Investment means devotion of money with the expectation of future benefits which can arise in the form of regular income ( such as interest ) or capital gain ( difference between buying and selling price ) or both. The extra amount earned on investment is called “ Earning on Investment ”. Income behind investment is a reward to the investors for the postponement of their today ‘ s buying and for bearing unavoidable risk. At present, many securities are available in the market for making investment such as equity shares, debentures, preference shares, gold, real estate, money market instruments etc. Selection of a security for an investment purpose completely depends upon the nature of an investor.
For instance – Investors expecting regular income would prefer debentures ( because debenture pays regular interest ), whereas investors having an aim of liquidity would like to opt money market instruments. The concept of investment follows the principle of “ More Risk, More Gain ” i. e. higher the level of risk, higher is the gain. The most prominent feature of investment is the time period which is found very long and ignores the short term fluctuations in the security prices.
Objectives of Investment
(1) Protection of Principal Amount – Money paid by the investors to buy any asset is known as the principal amount. Every investor prefers to keep his / her initial investment safe by opting less risky securities.
(2) Liquidity – How quickly you can sell your investment in the market is called liquidity. Investors who want quick conversion of their investment into cash prefer to buy highly marketable assets.
(3) Income – The most prominent objective of every investor is to make money on his savings. In other words, every investor prefers to acquire more money than invested. Income behind investment could occur in three ways –
- Safety against inflation – Increased market prices of product reduce the buying capacity of money therefore, it is really important to get enough income that can eliminate the impact of increased product prices.
- Capital appreciation – Besides eliminating the impact of inflation, investors also prefer to get some more money than invested which is called capital appreciation.
- Regular income – Investors prefer to receive some cash in hand after a fixed time interval to fulfill their day to day requirements.
For instance – Ram purchases 100 Debentures of Tata Motors at 1, 000 each carrying an interest of 6 per cent per annum and sells the same debentures after one year at 1, 200. It is further assumed that rate of inflation within a year has been increased by 2 per cent.
- In this case, Ram’s regular income would be 6 per cent ( i.e. 1, 00, 000 < 0. 06 = 6, 000 )
- Ram’s Capital appreciation would be 20 per cent i. e. 1, 20, 000 ( selling price ) – 1, 00, 000 ( buying price ) = 20, 000.
- Safety against Inflation would be 4 per cent ( i. e. 6 per cent ( interest ) ) – 2 per cent ( increment in rate of inflation )
(4) Reduction of Risk – Outcome of investment occurs in the future which is completely uncertain and there is an equal possibility to loss and to earn money. This uncertain characteristic of the occurrence of an outcome is called risk. Investors try their level best to reduce the amount of risk i.e. ( minimizing the possibility of losses and maximizing the possibility of income ) by making well informed investment decision.