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

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

3. 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

4. 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

5. 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

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

7. 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....)

8. 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

9. 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

10. 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)

11. 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)......

12. 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

13. 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

15. 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

16. 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