Saturday, September 12, 2009

What is Investment

Investment can be broadly classified as :
1. Financial Investment
2. Non-Financial Investment
Financial Investment are investment in paper securities like
  • Cash & Cash Equivalent
  • Bonds
  • Equity Shares
  • Mutual funds
  • Insurance
  • Derivatives
Non financial investments are investment in

  • Land & building,
  • Plant & machinery,
  • Business and like things.
Characteristics of an Investment
Return : Investments are made to earn returns. The return expectation can be payment received as interest, dividend received on stocks, capital appreciation on assets and many more. Different investments have different returns. Return from an investment depends on rating of the investment, liquidity of an investment, time horizon of the investment.
It is measured as HPR = [ Annual Income + ( Price at end – Price at beginning ) ] / Price at beginning
Risk : Saving becomes investment only because of risk. Risk is an inherent part of any investment activity. Some of the risk associated with an investment can be

  • Loss of capital,
  • Delay in repayment of capital,
  • Non payment of interest,
  • Variability of returns
Safety : By safety, an investment means that there should be a certainity of return of capital without loss of capital. The safety on probable return of capital is generally depicted by the ratings of the investment. A AAA bond signifies the highest possibility of return of capital with accrued benefits to the holder of the bond. This is a prime characteristics of investments, as every investor invest to get back his capital along with profit.
Liquidity : Liquidity is an important feature of any investment, as the yield on any investment is, to a great extent, a function of liquidity provided by the specific investment. Liquidity can be defined as the property of an investment, wherein it can be converted in cash on demand or at periodic interval of time, without loss of value.

Liquidity in marketable assets are provided by the market, while non marketable assets like fixed deposits cannot be liquidated in market but can be offered for premature repayment to bank.
Tax efficiency : Some investments offer tax benefits, while others do not. Tax benefits available to an investment can be any one of the following;

a. Investments can offer tax benefit on initial deposits. For eg PPF, which offers Section 80C benefit for deposits.

b. Investments can offer tax benefit on returns generated. For eg dividends on equity which are taxfree.

c. Investments which, when redeemed are tax exempted. For eg, Maturity proceeds of an insurance policy.

An ideal investment is, which offers tax efficient return commensurate to risk with safety and liquidity.


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