M. Subramanian
Faculty in Finance
RL Institute of Management Studies
Madurai, Tamil Nadu-625022
Phone : 0452-2690623/614 (O) 0452-2564660 (R),
E-mail :

Introduction to Investment

  • Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation, economic status, education and family background.
  • When a person has more money than he requires for current consumption, he would be coined as a potential investor.
  • The investor who is having extra cash could invest it in securities or in any other assets like gold or real estate or could simply deposit it in his bank account.
  • The companies that have extra income may like to invest their money in the extension of the existing firm or undertake new projects/ventures.
  • All of these activities in a broader sense mean investment.
  • An investment is a commitment of money that is expected to generate additional money. Investment has two key elements namely, time and risk.
  • Every investment entails some degree of risk; it requires a present certain sacrifice for a future uncertain benefit.
  • A simple formula for investment is: Investment = {Commitment of funds} + {For a future period} + {In expectation of good rate of return} with some degree of risk.

Investment from different perceptions

  • To an economist  Investment is the net addition made to the nation's capital stock that consists of goods and services that are used in the production process. A net addition to the capital stock means an increase in the buildings, equipments or inventories etc. These capital stocks are used to produce other goods and services.
  • To a financial expert  Financial investment is the allocation of money to assets that are expected to yield some gain over a period of time. It is an exchange of financial claims such as stocks and bonds for money. They are expected to yield returns and experience capital growth over the years.

Investment Alternatives/Media/Avenues

  • Investment can be in any form; we can generalize the investment forms within two sets of assets, because normally whatever we invest is only on assets.
  • So the investment could be on the following two assets:

Physical Assets

Financial Assets


  • As mentioned earlier there are two sets of assets for investment, with that two sets of assets we have numerous alternatives/avenues/media for investment.
  • They are as follows:
    (1) Non-marketable financial assets     (7) Life insurance policies
    (2) Bonds                                       (8) Precious objects
    (3) Mutual fund schemes                   (9) Financial derivatives
    (4) Real estate
    (5) Equity shares
    (6) Money market instruments

Investment Attributes

The following are said to be the investment attributes / qualities:
(i) Rate of return
(ii) Risk
(iii) Marketability
(iv) Tax shelter
(v) Convenience.

Investment Decision Process
Step-1 Setting the investment objectives
Step-2 Create the investment policy
Step-3 Make security analysis
Step-4 Do the valuation process
Step-5 Construct the portfolio
Step-6 Review the portfolio
Step-7 Evaluate the portfolio performance
Step-8 Rebalance the portfolio, if necessary

Investment Objectives
The following are the investment objectives:
# Safety
# Liquidity
# Regular return
# Capital appreciation
# Tax benefits

Security Analysis
The following are the few methods of security analysis:
(a) Fundamental Analysis - EIC analysis (Long term analysis)
(b) Technical Analysis Charts analysis (Short term analysis)

Classification of Investors
In the normal parlance investors broadly classified into three major categories, they are as follows:



Genuine Investor








Normal return

Abnormal return

Very high return


Limited risk

High risk

Very high risk




Ultra Short term




Very Aggressive

Tax benefits

Plans for tax benefit

No such tax plan

No such tax plan


Stable and regular

Uncertain & erratic

Highly uncertain


Scientific analysis

Past trends

Matter of luck

Principal Amount


No full confidence

Matter of luck

Approaches to Investment Decision Making
The stock market is thronged by investors pursuing diverse investment strategies which may be subsumed under four broad approaches:

  • Fundamental approach
  • Psychological approach
  • Academic approach
  • Eclectic approach

Common Errors in Investment Management

Investor appear to be prone to the following errors in managing their investments:
(a) Inadequately comprehension of return and risk
(b) Vaguely formulated investment policy
(c) Nave extrapolation of the past
(d) Cursory decision making
(e) Simultaneous switching
(f) Misplaced love for cheap stocks
(g) Over-diversification and under-diversification
(h) Buying shares of familiar companies
(i) Wrong attitude towards losses and profits
(j) Tendency to speculate.

Qualities for Successful Investing

The game of investment, as any other game, requires certain qualities and virtues on the part of investors, to be successful in the long run: (suggested by Prof. John Train)

1. Contrary thinking
2. Patience
3. Composure
4. Flexibility & Openness
5. Decisiveness

Sources /Books Referred:

1. Investment Analysis & Management, Jack Clark Francis, McGraw Hill International Editions, 5th Edition.
2. Investment Management, Maria John, Palani Paramount Publications, First Edition.
3. Security Analysis & Portfolio Management, Fischer & Jordon, Prentice Hall of India Publication.
4. Investment Management, VK Bhalla, Sultan Chand Publications.

About the Author

    • M. Subramanian, Faculty in Finance, RL Institute of Management Studies, Madurai,
      Tamil Nadu-625022, Ph. No.0452-2690623/614 (off) 0452-2564660(res);
      Email id:
    • The author has 8 years of teaching experience in management subjects and 4 years of industrial experience. The author has published Course materials on 'Management Accounting' and 'Financial Management' as an in house publication (private circulation only) for benefits of students.
    • Published an article on "Competitiveness the buzz word - in the global economy". refer - faculty column.

Authors' Qualification:
B.COM, BGL, MFC, MBM, PGDMM, (MBA), (M.Phil-Mgt.)

M. Subramanian
Faculty in Finance
RL Institute of Management Studies
Madurai, Tamil Nadu-625022
Phone : 0452-2690623/614 (O) 0452-2564660 (R),
E-mail :

Source : E-mail October 2003




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