BBA IV Sem
Sub: Financial
Management - II
CHAPTER 3
INVESTMENT OPPORTUNITIES
SSBES ITM NANDED
DR. MOHAMED AHMED A.R.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Meaning of Investment Opportunities
The term "investment opportunities" refers to upcoming financial
endeavours that are anticipated to bring in a profit.
One essential component of successful investing is the capacity to
identify and capitalize on investment opportunities.
Assets or ventures that have the potential to return money to investors
are called investment opportunities.
These opportunities can come in a variety of forms, including mutual
funds, stocks, bonds, real estate, and more.
Market trends, economic conditions, and company performance all
play a role in determining each opportunity's risk-return profile.
Investors look for investment opportunities that minimize risks and offer
high potential returns
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Meaning of Investment Opportunities
Opportunities to invest are significant because they give investors a
chance to build wealth over time.
Investors can earn returns that outpace inflation and provide long-
term financial security by investing in assets that have the potential
to appreciate in value.
Additionally, an important part of risk management is portfolio
diversification, which can be facilitated by investment
opportunities.
Investors can lessen the impact of market volatility on their
portfolios by investing in a variety of assets with varying risk profiles
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Definitions of Investment
“Investment analysis is the study of financial securities for the
purpose of successful investing.
“An investment is the purchase of goods that are not consumed
today but are used in the future to create wealth”.
“An investment is a commitment of funds make in the expectation
of some positive rate of return”. Example – equity shares,
preference share and debentures etc.
According to oxford dictionary “investment is defined as the action
or process of investment money for profit”.
According to keyness “investment is define as the addition of the
value of the capital equipment which has resulted from the
productive activity of the period”.
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Characteristics of Investment
Risk Factor
Risk is an inherent characteristic of every investment. Risk refers to
loss of principal amount, delay or non-payment of capital or
interest, variability of return etc. Every investment differs in terms of
risk associated with them. However, less risky investments are the
most preferred ones by investors.
Return
Return refers to the income expected from investment done. It is
the key objective for doing investment by investors. Investment
provides benefits to peoples either in the form of regular yields or
through capital appreciation.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Characteristics of Investment
Safety
It refers to the surety of return or protection of principal amount without
any loss. Safety is an important feature of every investment tool that is
analyzed before allocating any fund in it.
Income Stability
Income stability refers to the regularity of income without any
fluctuations. Every investor wants to invest in such assets which provide
return consistently.
Liquidity
Liquidity refers to how quickly an investment can be sold or converted
into cash. It simply means easiness with which investment can be sold in
the market without any loss. Most of the investors want to invest in liquid
assets.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Features of Investment
Safety Of Principal
Every investment is subject to fluctuations in its price which is caused due
to changing market conditions. An investment tool is termed as
adequate if it ensures the safety of the principal to investors. It should
possess an ability of redemption as and when required as per the needs
of the person. Proper evaluation of distinct economic and industry
trends should be done before deciding the type of investments.
Capital Appreciation
Capital appreciation is an important feature of every investment tool.
Every investment is expected to rise in its value over a period of time
which is a key determinant for making deploying funds in it. Investors
should properly forecast which assets are expected to appreciate in the
future and make timely purchases of them.
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Features of Investment
Expectation Of Return
The investment provides returns from time to time to investors which
varies as per the market conditions. It is the amount expected by
people for deploying their funds for a particular period of time in a
set of assets. It is the main objective of every investment and every
investor expects a stable and regular return from their investment.
Marketability
Marketability refers to the ease with which the investment securities
can be purchased and sold or can be transferred in the market.
This feature of investment tools determines their value as assets with
better marketability are preferred more by the people looking for
the investment.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Features of Investment
Purchasing Power Stability
Every investor before making an investment considers the future
purchasing power of their funds. In order to maintain the stability of
purchasing power, he ensures that the money value of the investment
should increase in accordance with rising in price levels to avoid any
chance of losing money.
Tax Benefits
Tax implications on the income provided by investment programs are
seriously taken into consideration by investors. The real return earned by
people is one that is left after paying income tax. While deciding an
investment option, the burden of taxes on its income is an important
determinant analyzed by investors. He should choose such investment
securities which put less tax burden and maximize its return.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Features of Investment
Legality
Investment securities must be evaluated from legal aspects before
selecting them. Only such securities which are approved by law
should be chosen as illegal securities will land investor in trouble.
The best way is to do investment in securities issued by LIC, UTI, and
Post office national saving certificates which are legal and save
investors from various troubles.
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Importance of Investment
Generates Income
Investment serves as an efficient tool for providing periodic and
regular income to people. Earning return in the form of interest and
dividends is one of the important objectives of the investment
process. Investors analyses and invest in those that provide a better
rate of return at lower risk.
Wealth Creation
Creation of wealth is another important role played by an
investment activity. It helps investors in wealth creation through
appreciation of their capital over the time. Investment helps in
accumulating large funds by selling assets at a much higher price
than the initial purchase price.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Importance of Investment
Tax Benefits
It enables peoples in availing various tax benefits and saving their
incomes. Under section 80C of income tax act, individuals can
save up to a maximum limit of Rs. 1,50,000. Many peoples prefer to
go for an investment for taking numerous tax exemptions.
Economic Development
Investment activities have an efficient role in the overall
development of the economy. It helps in efficient mobilization of
ideal lying resources of peoples into productive means. Investment
serves as a mean for bringing together those who have sufficient
funds and one who are in need of funds. It enables in capital
creation and leads to economic development of the country.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Importance of Investment
Meet Financial Goals
Investment activities support peoples in attaining their long term
financial goals. Individuals can easily grow their funds by investing
their money in long term assets. It serves mainly the purpose of
providing financial stability, growing wealth and keeping people
on track at their retirement by providing them with large funds.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Corporate Security Deposits
Company deposits are very similar to bank fixed deposits that are
made by the investors with Financial Institutions and NBFCs for a
fixed period at a pre-determined fixed rate of interest.
The interest paid on these deposits is relatively higher than the bank
deposits, since there is a higher degree of risk associated.
The risks associated with these company deposits are credit risk and
interest rate risk.
Although, there is a higher risk involved, the investors are motivated
to invest in these instruments due to higher returns earned thereof
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Post Office Term Deposits
Post office deposits are very popular means of investment by
individuals and households in India, since it is one of the safest and
easiest modes of investments.
The investment in post office term deposit is quite similar to that of
fixed deposits offered by the bank, but with additional features.
POTD has the maturity periods ranging from 1 year, 2 years, 3 years
and 5 years. The POTD can be opened with a very small amount of
200 and in its multiples; however, there is no upper limit.
The rates offered by POTD are slightly higher than the bank deposits
and very safe mode of investment, since government backing is
available
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Life Insurance
Insurance is a contract, wherein the individual or an entity gets the
protection against the losses resulting from some unexpected or
uncertain event.
The concept of insurance is that a group of people exposed to similar
risk come together and make contributions towards formation of a pool
of funds.
A person, suffering an actual loss on account of such risk, is
compensated out of the same pool of funds.
The interesting aspect of insurance is that it serves the twin-objective of
protection as well as investment.
The investor has to primarily separate the insurance portion from the
investment portion of the premium that he pays, so that he knows, the
quantum of each portion.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - Endowment Assurance
Endowment assurance is a policy which not only provides
protection to the family of the life assured in case of early death,
but also assures a lumpsum at a desired age.
The premiums are generally paid for a fixed term or until death
whichever is earlier.
The lumpsum received at the end of the term can be reinvested to
provide an annuity during the remainder of the life.
The salient features of endowment assurance are, a. Moderate
premium b. High bonus c. High liquidity d. Savings oriented
LIC‘s Jeevan Saral and Jeevan Anand are the two popular
endowment policies in India.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - Money Back Plans
In case of money back policy, the insured gets periodic
receipt of partial survival benefits during the term of the policy.
Money back policy protects the family‘s financial interests from
unforeseen situation like death or critical illness of the policy
holder.
Inthis case, the periodic pay-outs ensure wealth creation for
meeting financial commitments at important phases in life.
A good money back policy has lower risk, assured returns and
also gives tax benefits.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - Money Back Plans
At the time of maturity, the policyholder gets the remaining
amount of the survival benefits plus the accrued bonus.
In case of death of the life assured within the term, the total sum
insured is paid to the nominee, irrespective of earlier survival
benefits.
Money back policy can be availed for either 20 years or 25 years.
Generally, periodic payments are made every 5 years.
At the end of the period, the remaining amount plus bonus is paid
to the insured.
The amount invested in the money back policy is eligible for
deduction u/s 80C of Income Tax Act of 1961
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - Whole Life Assurance
WholeLife Assurance A whole life assurance is a policy
where premium is for a term and this premium has two
components.
Thefirst component is the insurance component and the
second component is the investment component.
The
insurance component pays an assured amount upon
death of the insured and the investment component the
wealth that the policyholder can withdraw or borrow
against.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - Whole Life Assurance
Thewhole life insurance is different form term assurance. In
case of term assurance, the amount is paid only in case of
death during the term of the policy, but the whole life
assurance always pays out eventually.
Hence, whole life assurance is comparatively expensive than
term assurance. This policy is mainly devised to create a wealth
for legal heirs of the policyholders.
Thepremium under this policy are payable up to the age of 80
years of the policyholder or for a term of 35 years whichever is
later.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - ULIP
ULIP is a unique investment avenue which blends the benefits
of both insurance and investment under a single integrated
plan.
ULIP is an avenue that focuses on safety on insurance as well
as wealth creation opportunities.
In case of ULIPs, a portion of investment is apportioned towards
providing life cover and the residual portion is invested in a
fund to be invested in equity or bonds.
The investment value is market driven.
ULIPs are gaining popularity since they offer dual role of
protection for life and investment plan simultaneously.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - ULIP
The amount invested in ULIP is eligible for deduction u/s 80 C of
Income Tax Act of 1961.
There is however a lock-in-period of 5 years for these ULIPs.
ULIP returns are directly linked to market performance and
investment risk in investment portfolio is entirely borne by the
policyholders.
The invested portions of the premium after deducting for all the
charges and premium for risk cover under all policies in a
particular fund.
The value of the fund units with accrued bonus is payable on
maturity of the policy.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Life Insurance - Term Assurance
Term assurance is the purest and the simplest form of the life insurance
providing coverage for a defined period of time, at a fixed rate of
payment.
In case of death of the insured during the relevant term, the benefit is
payable to the nominee. There is no survival benefit payable to the insured.
Further, if the coverage has to be extended beyond the term, he has to
pay generally a higher premium for the continual.
Term assurance is the least expensive mode of substantial life cover over a
particular period of time.
The term assurance just provides a specific amount of coverage for a
specified period of time, but does not involve any investment component.
However, the premium paid for term assurance is eligible for deduction u/s
80C of Income Tax Act of 1961.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Provident Fund - Employees Provident Fund Scheme (EPF)
Employee Provident Fund is a prominent platform of savings in India amongst
the organized workforce.
Employee Provident Fund Scheme is an investment avenue, wherein, the
employees from both the private sectors and public sectors can invest a
portion of their salary every month and build a corpus for future.
Generally, the contribution is made by both the employee and the employer.
The contribution made by the employee is eligible for deduction u/s 80C of
Indian Income Tax Act of 1961.
Interest is paid on amount deposited and it is accumulated with the fund. The
fund gets built and the investor can use it for his retirement of future plans.
Employee Provident Fund Organization, a statutory body of the Government
of India, established under the Ministry of Labour and Employment oversees
the functioning of EPF.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Provident Fund - Public Provident Fund (PPF)
Public Provident Fund is a long-term debt scheme of Government
of India, wherein, any individual in India can invest in this scheme
and can earn a decent tax-free return on the same.
The interest rate on PPF is generally slightly higher than that of
interest rates offered by Bank Fixed Deposits.
PPF account can be opened in any post office or designated bank
branches.
The PPF investors prefer to maintain their PPF account with banks
rather than Post office, since banks facilitate online transfer of funds
and online deposits.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Provident Fund - Public Provident Fund (PPF)
The minimum amount to be deposited in a PPF account is Rs.500 and the
maximum is Rs.1,00,000 per annum.
PPF account can be closed after a period of fifteen years from the date of
opening the account.
However, the investor can extend for a further period of five years.
There is also a lock-in-period of initial five years.
Another unique feature of PPF account is that the account holder can avail
loan from the third year onwards.
He can get a loan up to 25% of the amount outstanding at the end of
immediately preceding the year in which the loan is applied for.
Investment in PPF is eligible for deduction u/s 80C of Income Tax Act of 1961
and also, the tax earned thereon is tax-free.
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Mutual Fund
Investing directly in equity shares, and debt instruments
may be difficult task for a large number of customers
because they want to know more about the company,
promoter, prospects, competition for the product etc.in
such a case, investor can go for investing in financial assets
indirectly through mutual fund.
A mutual fund is a trust that pools the savings of a number
of investors who share a common financial goal.
Each scheme of a mutual fund can have different
character and objectives.
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Mutual Fund
Types of return
Capital appreciation: an increase in the value of
the units of the fund is known as capital appreciation
Dividend distribution: the profit earned by the fund
is distributed among unit holders in the form of
dividends.
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Mutual Fund
Type of Mutual Funds
Open ended schemes:
Inthis scheme there is an uninterrupted entry and exist into
the funds.
The open ended scheme has no maturity period and they
are not listed in the stock exchanges.
The open ended fund provides liquidity to the investors
since repurchase available.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Mutual Fund
Type of Mutual Funds
Closed ended funds:
The closed ended funds have a fixed maturity period. The
first time investments are made when the close ended
scheme is kept open for a limited period.
Once closed, the units are listed on a stock exchange
.investors can buy and sell their units only through stock
exchanges.
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Mutual Fund
Type of Mutual Funds
Other classification
Growth scheme: aims to provide capital appreciation
over medium to long term. Generally these funds invest their
money in equities.
Income scheme: aims to provide a regular return to its unit
holders. Mostly these funds deploy their funds in fixed income
securities.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Mutual Fund
Type of Mutual Funds
Balanced scheme
A combination of steady return as well as reasonable growth.
The fund of this scheme is invested in equities and debt
instruments.
Money market scheme: this type of fund invests its money to
money market instruments.
Tax saving scheme: this type of scheme offers tax rebates to
investors.
Index scheme: Here investment is made on the equities of the
Stock index.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Money Market Instruments
Money market instruments are the investment
avenues which have high liquidity and short term
maturity, generally less than a year.
These instruments provide an opportunity for the
investor to park his/her money for a short-term
varying from few days to few weeks to few months.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Money Market Instruments a) Treasury Bills
Treasury bills are another investment vehicle available for
the investors who can invest for a period of less than a
year.
These are issued by Government of India and currently
three variants of treasury bills are issued, namely, 91-day
treasury bills, 182- day treasury bills and 364-day treasury
bills.
The subscriptions can be made for a minimum of Rs.10,
000 and in multiples of Rs.10, 000.
Treasury bills are issued based on auction and these
auctions are held on Negotiated Dealing System (NDS).
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Money Market Instruments (b) Certificate of Deposits
Commercial deposits are short-term instruments issued by schedule banks,
having a maturity ranging from 7 days to a year.
These are similar to promissory notes and are issued in Demat form. CDs are
issued in denomination of Rs. 1, 00,000 and in multiples of Rs. 1,00,000,
thereon. The interest rate on these are market driven.
Commercial deposits are like bank term deposits, except for the fact that
they are freely negotiable and transferable.
Commercial deposits normally earn relatively higher return as compared to
bank term deposits.
There can be traded in secondary market and there is no lock-in-period.
These instruments can be purchased by individuals, corporate, trusts and
even NRIs.
They have to be compulsorily credit rated by credit rating agencies.
YASH, an Institute for MBA Entrance (CAT, CET, etc.), MCA Entrance & banking Exams Since 2009
Money Market Instruments c) Commercial Papers
These are short-term monetary funds, issued in the form of promissory notes by
large corporations.
They are not backed by any form of collaterals and hence are unsecured. The
corporations issuing these papers must be compulsorily credit rated.
The issuers of commercial paper create supply while the subscribers or
investors create demand for these papers.
The main issuers of commercial papers are large corporations and subscribers
are majorly the banking companies.
The other subscribers are individuals, NRIs and FIIs. These are generally issued at
a discount to face value and redeemed at par value.
The face value of these papers are in denominations of Rs.5,00,000 and in
multiples thereof.
The maturity period of these papers, range between 7 days and a year.
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