The term ‘Investment’ can be described in various ways as per different principles and theories. Typically, the application of assets or money with the expectation that it would generate or appreciate more income in future is known as investment.
According to various economics, an investment can be defined as utilizing resources in such a manner that increases production output or income in the future. On the other hand, investment as per different Business theories can be defined as that act through which a manufacturer purchases a physical asset, such as, production equipment or stock, in a hope that in the long run, it will be a help to the business is growing.
As per the legal terminology, an investment can be defined as an outlay of money which is generally for profit or income.
There are various definitions of investment, but all of them carry the same spirit that investment is the act of putting money into something to make a profit or get an advantage or the money income or appreciation in value.
Objectives of Investment
- Income: Many people do investment with the aim of creating a new source of income as quickly as possible.
- Preservation of Capital: Affluent people and other people, whose gifting and spending stages are going on, show high interest in the preservation of capital with less risk.
- Current Growth: Growth investment normally generates little or no current income, but have the potential for capital appreciation and the whole payment with this technique is in disposing of it off after many years from now to generate multiples of amount what we paid originally.
- Safety: While there is no completely safe investment option, some risk-averse investors prefer certain products such as fixed deposits, savings account, Government bonds etc. Some people invest their money to keep it safe irrespective of the rate of return on their capital.
- Liquidity: Many options for investment are not liquid. This signifies that they cannot be converted or sold in cash instantly. However, some individuals prefer investing in option, which can be used during emergencies easily. Such liquid instruments are stock, exchange-traded funds, money market instruments etc.
- Tax Exemption: Many people invest their money solely for evading their tax liability. Some investment like investment done in mutual funds offers tax exemption on long term profits.
Classification of Investment
- Traditional and Alternative Investment:
- Traditional Investment: (a) Boards; (b) Stocks; (c) Provident Fund; (d) Small Saving Schemes; (e) Mutual Funds; (f) National Pension Scheme; (g) Real Estate and (h) Fixed Deposits.
- Alternative Investment: (a) Hedge Funds; (b) Private Equity; (c) Managed Futures; (d) Venture Capital; (e) Collectible items and (f) Structured Products.
- Financial and Non- Financial Investment:
- Financial Investment: (a) Equities; (b) Bonds; (c) Mutual Funds; (d) Cash equivalents and (e) Deposits.
- Non- Financial Investment: (a) Real Estate; (b) Gold- Silver.
- Ownership, lending and cash- equivalent Investment:
- Ownership Investment: (a) Business; (b) Stocks; (c) Previous Objects and (d) Real Estate.
- Lending Investment: (a) Bonds and (b) Savings Accounts.
- Cash Equivalent Investment: Money Market Funds.
Types of Investment
- Equities: The securities which provide ownership in a company are equities. Stock markets appear as a platform to trade (buying and selling) in this form of securities. Alternatively, they can be bought directly from the company. Equity investment is a better option for long term investment since the return on equity for a long period is higher than any other method of investment.
- Mutual Funds: This form of investment enables a class of people to lump all their money together and get it managed professionally, with an already determined objective for investment. This way of investing money is very popular since it is cost-efficient, sound regulation, professional management and risk- diversification. One can get a small amount of money invested in any mutual fund. There are different types of thematic and general mutual funds available in the market and their return and risk policies differ accordingly.
- Deposits: Investment in post- office or bank deposits is the commonly used method to secure surplus funds. These deposits can be found at the low end of the spectrum of risk-return. They earn interest over a net amount of time. They usually range from 30 days to 5 years and they are issued by post offices and banks.
- Bonds: They have established a mode of income that is issued with the objective of raising capital. Both private entities, such as companies, financial institutions, Local or State or Central Government and other Governmental Institutions make use of these instruments as a method of accumulating funds. These are also issued by Government and the lowest risk is attached with such government bonds but could provide fair returns.
- Cash Equivalents: There are highly liquid in nature and are a relatively safe investment option. Money market funds and treasury bills are the types of cash equivalents.
- Real Estate: Appreciation of property makes real estate a good investment options. Since the cost of land is ever-increasing, the real state has appeared as one of the profitable ventures for investment.
- Precious Objects: Gold is one of the precious metal to invest. It is often a small part of a portfolio that grows with time. It is thought to be a form of financial protection in lieu of cash. There are other metals also such as silver, copper where one can invest money. Over the long term, precious metals prove to be of low risk while in the short term, they can be volatile in nature.
Importance of Investment
Some important reasons for investing money are as follows:
- Investing money in various financial avenues ensures the growth of money.
- Investment yields returns which take care of expenses during emergencies.
- Fighting inflation becomes one of the main reasons for ensuring the growth of your money.
- Distant financial goals, both short- term and long- term can be planned and fulfilled by making relevant and intelligent investments.
Security is a financial method to represent ownership in a stock or publicly traded Corporation, a Corporation bond or a relationship of a creditor with a government body or ownership right as depicted by an option. Security can also be defined as a document of settled requisites or forms, which mirrors the related property rights that may self- refer to the market and be the object of buying and selling and various transactions exchanges, is the type of money capital.
Sec 2(h) of the Securities Contract (Regulation) Act, 1956 gives an inclusive definition of securities, which is as follows:
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other bodies corporate;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]
[(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]
[(id) units or any other such instrument issued to the investors under any mutual fund scheme;]
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;
[(i) “spot delivery contract” means a contract which provides for,—
(a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository;]
Classification of Securities
- Based on issuers:
- Public (State); (ii) Private (private persons) and (iii) International (foreign entities)
- On the basis of economic nature (financial)
- Credit Securities (Different forms of bonds, debt, bills, bank certificate etc.); (ii) Equity Services and (iii) Derivative Securities.
- Based on time factor (less than one year)
- Short term Securities; (ii) Medium Securities (1-5/ 10 years); (iii) Long term Securities (up to 20/ 30 years) and (iv) Perpetual (forever).
- By origin
- Primary Securities (based on assets); (ii) Secondary Securities (on the basis of primary securities).
- By type of use
- Investment (capital) (Bonds, Stocks); (ii) Non- investment Securities (Cash payment on commodities).
- On the basis of Ownership
- Owner on transfer and (ii) Owner registered.
Types of Securities
Securities can be divided into equity securities and debt securities that represents partial ownership in a company.
- Equity Securities (Stocks): This form of security is a portion of equity interest, for example, the share capital of an organization, association or trust. Although preferred equity is additionally a type of capital stock, yet the common stock is the most widely recognized type of equity interest. The equity holder is an investor, owning a fractional part or share of the issuer. In contrast to debt securities that normally requires payments regularly (interests) to the holder, the equity securities do not require any form of payment. In bankruptcy, they share only in the issuer’s residual interest even after the organization has disposed of all its liabilities. In any case, equity normally allows the holder to have a pro-rata representation in the management of the company, implying that the holder of a lion’s share of the equity is qualified for controlling the issuer. Equity likewise appreciates the privilege of capital gains and benefit.
- Debt Securities: These are also known as deposits, debentures, bonds, commercial paper or notes, which depends on their maturity and many other features. The debt security holder is commonly qualified for the payment of interest along with the principal, as well as other legally binding rights under the terms for issuing, for example, the privilege to get certain data. Debt securities are most of the times issued for a certain period of time and are redeemable by the issuer by the end of that period. Debt protections can be unsecured or can be secured with the help of collateral.
- Corporate Bonds: Company issues a debt instrument, which is known as a Corporate Bonds. When one invests one’s money in a bond, it becomes a loan to the company. The owner of such a bond receives interest on it annually until it is paid off. These are more stable and safer than stocks. A steady mode of income is guaranteed by the means of the bond. On the other hand, no dividend or voting rights are provided to the bondholders. Additionally, stockholders have the capability for greater returns, especially, in the long run.
- Money Market Instruments: They are the debt instruments for a short period of time that might have a deposit account, for instance, certain bills of exchange and certificate of deposit. They are liquid in nature.
- Government bonds: Sovereign Government or their agencies issues long term or medium debt securities, which are known as Government Bonds. Generally, their rate of interest is less than that of corporate bonds and serves as a method of finance for Government. A very low level of risk is attached to this form of investment. They are virtually free of any kind of risk because the Government guarantees them
- Municipal Bonds or Sub- Sovereign Government bonds: Debt securities which are issued by Local and State government entities such as Universities are known as Municipal Bonds. The rate of interest is typically less in comparison to that of the corporate bonds. On the other hand, they are risk-free like Government bonds.
- Supernational Bonds: They are the debts of an international organisation, for example, the International Monetary Fund, World Bank, regional multilateral development banks such as Asia Bank and others.
- Mutual Funds: A variety of securities jointly form mutual funds. It may have its prime focus either on bonds, stocks or on a combination of both. The money of various investors is clubbed together. An investment company picks the securities from the market and manages a mutual fund. This leads to diversity which helps in decreasing the risk attached with the investment.
A new innovation in the sphere of investments in Exchange Trade Funds (ETFs). They are similar to mutual funds and thus, are a basket of stocks, which can be purchased and sold in the form of an individual stock. The merits of ETFs in comparison to mutual funds are the capability to ‘time’ one’s capital gains or losses and significantly lower management fees.