquidated. Eg. Withdrawal from the PPF account is not subject to tax. 4. Tax Shelter

Ease with which the investment can be made and looked after. Can the investment be made readily? Can the investment be looked after easily? Savings Account – made easily, no maintainance Property – too many processes, high maintenance. 5. Convenience

Investment vs. Speculation Investor Speculator Planning Horizon Longer Holding period at least of a year Short Holding period may be few days or even few months Risk Disposition Moderate Risk taker Ordinarily willing to assume high risk Return Expectation Modest High Basis for Decisions Fundamental Factors Careful evaluation of the prospects of the firm Hearsay Technical Charts Market Psychology Leverage Normally uses his own funds Normally resorts to borrowings Investment vs. Speculation

Fundamentally different from investment and speculation in the following respects: Result of gambling is known more quickly Rational people gamble for fun, not for income. Gambling doesnot involve a bet on an economic activity. It is based on risk that is created artificially Gambling creates risk without providing any commensurate economic return Gambling