Investment Opportunity and Financial Products
1|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
Investment is really important for an economy to grow. It
means putting money into things that can make more money in
the future. This helps increase the total income of a country.
When people and businesses invest their money, they can earn
more and help the economy grow. But investing also has risks.
Sometimes you might not make any money or even lose some.
That's because the investment world is full of uncertainty.
For example, in 1986, Microsoft offered its stocks and in 10
years, they grew by 5000%. But another company, Worlds of
Wonder, also offered stocks in the same year and ended up
failing after 10 years. So, it's important to be careful when
investing and to understand the risks involved.
Financial assets are things that you can quickly turn into cash.
Some examples are stocks, bonds, money in the bank, and
shares in companies. These assets represent ownership or
claims on other valuable things like real estate. The key thing
about financial assets is that they have value, but you can't
touch that value until you sell them for cash. Financial assets
2|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
can be split into two main types: equities, which are shares of
ownership in a company, and fixed income securities, which
are like loans that earn a fixed amount of interest. When you
put money into these assets, it's called financial investment.
On the other hand, real assets are physical things that a
business owns and can use to make money. Examples include
land, buildings, inventory, and machinery. These assets have
value because they can generate income or because they are
useful for running a business. When you invest in these types
of assets, it's called real investment.
People invest their money for different reasons. They want to
achieve certain goals and make their money grow. When you
invest, you're choosing to save your money now to get more
money later. The main goal of investing is to balance the risk
and reward: the more risk you take, the more potential there
is for reward.
Here are some common reasons why people invest:
1. Capital Appreciation: This means you want your
investment to grow over a long time. You might invest in
3|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
things like stocks, which are shares of ownership in
companies, and let them grow in value over many years.
The idea is to have more money in the future than you
put in.
2. Current Income: Some people invest to get regular
income right now. They might choose investments that
pay out dividends regularly, like certain stocks or bonds.
This income can be used for living expenses or other
needs.
3. Capital Preservation: This is about keeping your money
safe, especially if you're close to retirement. You want to
make sure your money doesn't decrease in value, even if
it means sacrificing some potential growth. So, you might
choose safer investments like bank CDs or U.S. Treasury
bonds.
4. Speculation: Some people invest for the thrill of trading
and trying to make quick profits. They might buy and sell
stocks frequently, hoping to take advantage of market
fluctuations. But this can be risky, and many people lose
money this way.
It's important to understand your reasons for investing and
choose investments that match your goals and risk tolerance.
And remember, investing should be done wisely and
responsibly to avoid losing money.
4|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
Direct investing means buying and selling securities by
yourself. You're in full control of what you invest in and when
you buy or sell. This could be stocks, bonds, or other financial
5|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
products like treasury bills or commercial papers. It requires
expertise and takes time because you have to make all the
investment decisions yourself. You also have to pay for the
analysis and monitoring of your investments.
Indirect investing, on the other hand, involves investing in
mutual funds, exchange-traded funds (ETFs), or other
collective investment schemes. Instead of buying securities
directly, you invest in these funds or schemes. You don't
control the specific investments made by the fund; that's
decided by the fund managers. You simply decide which fund
to invest in. When you invest in these funds, you become a unit
holder and own a portion of the assets held by the fund. You'll
receive dividends or interest, and your investment will grow or
decline based on the fund's performance.
Indirect investing is convenient for people who don't have the
time or expertise to manage their investments directly.
However, there are fees involved, which reduce the value of
your investment. These fees are charged by the fund or
company managing your investments.
Investing in India's stock and debt markets can help people
grow their money. Stock market investments, like buying
stocks or mutual funds, offer potential for higher returns but
come with more risk. Debt market investments, such as fixed
6|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
deposits or government bonds, are safer but offer lower
returns.
When investing in stocks, it's crucial to research and
diversify your portfolio to minimize risk. Stocks represent
ownership in companies, and investors earn money through
dividends and capital gains. Bonds, on the other hand, involve
lending money to a company or government and earning
interest in return.
While stocks offer higher potential returns, bonds are safer.
Both types of investments carry risk and depend on market
conditions. Consulting a financial advisor and staying informed
about market trends is essential before making any
investment decisions.
Derivatives are like financial tools that get their value from
something else, called the underlying asset. This asset could
be real, like gold or commodities, or financial, like an index or
interest rate. Derivatives don't exist on their own; they're
7|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
based on a contract between a buyer and a seller. Their value
changes depending on what happens to the underlying asset.
So, if the underlying asset goes up in value, so does the
derivative, and vice versa. Sometimes, derivatives are even
based on other derivatives. They can include things like
securities, contracts, or agreements that are tied to the value
of something else, like stocks or prices of goods.
Derivatives can be put into different groups based on what
they're connected to, how complicated they are, or how
they're traded.
1. Commodity or Financial Derivative: This grouping depends
on what the derivative is tied to. If it's connected to things
like wheat, gold, or other physical goods, it's called a
commodity derivative. But if it's linked to financial stuff like
stocks or bonds, it's a financial derivative. Financial
derivatives are more common worldwide. Commodity
derivatives are traded on special exchanges like the Multi
Commodity Exchange (MCX) and the National Commodities and
Derivatives Exchange (NCDEX) in India. Financial derivatives
are traded on exchanges like BSE, NSE, United Stock
Exchange (USE), and MCX-SX in India.
2. Simple or Complex Derivative: Some derivatives are easy
to understand, like futures and options. We call these simple
or elementary derivatives. But others have tricky features
that make them hard to figure out, like exotic options or
8|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
synthetic futures and options. These are known as complex
derivatives.
3. Exchange-Traded or Over-the-Counter (OTC)
Derivative: Derivatives can also be grouped based on how
they're traded. Exchange-traded derivatives are standard
products traded on regulated exchanges, like stock index
futures or options. But OTC derivatives are private contracts
between two parties and aren't standardized. These are
tailored to fit the needs of the parties involved, like forward
contracts in the foreign exchange market.
In the derivative market, there are three types of traders:
hedgers, speculators, and arbitrageurs.
i) Hedgers: These are investors who want to protect
themselves from price changes in the market. If they
have a long position (expecting prices to rise), they're
worried about prices falling. If they have a short position
(expecting prices to fall), they're worried about prices
rising. To manage this risk, they use derivatives to offset
potential losses. Options are commonly used by hedgers to
reduce their risk exposure.
ii) Speculators: Speculators aim to make quick profits by
predicting future price movements in the market. They
use derivatives to amplify their potential gains (but also
their potential losses). For example, if a speculator
expects a stock price to rise, they might buy futures
9|Page
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
contracts, betting on an increase. If they predict a drop,
they might sell futures contracts to profit from the
decline.
iii) Arbitrageurs: These traders exploit pricing differences
between different markets to make profits. They buy
assets in one market where the price is low and sell them
in another market where the price is higher, profiting
from the difference. Arbitrageurs help keep prices in
different markets aligned and efficient.
Financial derivatives are those whose underlying asset is the
financial asset or instrument such as index, stock, bonds,
currency etc. Financial derivative are generally classified as
forward, futures, options and swaps.
10 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
A forward contract is like a private deal between two people
to buy or sell something at a specific price on a certain date in
the future. For instance, imagine Mr. X has 6000kg of wheat.
He's worried that the price might drop before he can sell it.
So, he agrees with Aashirvaad Atta to sell the wheat at a
fixed price after the harvest, using a forward contract. This
way, he's protected from prices going down, but if they go up,
he might lose out.
Key features of forward contracts:
Customized: Each contract is tailored to suit the needs
of the parties involved, like the size of the contract,
when it ends, and what's being traded.
Underlying Asset: The contract is based on something
valuable, like stocks, bonds, or commodities.
11 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
Equal Rights and Obligations: Both parties have the
same duties and rights. The buyer must buy, and the
seller must sell when the contract ends.
Non-Regulated Market: These deals happen privately
among big players like banks, companies, and
governments. They're not regulated by any official
exchange.
Counterparty Risk: There's a risk that one party might
not keep their end of the deal, like not paying or not
delivering the goods.
Held Until Maturity: Usually, the contract has to be
kept until it ends. It can't be ended early without both
parties agreeing.
Low Liquidity: Since each contract is unique, they're not
easily traded. They're not bought and sold on a market
like stocks.
Settlement: The deal can be settled by either delivering
the goods or paying cash. Most forward contracts involve
delivering the goods.
A futures contract is like a promise to buy or sell something
at a certain price on a certain date. It's similar to a forward
contract, but it's traded on an official market, like a stock
exchange, and follows set rules.
Key features of futures contracts:
Standardized: The terms and conditions of futures
contracts are the same for everyone. They're decided by
the exchange where they're traded.
12 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
Exchange Trading: Futures are traded on formal
exchanges, providing a place for people to buy and sell
them.
No Default Risk: A clearing house oversees futures
contracts, ensuring that both parties stick to their side
of the deal. They require both parties to deposit money
upfront (margin) and adjust it daily based on market
changes
High Liquidity: Futures contracts are easy to buy and
sell because they're actively traded on exchanges.
Early Settlement Possible: Investors can end their
futures contract early by making an opposite trade
before it officially ends.
Margin Requirement: Both the buyer and seller of a
futures contract must deposit money (margin) with the
exchange. This margin is adjusted daily based on market
changes.
Settlement Methods: Futures contracts can be settled
by delivering the goods or through cash settlement
An option is like a special contract where one person gets the
choice to buy or sell something, but they don't have to if they
don't want to. This contract is sold by one person to another.
Here's how it works:
Buyer's Choice: The person who buys the option (the
buyer) gets the special right, but not the obligation, to
buy or sell something in the future at a specific price.
13 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
This special price is called the "strike price" or "exercise
price."
Seller's Obligation: The person who sells the option (the
seller) has to follow through if the buyer decides to use
the option. For example, if the buyer wants to sell, then
the seller has to buy.
Privileged Position: The buyer has the advantage because
they have the choice but don't have to do anything if
they don't want to. However, they have to pay a fee
(called the "option premium") to the seller for this
privilege.
In simple terms, buying an option gives you the right to do
something, but you're not forced to do it, and you have to pay
for that right.
a) Call Option: A call option is like having a coupon that lets
you buy something at a fixed price in the future. For
example, let's say you have a coupon to buy a toy car for
$10 in two months, but right now it's selling for $12. If the
14 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
price goes up to $15, you can still buy it for $10 using your
coupon and make a profit.
b) Put Option: A put option is like having insurance that lets
you sell something at a fixed price in the future. For
instance, imagine you have a watch worth $100, but you're
worried its value might drop. You buy insurance that lets
you sell it for $100 in a month. If the price falls to $90,
you can still sell it for $100 and avoid losing money.
i) European Option: A European option is like a ticket to a
show that only lets you enter on the final day. You can't use
it before then, no matter what. For example, if you have a
ticket to a concert on December 31st, you can only go to
the concert on that specific date, not earlier.
ii) American Option: An American option is more flexible, like
a ticket to a movie that lets you watch it anytime, including
the last day. You can use it whenever you want before or on
the expiration date. So, if you have a ticket to a movie, you
can choose to watch it on any day leading up to the last
show.
15 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
A mutual fund is like a team captain who collects money from
many people (investors) and then uses that money to buy a
variety of things like stocks, bonds, or other investments.
Each investor owns a part of these investments based on how
much money they put in. The fund has professionals who
decide where to invest the money to reach the fund's goals.
These pros charge a fee for managing the fund. In India,
mutual funds must be approved by SEBI, which keeps an eye
on them to ensure they're following the rules.
SEBI (Mutual Fund) Regulation, 1996 defines a mutual fund as
a fund set up in the form of a trust to gather money by selling
16 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
units to the public. This money is then invested in various
securities like stocks, bonds, or real estate assets. The trust
has key parts:
1) Sponsor: This is the person or group that starts the
mutual fund, similar to a company's promoter.
2) Board of Trustees: These trustees manage the fund's
assets for the benefit of unit holders. They oversee the
asset management company (AMC) and ensure it follows
SEBI regulations. At least two-thirds of the trustee board
should be independent from the sponsor.
3) Asset Management Company (AMC): This company,
approved by SEBI, manages the investments of the mutual
fund. Half of its directors must be independent.
4) Custodian: The custodian, registered with SEBI, is
responsible for safekeeping the mutual fund's securities,
like stocks or gold, and providing other custodial services
authorized by the trustees.
Mutual funds offer several advantages to investors:
Professional Management: Skilled professionals analyze
companies and invest accordingly.
Diversification: Mutual funds invest in various companies
across different sectors, reducing risk for investors.
However, sector-specific funds may not provide
diversification.
17 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
Convenient Administration: Mutual funds reduce
paperwork and issues like delayed payments, making
investing easier.
Return Potential: Investing in a wide range of securities
can lead to higher returns over the medium to long term.
Low Costs: Mutual funds are cheaper compared to direct
investing, as they benefit from economies of scale.
Transparency: Investors receive regular updates on the
value of their investments, ensuring transparency.
While mutual funds offer advantages, there are also some
drawbacks:
No Direct Choice of Securities: Investors cannot
directly choose which securities to invest in. They rely on
the fund manager's decisions.
Relying on Fund Manager's Performance: Investors
depend on the fund manager's performance for returns. If
18 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
the manager focuses on short-term gains to boost their
pay, it may not align with investors' long-term goals.
High Management Fees and Expenses: Some mutual funds
charge high management fees, affecting investors'
returns. These fees may be used for paying hefty
compensation to fund managers.
Lock-in Period: Certain mutual fund schemes, especially
tax-saving ones, have a lock-in period during which
investors cannot redeem their units. This makes the units
illiquid during that time.
Mutual funds come in various types to suit different investor
needs:
Open-Ended Mutual Funds: Investors can buy or sell units
at any time as there is no fixed maturity date.
19 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
Close-Ended Mutual Funds: These have a fixed maturity
period, and investors can only invest during the initial
launch period.
Interval Funds: These combine features of open-ended
and close-ended schemes, allowing investments and
redemptions at pre-specified intervals.
Load Funds: Charge a percentage of the invested amount
as entry or exit fee.
No Load Funds: No charges for entry or exit.
Domestic Funds: Open for investment within the country.
Offshore Funds: Open to foreign investors only.
Growth Funds: Aim for capital appreciation by investing
mostly in equity.
Income Funds: Provide regular income by investing in
fixed-income securities like bonds.
Balanced Funds: Invest in both equity and bonds for
moderate growth and regular income.
Gilt Funds: Invest solely in government securities,
offering low-risk, low-return options.
Money Market Funds: Invest in short-term debt
instruments for liquidity and moderate income.
Tax Saving Schemes (ELSS): Offer tax benefits under
specific tax provisions while investing in equities.
Index Funds: Replicate the performance of market
benchmarks like BSE SENSEX or NSE NIFTY.
Sectoral Funds: Invest exclusively in specific sectors to
capitalize on industry cycles.
Ethical Funds: Invest based on certain ethical or shariah
values, screening companies accordingly.
20 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
ETFs are like baskets of stocks traded on the stock
exchange, similar to individual stocks. They follow an index
and invest in the same proportion of securities as the index.
Unlike mutual funds, ETFs can be bought and sold throughout
the trading day like stocks. They have lower expenses
compared to index mutual funds, but investors need to pay
brokerage fees to buy and sell ETF units.
Advantages of ETFs include:
Intra-Day Trading: ETFs allow investors to buy and sell
throughout the trading day, taking advantage of prevailing
prices, unlike index funds which are redeemed at a fixed
NAV price at the end of the day.
Low Cost: They are a cost-effective investment option
compared to traditional funds.
Wide Reach: Since ETFs are listed on exchanges,
distribution costs are lower, and they have a wider reach.
Protection for Long-Term Investors: ETFs protect long-
term investors from the effects of short-term investors
buying and selling frequently, as the fund does not face
extra costs from frequent buying and selling of index
shares.
21 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
A fund of funds scheme is a type of mutual fund that invests
in other mutual fund schemes instead of directly investing in
stocks or bonds. This means that the money you invest in a
fund of funds gets distributed across different mutual funds,
offering greater diversification. However, because they invest
in other funds, they often have higher expenses and fees
since they need to pay fees to the underlying funds.
A systematic investment plan (SIP) is a smart way to invest in
mutual funds. It allows you to invest a fixed amount of money
regularly, like every week or month. SIPs help you save and
22 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
build wealth for the future in a planned manner. They're great
for people who can't actively manage their investments.
Here are the benefits of SIP:
Rupee-cost Averaging: With SIP, you buy more units when
prices are low and fewer when prices are high. This helps
even out market fluctuations and reduces investment risk.
Power of Compounding: Investing regularly lets your
money grow over time, thanks to compound interest.
Starting early means more time for your money to grow.
Disciplined Saving: SIP encourages regular saving and
disciplined investing.
Flexibility: You can stop,
increase, or decrease
your SIP anytime, giving
you control over your
investments.
Long-term Gains: SIPs
can provide good returns
over the long term,
thanks to rupee-cost
averaging and
compounding.
Convenience: SIPs are
easy to set up. You can
instruct your bank to
automatically deduct the
SIP amount from your account.
23 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
A systematic withdrawal plan (SWP) lets investors invest a
lump sum of money and then withdraw a fixed amount at
regular intervals. This allows them to receive a steady income
while keeping the remaining amount invested. Withdrawals can
be made monthly or quarterly, depending on the investor's
needs and goals. SWP offers convenient payout options and
has tax advantages. Tax is not deducted from withdrawals,
and there's no dividend distribution tax or entry/exit loads.
24 | P a g e
Notes By: ENG HONS HUB
Investment Opportunity and Financial Products
25 | P a g e
Notes By: ENG HONS HUB
