Underst anding of Investment

There  are m any different definitions of wh at ‘investment’  and ‘investing’  actu ally me ans. One

of the simplest w ays of describing it is using your money to try  and m ake more money. This c an

h appen in m any different w ays.  All investors  are different. The common f actor is th at you would

like to invest money with the  aim of m aking it grow or to receive  a regul ar income from it. It must

be noted th at choosing the most suit able investment does not need to be difficult.  All one needs is

the right help  along the w ay. The  act of committing money or c apit al to  an ende avor with the

expect ation of obt aining  an  addition al income or profit is known  as investment. Investing me ans

putting your money to work for you

2.2.1 Investment Decision

These d ays  almost everyone is investing in something even if it’s  a s avings  account  at the loc al

b ank or  a checking  account th at e arns interest or the home they bought to live in. However, m any

people  are overwhelmed when they begin to consider the concept of investing, let  alone the

l aundry list of choices for investment vehicles. Though it m ay seem people h ave full knowledge

on investment th at is not ex actly the c ase. M ajority of investors typic ally jump on the l atest

investment b and w agon  and prob ably don’t know  as much  about wh at’s out there  as you think.

Before you c an confidently choose  an investment p ath th at will help you  achieve your person al

go als  and objectives, it’s vit ally import ant th at you underst and the b asics  about the types of

investments  av ail able. Knowledge is your strongest  ally when it comes to weeding out b ad

investment  advice  and is cruci al to successful investing whether you go  at it  alone or use  a

profession al. The investment options before you  are m any. Pick the right investment tool b ased

on the risk profile, circumst ance, time  av ail able etc. if you feel the m arket vol atility is something,
which you c an live with then buy stocks. If you do not w ant risk, the vol atility  and simply desire

some income, then you should consider fixed income securities. However, remember th at risk  and

returns  are directly proportion al to e ach other. Higher the risk, higher the returns

2.2.2 Types of investment options

 A brief preview of different investment options is given below:

Equities: Investment in sh ares of comp anies is investing in equities. Stocks c an be brought/sold

from the exch anges (second ary m arket) or vi a IPO’s – Initi al Public Offerings (prim ary m arket).

Stocks  are the best long-term investment options wherein the m arket vol atility  and the result ant

risk of losses, if given enough time,  are mitig ated by the gener al upw ard momentum of the

economy. There  are two stre ams of revenue gener ation from this from of investment: dividend

 and growth. Dividend is the Periodic p ayments m ade out of the comp any’s profits  are termed  as

dividends  and growth is the price of the stock  appreci ates commensur ate to the growth posted by

the comp any resulting in c apit al  appreci ation.

On  an  aver age  an investment in equities in Indi a h as  a return of 25%. Good portfolio

m an agement, precise timing m ay ensure  a return of 40% or more. Picking the right stock  at the

right time would gu ar antee th at your c apit al g ains i.e. growth in m arket v alue of stock

possessions, will rise. Bonds: It is  a fixed income (debt) instrument issued for  a period of more

th an one ye ar with the purpose of r aising c apit al. The centr al or st ate government, corpor ations

 and simil ar institutions sell bonds.  A bond is gener ally  a promise to rep ay the princip al  along

with fixed r ate of interest on  a specified d ate, c alled  as the m aturity d ate. Other fixed income

instruments include b ank deposits, debentures, preference sh ares etc. The  aver age r ate of return

on bond  and securities in Indi a h as been  around 10-13% p. a.

Mutu al Fund: These  are open  and close-ended funds oper ated by  an investment comp any, which

r aises money from the public  and invests in  a group of  assets, in  accord ance with  a st ated set of

objectives. It is  a substitute for those who  are un able to invest directly in equities or debt bec ause

of resource, time or knowledge constr aints. Benefits include diversific ation  and profession al

money m an agement. Sh ares  are issued  and redeemed on dem and, b ased on the funs net  asset

v alue, which is determined  at the end of e ach tr ading session. The  aver age r ate of return  as  a

combin ation of  all mutu al funds put together is not fixed but is gener ally more th an wh at e arn is

fixed deposits. However, e ach mutu al fund will h ave its own  aver age r ate of return b ased on

sever al schemes th at they h ave flo ated. In the recent p ast, Mutu al Funs h ave given  are turn of 18

– 35%.Re al Est ate: For the bulk of investors the most import ant  asset in their portfolio is  a

residenti al house. In  addition to  a residenti al house, the more  affluent investors  are likely to be

interested in either  agricultur al l and or m ay be in semi-urb an l and  and the commerci al property.

Precious Projects: Precious objects  are items th at  are gener ally sm all in size but highly v alu able

in monet ary terms. Some import ant precious objects  are like the gold, silver, preciousstones  and

 also the unique  art objects. Life insur ance: In bro ad sense, life insur ance m ay be reviewed  as  an

investment. Insur ance premiums represent the s acrifice  and the  assured the sum the benefits. The

import ant types of insur ance policies  are:

 Endowment  assur ance policy

 Money b ack policy

 Whole life policy

 Term  assur ance policy

 Unit-linked insur ance pl an

2.3 Theories of investment beh aviour

There  are different theories th at h ave been developed with the  aim of expl aining the investment

beh aviour of investors. The not able ones  are elucid ated below:

2.3.1 Regret-theory

The regret theory de als with the emotion al re action people experience  after re alizing they h ave

m ade  an error in judgment. F aced with the prospect of selling  a stock, investors become

emotion ally  affected by the price  at which they purch ased the stock.

So, they  avoid selling it  as  a w ay to  avoid the regret of h aving m ade  a b ad investment,  as well

 as the emb arr assment of reporting  a loss. Regret theory c an  also hold true for investors who find

 a stock they h ad considered buying hut did not went up in v alue. Some investors  avoid the

possibility of feeling this regret by following the convention al wisdom  and buying only stocks

th at everyone else is buying, r ation alizing their decision with everyone else is doing it" (P areto.

1997).

2.3.2 Theory of Ment al  Accounting

It st ates th at hum ans h ave  a tendency to pl ace p articul ar events into ment al comp artments,  and

the difference between these comp artments sometimes imp acts our beh avior more th an the events

themselves.  An investing ex ample of ment al  accounting is best illustr ated by the hesit ation to sell

 an investment th at once h ad monstrous g ains  and now h as  a modest g ain. During  an economic

boom  and bull m arket, people get  accustomed to he althy,  albeit p aper, g ains. When the m arket

correction defl ates investor's net worth, they’re more hesit ant to sell  at the sm aller profit m argin.
They cre ate ment al comp artments for the g ains they once h ad c ausing them to w ait for the return

of th at g ainful period (Th aler, 2001).