Investment Management Notes -- CBCS (NEP2020) B.Com, BBA

 Introduction to Investment

Overview

• Meaning and Importance of Investment Management
• Types of Investment Instruments
• Major Participants in Investment industry
• Difference between Gambling and Speculation

What in Investment??

Investment Management refers to the professional handling of various securities (like stocks, bonds, and other assets) and funds to meet specific investment goals for the benefit of investors. These investors may be individuals or institutions. The process includes:

• Asset Allocation
• Portfolio Management
• Risk Analysis

Why is it important in personal and institutional finance?

For Individuals:

1. Wealth Creation:

   • Helps grow personal wealth over time through strategic investments.

   • Enables financial independence and supports goals like retirement, education, or buying property.

2. Risk Management:

   • Diversification and risk analysis help individuals minimize potential losses.

3. Goal-based Planning:

   • Aligns investments with short-term and long-term goals such as children’s education or retirement.

4. Inflation Protection:

   • Investments like equity and real estate tend to beat inflation in the long run, preserving purchasing power.

5. Professional Guidance:

• Helps individuals make informed decisions, especially those without financial expertise.

For Institutions:

1. Maximizing Returns on Surplus Funds:

   • Institutions like banks, insurance companies, and pension funds invest to earn returns on idle funds.

2. Meeting Liabilities:

   • Helps institutions like pension funds meet their future payout obligations.

3. Capital Preservation and Growth:

   • Ensures the safety and steady growth of large pools of capital for long-term objectives.

4. Portfolio Diversification:

   • Institutions deal with large sums and need to balance risk across asset classes and geographies.

5. Regulatory Compliance and Reporting:

   • Professional investment management ensures adherence to financial regulations and accurate reporting.

Types of Investment instrument

1. Stocks— Stocks, also called shares or equities, is the most well-known and simple type of investment. When you buy stock, you’re buying an ownership stake in a publicly traded company. Many of the biggest companies in the country are publicly traded, meaning you can buy stock in them. examples include Apple and Microsoft. 

Whenever you buy a stock when its price goes up you make profit. the risk involves that price of the stock could go down leading you lose the value of your money

2.  Bonds— When investing in a bond you’re essentially lending money to an entity. Generally, this is a business or a government entity. Investors lend money in exchange for periodic interest payments and the return of principal at maturity.

The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be a lower risk.

3. Mutual Funds— A mutual fund pools investor's money that’s then invested broadly in a number of companies. All shareholders combine their funds to purchase these financial instruments, all shareholders involved in the mutual fund participate proportionally in the gains or losses that are experienced.

Mutual Funds can be actively managed or passively managed. Actively managed funds have a fund manager who selects and manages securities.

4. Exchange-Traded Funds (ETFs)—ETFs are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, shares of ETFs are publicly traded on the open market. Their price fluctuates throughout the trading day unlike mutual fund which is calculated at the end of each trading session.

5. Certificates of Deposit (CDs)—A certificate of deposit is considered to be a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time and earn interest on that money. When that time period is over, you get your principal back, plus the predetermined amount of interest. The longer the loan period, the higher your interest rate is likely to be. While the risk is low, so is the potential return.

6. Real Estate—Investing in real estate involves purchasing residential, commercial, or rental properties for capital appreciation and rental income. Investors can also invest in Real Estate Investment Trusts (REITs), which are companies that own and manage properties.

7. Annuities— Annuities are financial products that provide a steady income stream, often used for retirement planning. They can be fixed, variable, or indexed.

Example: If you buy a LIC Jeevan Akshay VII annuity for ₹10 lakh, you may receive a monthly pension of ₹8,000 for life, depending on the plan chosen.

Major participants in the Investment industry

1. Individual Investors— These are retail investors who invest their personal money in stocks, bonds, mutual funds, real estate, and other assets.

Example: A salaried professional investing in a Systematic Investment Plan (SIP) in mutual funds.

2. Institutional Investors— These are large organizations that invest significant amounts of money in financial markets on behalf of others.

Examples: Pension Funds (e.g., CalPERS in the USA), Insurance Companies (e.g., LIC, HDFC Life)

3.  Asset Management Companies (AMCs)--An asset management company (AMC) is a firm that invests pooled funds from clients, putting the capital to work through different investments including stocks, bonds, real estate. These firms manage mutual funds, ETFs, and other investment vehicles for investors.

Examples: SBI Mutual Fund, BlackRock, Vanguard

4. Banks and Financial Institutions— Banks offer various investment products like fixed deposits, bonds, and wealth management services.

Investment Banks (e.g., Goldman Sachs, JPMorgan) --Investment banks are financial institutions that act as intermediaries in complex corporate transactions, such as mergers and acquisitions, and help companies raise capital in stock and bond markets.

Commercial Banks (e.g., HDFC Bank, ICICI Bank) --A commercial bank is a financial institution that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit.

5. Stock Exchanges— Stock exchange is a regulated marketplace where individuals and businesses can buy and sell securities such as stocks, bonds, and derivatives. An exchange also acts as an intermediary, facilitating transactions between buyers and sellers, ensuring liquidity and price transparency.

Examples: National Stock Exchange (NSE), India, Bombay Stock Exchange (BSE), India

6. Venture Capitalists & Private Equity Firms-- These firms invest in startups (VCs) or established private companies (PE firms) for growth and profit. Private equity and venture capital buy different types of companies, invest different amounts of money, and claim different amounts of equity in the companies in which they invest.

Private Equity invests in companies that are not publicly traded or listed whereas Venture Capital focuses on early-stage companies with high growth potential.

Examples: Sequoia Capital (VC)--Venture capital is funding given to startups or other young businesses that show potential for long-term growth Blackstone (PE)--Private equity is capital invested in a company or other entity that is not publicly listed or traded.

Speculation and Gambling

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