Investment risks 2 Attributes of investment by risk

Investment risks 2. Attributes of investment by risk types

�Time and risk �Portfolio �Investment opportunities �Rate of return �Risk �Marketability �Tax shelter �Convenience �Investment vs. Speculation Outline

• • In its broadest sense, an investment is a sacrifice of current money or other resources for future benefits. Two key aspects of investment: TIME AND RISK – The sacrifice takes place now and is certain. – The benefit is expected in the future and tends to be uncertain Time and risk

�The portfolio is likely to comprise of: ◦ Financial assets (bank deposits, bonds, stocks and so on( ◦ Real assets (automobile , house and so on( �Almost everyone investments. � May owns a portfolio of be the result of haphazard decisions or may be the result of deliberate and careful planning. Portfolio

Non marketable financial assets Bonds Mutual Fund Schemes Real Estate Equity Shares Money Market Instruments Life Insurance Policies Precious Objects Investment alternatives

�For evaluating an investment avenue, the following attributes are relevant: 1. 2. 3. 4. 5. Rate of Return Risk Marketability Tax Shelter Convenience Investment Attributes

Rate • Current Yield of • Capital Gain/Loss Yield Retur n • Variance • Standard Deviation Risk • Beta • Depth Mark • Breadth etabil • Resilience ity • Initial Tax Benefit Tax • Continuing Tax Benefit Shelt • Terminal Tax Benefit er Conv • Made enien • Looked After ce Investment Attributes (contd(. . 7

Current Yield Capital Gain/Loss Yield Rate of Return of any investment instrument can be calculated. 1 Rate of Return 8

�Risk = Variability of the rate of return �Common Measures in finance: �Variance – squares of deviations of individual returns around their average value �Standard Deviation – square root of variance �Beta – reflects how volatile the return from an investment is, in response to market swings. . 2 Risk 9

• An investment is highly marketable or liquid if: a) It can be transacted quickly b) The transaction cost is low c) The price change between two successive transactions is negligible • Liquidity of a market may be judged in terms of its – – – depth , breadth and resilience . 3 Marketability (Liquidity( 10

• Depth: • Breadth: • Resilience: • – Refers to the existence of buy as well as sell orders around the current market price – Implies the presence of such orders in substantial volume – Means that new orders emerge in response to price changes. High marketability is a desired attribute of a good investment instrument. . 3 Marketability (Liquidity. . . ( 11

• Initial Tax Benefit: • Continuing Tax Benefit: • Terminal Tax Benefit: – Tax relief enjoyed at the time of making investment – Eg. Investment in Providend Fund – Tax shield associated with the periodic returns from the investment – Eg. Dividend income and income from certain other sources are tax-exempt, upto a certain limit, in the hands of receipient. – Relief from taxation when an inveswtment is realized or liquidated. – Eg. Withdrawal from the PPF account is not subject to tax. . 4 Tax Shelter 12

Ease with which the investment can be made and looked after. • a) b) • • Can the investment be made readily? Can the investment be looked after easily? Savings Account – made easily, no maintainance Property – too many processes, high maintenance. . 5 Convenience 13

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Investor • Longer • Holding period at Planning Horizon least of a year • Moderate Risk Disposition taker Return Expectation Basis for Decisions • Modest Speculator • Short • Holding period may be few days or even few months • Ordinarily willing to assume high risk • High • Fundamental • Hearsay Factors • Technical Charts • Careful evaluation • Market Psychology of the prospects of the firm Investment vs. Speculation • Normally uses his • Normally resorts Leverage own funds to borrowings 15

• Fundamentally different from investment and speculation in the following respects: – Result of gambling is known more quickly – Rational people gamble for fun, not for income. – Gambling doesnot involve a bet on an economic activity. – It is based on risk that is created artificially – Gambling creates risk without providing any commensurate economic return Gambling 16