CHAPTER NO.

1 : INTRODUCTION

1.1 What is Investment ?

Savings are funds that an individual holds back out of his normal income. They may be
for short term purposes like paying for a holding or for buying a car or constructing a
house or they may be made for long term purposes such as providing for retirement.
Sometimes savings are made simply to meet unknown contingencies. Money saved is
not necessarily money invested. There are still some people who save their money by
placing it in some safe place.

Investments do not always originate from savings. There are many people who
sometimes quite unexpectedly receive lump sums which are surplus to their immediate
requirement.

All types of investment have one common aspect. They are concerned with foregoing
money now and receiving it back over a period of time in future. Savings only become
investments if a person makes a decision to forgo the use of the money saved for a
period of time, in the hope of earning a return.

Savings and investments are two important activities of men and women. Every
individual has a tendency to save for various reasons. The pattern of earning, saving
and expenditure differs from person to person. Every individual puts more effort to earn
more as a result of his involvement in savings activities. Moreover, individuals reduce
their expenditure to save more. The purpose of saving is to ensure that an individual
secures a better living in future. Savings enable a person to face any eventuality in
future. As man is a social animal and as such he is more interested in the welfare of
his family and of the society at large.- Therefore, he makes provision for future welfare
through his savings.

The positive gap between income and expenditure is savings and the negative gap
between the two is indebtedness. Income and expenditure have to be properly
managed to get a surplus which ends in savings. If income and expenditure are
mismatched, there would be a deficit, which would eat away the little savings already
made.

Savings and investment are integral activities of individuals, institutions and nations.
Every saving ends in investment. Investment inturn generates more income, which is
ploughed back into investment.
More savings lead to more investment. More investment generates more income,
which is added to investment. If the level of savings is low, automatically the
investment would come down and the income would also be low.

Countries like Japan have a high level of savings, which in turn leads to a high level of
investment. The high investment brings in accelerated economic growth and capital
formation. The high tempo of economic growth in Japan is mainly due to her savings
and investment. In India, the presence of a large number of financial institutions under
Central Government and State Governments and rural bodies encourage the growth of
savings and investment. The investment market should have a favourable environment
to be able to function effectively. Legal safety, Stability, longer existence and good form
of business are the factors necessary for investment marketing.

Investment falls into two categories, financial investment and non financial
investment. Financial assets like shares, debentures, bonds, and the like can be
bought and sold without much difficulty and they are liquid. The money market
institutions and capital market institutions promote savings and investment.
Non-financial investment includes land and building, plant and machinery, equipment
and the like.

A person holds direct investment by directly investing in companies in the form of

shares and debentures. An indirect investment is one made through a financial
intermediary such as a bank, society, Unit Trust investment or insurance company.

Investors may be individuals, institutions and governments. Individual investors may be

engaged in the farming, business and service industry. These investors do not have a
fixed income and they get surplus when there is a boom in the economy. The income is
negative when the economic conditions are uncongenial.

The salaried class has a fixed income and hence salaried people can save a
percentage of their income. Those persons who get a higher salary have to plan their
investment through tax planning. Otherwise, their income will be taken away by the
government in the form of income tax. The income of the salaried class rises gradually
and hence they save a portion of their salary and invest in financial and non-financial
assets. In a developing country like India, the salaried class is a major income group.
As The salary increases, the number of people coming into the tax net increases
automatically. The present study is an attempt to probe the pattern of investment of
different types of salaried persons. The findings of the study will pave the way for
taking steps for promoting investment among the salaried persons
1.2 What are Investment Strategies ?

An investment strategy is your game plan for achieving financial goals. It guides
investment choices based on risk tolerance, timeframe, and objectives.

A good strategy helps you stay focused through ups and downs and gives you discipline
when emotions run high. Developing the right investment strategy involves
understanding your current and future needs. With a plan in place, you have a system
for making wise investment preferences. The remaining questions are just around the
corner from finding the perfect fit.

1.3 Types Of Investment Strategies

Investment strategies allow investors to achieve their financial goals in a structured

manner. Here are the common investment strategies:

1.​ GROWTH INVESTMENT : Growth Investing is a strategy where investors focus

on purchasing stocks or other assets that are expected to experience
above-average growth in earnings, revenues, or market share. The primary goal
is to capitalize on future potential rather than the current value of the asset.
Here’s a more detailed explanation:

Key Features of Growth Investing:

●​ Focus on Growth Potential: Investors looking for growth target firms anticipated
to expand more quickly than the broader market or their specific sector. Typically,
these businesses are found in industries such as technology, healthcare, or
renewable energy, where innovation propels swift growth.
●​ High Earnings Growth: Strong Earnings Expansion: Growth-focused investors
generally seek out companies that demonstrate either a history or projections of
robust earnings growth. These investors aim to find stocks anticipated to greatly
enhance their profits over time, even if the company has not achieved profitability
yet or is using its earnings to support further growth initiatives.
●​ Reinvestment of Profits: Many growth companies reinvest their profits back into
the business rather than paying dividends to shareholders. This reinvestment
helps fuel further expansion, research, and development, which can increase the
company’s value over time.
●​ Higher Risk, Higher Reward: Growth stocks tend to be more volatile because
they often come with higher risk. Since investors are betting on future growth,
there is uncertainty around whether a company will actually meet those
expectations. As a result, growth investing can involve more price swings than
more conservative strategies.
●​ Valuation: Growth stocks are often priced at a premium compared to their
current earnings. This means investors might pay more for the stock than its
current earnings suggest it’s worth, based on the expectation that the company’s
earnings will grow significantly in the future. This is different from value investing,
where the focus is on undervalued stocks.
●​ Long-Term Horizon: Growth investing typically involves a long-term perspective.
Investors expect that over time, as the company’s earnings and value grow, the
stock price will appreciate. This strategy often requires patience and a belief in
the company’s future prospects.

Examples of Growth Stocks:

●​ Technology Companies: Firms like Amazon, Tesla, or Alphabet (Google’s

parent company) are often seen as growth stocks because they have high
growth potential and have transformed industries through innovation.
●​ Biotech Companies: Pharmaceutical companies working on new drug
developments can also fit into the growth investing category if they are expected
to see strong growth once their treatments are approved and reach the market.

Risks of Growth Investing:

●​ Market Volatility: Growth stocks are often more sensitive to market swings, and
a small setback in a company’s growth projections can lead to sharp declines in
stock price.
●​ Uncertainty: Since growth investing depends on future performance, there is a
lot of uncertainty involved. A company might not achieve the anticipated growth,
which could hurt its stock value.
●​ Overvaluation: There’s a risk that growth stocks may become overvalued if
investors overly inflate their expectations of future growth, leading to potential
price corrections.
●​ Growth investing: is ideal for investors with a higher risk tolerance, those who
are looking for capital appreciation rather than immediate income (such as
 dividends), and those who have a long-term investment horizon. It is often used
by younger investors who have the time to ride out market volatility and are
aiming for substantial long-term gains.

2. Value Investing is an investment strategy that focuses on buying securities that are
undervalued in the market, with the expectation that their true value will be recognized
over time. Essentially, value investors look for stocks or other assets that are priced
lower than their intrinsic value, often due to temporary factors or market misjudgments.
Here’s a deeper dive into value investing:

Key Features of Value Investing:

1.​ Undervalued Stocks: Value investors search for stocks that are trading at a
price below their perceived intrinsic value. This could be due to market
overreactions, short-term difficulties, or negative sentiment. The goal is to
purchase these undervalued assets before the market corrects and their price
increases to reflect their true value.
2.​ Margin of Safety: A critical aspect of value investing is the concept of the
"margin of safety." This means purchasing a stock at a significant discount to its
intrinsic value to minimize the potential downside risk. Even if the market doesn’t
immediately recognize the value, the investor is somewhat protected by buying at
a lower price.
3.​ Fundamental Analysis: Value investors typically use fundamental analysis to
assess a company's true value. This includes examining financial statements,
earnings reports, debt levels, dividend history, and other financial metrics.
Common valuation metrics used include:
○​ Price-to-Earnings (P/E) ratio: A lower P/E ratio relative to the market or
its peers might suggest that a stock is undervalued.
○​ Price-to-Book (P/B) ratio: A low P/B ratio may indicate a stock is trading
below its book value (assets minus liabilities).
○​ Dividend Yield: High dividend yields can be a signal that the stock is
undervalued, especially if the company has a stable and sustainable
payout.
4.​ Long-Term Focus: Value investing is typically a long-term strategy. Investors
believe that market inefficiencies will correct themselves over time, and that the
true value of an asset will eventually be reflected in its price. This approach often
requires patience, as undervalued stocks may take time to appreciate.
5.​ Lower Risk: Because value investors are buying assets at a discount, they often
believe they are taking less risk than investors who buy stocks at higher prices.
The theory is that by purchasing undervalued stocks, the downside risk is limited
because the price is already low relative to its true value.
Common Characteristics of Value Stocks:

●​ Low Price Relative to Earnings or Book Value: Value stocks often have lower
price-to-earnings (P/E) ratios or price-to-book (P/B) ratios compared to the
market or their industry peers.
●​ Stable Dividends: Many value stocks offer stable or high dividend yields,
providing an additional income stream for investors while waiting for the price
appreciation.
●​ Established Companies: Value stocks are typically from well-established
companies with a stable earnings history, but their stocks may have been
temporarily underperforming due to market factors.

Examples of Value Investing:

●​ Warren Buffett is perhaps the most famous practitioner of value investing. He

looks for companies with strong fundamentals, solid earnings potential, and good
management that are temporarily undervalued by the market. His investments in
companies like Coca-Cola and American Express exemplify his value-investing
approach.
●​ Bank Stocks: Some bank stocks may become undervalued during periods of
economic downturns, but with solid fundamentals, they can represent good value
buys for long-term investors.

Risks of Value Investing:

●​ Value Traps: A stock may be undervalued for a reason, such as a fundamental

issue within the company or industry. It might remain undervalued for a
prolonged period, or its price may not rise as expected.
●​ Market Sentiment: The market can sometimes take longer than expected to
recognize a stock’s true value, which can lead to missed opportunities or
frustration for value investors.
●​ Cyclicality: Some value stocks are in cyclical industries, and while they may be
undervalued during downturns, their performance can be highly dependent on
the economic cycle.
●​ Value investing is suitable for investors with a long-term perspective, those who
are patient, and those willing to do in-depth research and analysis of financials.
It’s ideal for investors who are comfortable holding stocks even when the market
is skeptical about them in the short term. Value investing also tends to appeal to
those with a moderate to low risk tolerance, as they’re looking to minimize losses
by purchasing stocks at a discount.
3. Income Investing is a strategy that focuses on generating regular income through
investments, rather than seeking capital appreciation (price growth). Investors following
this approach prioritize steady cash flows from interest payments, dividends, or rental
income. It's especially suitable for those who need or prefer consistent income, such as
retirees, or those who are risk-averse and seek a more stable, predictable return.

Key Features of Income Investing:

●​ Focus on Regular Income: The primary goal of income investing is to generate

a regular income stream from investments. This could come in the form of:
○​ Dividends from stocks
○​ Interest from bonds or other fixed-income securities
○​ Rental income from real estate investments
○​ Royalties or other income-generating assets
●​ Low Risk, Stable Returns: Income investing typically focuses on more stable,
established companies or assets. These assets often provide lower risk
compared to high-growth or speculative investments. The goal is to minimize
volatility while ensuring a reliable income stream.
●​ Dividend Stocks: One of the most common forms of income investing involves
purchasing dividend-paying stocks. These are usually shares in
well-established companies with a history of paying regular dividends. Blue-chip
stocks in sectors like utilities, consumer goods, and healthcare are often favored
by income investors for their reliability.
●​ Bonds and Fixed-Income Securities: Bonds are another popular investment
for income seekers. These are debt instruments issued by corporations or
governments that pay regular interest (coupon payments). Bonds tend to provide
more predictable income and are less volatile than stocks, though they carry
risks such as interest rate fluctuations and credit risk.
●​ Real Estate: Income investors may also turn to real estate for steady income,
either through direct property investments (such as rental properties) or Real
Estate Investment Trusts (REITs), which pool capital to invest in
income-generating real estate properties. These investments typically provide
regular income in the form of rent payments or dividends.
●​ High-Yield Assets: Income investors may look for high-yield bonds or stocks
with high dividend yields. While these can offer attractive returns, they often
come with higher risks, as the companies or issuers may be financially unstable.
●​ Reinvestment vs. Income Withdrawal: Income investors can choose to
reinvest the income generated (compounding returns over time) or withdraw the
income for immediate use. Retirees, for example, may prefer to withdraw income
for living expenses, while others may reinvest to grow their portfolio.

Common Types of Income Investments:

●​ Dividend Stocks: Stocks from companies that pay regular dividends are a
cornerstone of income investing. Examples include companies like Coca-Cola,
Johnson & Johnson, or Procter & Gamble, which are known for paying steady
dividends.
●​ Bonds: Government bonds (e.g., U.S. Treasury Bonds) and corporate bonds
are widely used for income investing. Bonds provide fixed interest payments, and
the principal is returned when the bond matures. The risk level depends on the
issuer’s credit rating.
●​ Real Estate Investment Trusts (REITs): REITs invest in real estate properties
and pass income from rents and sales to shareholders in the form of dividends.
REITs are popular for income investors seeking exposure to real estate without
the need for property management.
●​ Preferred Stocks: These are a type of stock that typically offers higher dividend
yields than common stocks, and dividends are often paid before common stock
dividends. They are considered less risky than common stocks but come with
limited growth potential.
●​ Annuities: An annuity is a financial product that provides guaranteed periodic
payments in exchange for an initial lump sum investment. Annuities can be
particularly appealing for those looking for a reliable income stream in retirement.

Risks of Income Investing:

●​ Interest Rate Risk: When interest rates rise, the value of existing bonds typically
falls. This can affect income investors who rely on bonds or other fixed-income
investments for their returns.
●​ Credit Risk: If the issuer of a bond or preferred stock faces financial trouble,
there’s a risk they may not be able to pay the promised interest or dividends. This
is particularly relevant for high-yield or "junk" bonds.
 ●​ Inflation Risk: Over time, inflation can erode the purchasing power of the
income generated by fixed-income investments, like bonds or annuities. Income
investors may need to adjust their strategies in high-inflation environments.
●​ Dividend Cuts: Companies can reduce or eliminate their dividend payments if
their financial situation worsens, leading to a reduction in the expected income
for investors.
●​ Liquidity Risk: Some income investments, like real estate or certain bonds, may
be illiquid, meaning they can’t easily be sold or converted to cash without a
potential loss in value.
●​ Income investing is ideal for: Retirees who need consistent income to cover
living expenses.Conservative investors who prioritize stability and lower volatility
over high returns.Investors seeking to diversify their portfolios with stable,
income-generating assets.People seeking to reinvest for compound growth while
generating regular cash flow.

4. Index Investing is a passive investment strategy where investors aim to replicate the
performance of a specific market index, rather than trying to beat the market through
stock picking or active management. The goal is to invest in a broad, representative
selection of stocks or other assets that reflect the overall market or a specific sector,
such as large-cap U.S. stocks or international markets.

Key Features of Index Investing:

●​ Passive Management:In index investing, the fund manager doesn't actively pick
and choose individual stocks. Instead, the goal is to track the performance of an
index (like the S&P 500, Nasdaq 100, or Dow Jones Industrial Average). This
means the portfolio is designed to match the index's composition and
performance as closely as possible.
●​ Broad Market Exposure:Index funds offer broad exposure to a large segment of
the market, which helps reduce risk through diversification. For example, an S&P
500 index fund will include stocks from 500 of the largest U.S. companies,
offering exposure to a wide range of industries (technology, healthcare, finance,
etc.).
●​ Lower Costs:Since index funds don’t require active management (like picking
and researching individual stocks), they typically have lower management fees
and operating costs compared to actively managed funds. This can be a huge
advantage, as lower fees mean more of your investment stays with you and
compounds over time.
 ●​ Diversification:Index funds provide instant diversification. Rather than investing
in one or a few stocks, you’re investing in an entire index, which includes a broad
mix of companies or asset classes. This helps spread out the risk and reduces
the impact of any single stock's poor performance on your overall portfolio.
●​ Consistency with Market Performance:The objective of index investing is to
mirror the performance of the index, not to outperform it. Over the long term,
many indexes have provided solid returns, and by investing in an index fund,
you're essentially capturing the overall market return.
●​ Long-Term Strategy:Index investing is generally suited for long-term investors,
as it tends to ride out short-term market fluctuations and captures long-term
growth trends. It is a low-maintenance, buy-and-hold strategy designed for
investors who don’t want to worry about day-to-day market movements.

Common Types of Index Funds:

●​ Stock Index Funds:These funds track specific stock market indexes, such as
the S&P 500 (which includes 500 of the largest U.S. companies), the
Nasdaq-100 (focused on tech-heavy companies), or the Russell 2000 (which
tracks smaller U.S. companies).
●​ Bond Index Funds:These funds track indexes of fixed-income securities, such
as government or corporate bonds. Examples include the Bloomberg Barclays
U.S. Aggregate Bond Index.
●​ International Index Funds:These funds track the performance of stock markets
outside the U.S., offering global diversification. Examples include funds tracking
the MSCI Emerging Markets Index or MSCI World Index.
●​ Sector-Specific Index Funds:These focus on particular sectors of the market,
such as technology, healthcare, or energy. For example, a technology index fund
might track the NASDAQ-100 or a global tech index

Examples of Index Funds :

S&P 500 Index Fund:

●​ Tracks 500 of the largest U.S. companies.

●​ Example: Vanguard S&P 500 ETF (VOO).

NASDAQ-100 Index Fund:

●​ Focuses on 100 major tech and non-financial companies on the NASDAQ.

●​ Example: Invesco QQQ ETF.
 Russell 2000 Index Fund:

●​ Includes 2,000 small-cap U.S. companies.

●​ Example: iShares Russell 2000 ETF (IWM).

MSCI Emerging Markets Index Fund:

●​ Tracks stocks from developing countries.

●​ Example: Vanguard FTSE Emerging Markets ETF (VWO).

Dow Jones Industrial Average Fund:

●​ Covers 30 major U.S. companies.

●​ Example: SPDR Dow Jones Industrial Average ETF (DIA).

5. Buy and Hold is a long-term investment strategy where an investor purchases

securities (such as stocks, bonds, or funds) and holds onto them for an extended
period, regardless of market fluctuations. The primary goal is to benefit from the
long-term growth and compounding of investments rather than attempting to time the
market or frequently buy and sell based on short-term market movements.

Key Features of Buy and Hold:

●​ Long-Term Focus:
○​ The buy-and-hold strategy is centered around patience. Investors believe
that over time, the market will grow, and their investments will increase in
value.
○​ This approach typically involves holding investments for several years, or
even decades, to ride out market volatility and benefit from long-term
trends.
●​ Minimal Trading:
○​ In buy and hold, there is little to no trading once the investment is made.
The idea is to avoid reacting to short-term market fluctuations, which can
often be unpredictable.
○​ Investors do not try to "time" the market (buying low and selling high
frequently), but rather focus on the potential for growth over a prolonged
period.
●​ Lower Transaction Costs:
○​ Since there is little buying and selling, transaction costs (like commissions
and taxes) are kept low, which can enhance overall returns.
 ●​ Capital Appreciation and Dividends:
○​ The focus is on capital appreciation (the increase in the value of the
asset over time) and possibly dividends (income paid out from stocks or
bonds).
○​ Investors often hold dividend-paying stocks to earn a steady income in
addition to benefiting from stock price growth.
●​ Reduced Stress:
○​ Because investors are not constantly monitoring the market or making
trades based on short-term news, the buy and hold strategy can be less
stressful than active investing.
○​ Investors are less likely to panic sell during market downturns, as they
focus on long-term potential.

Example:

●​ Example: An investor buys shares of a well-established company like Apple,

and instead of selling them when the stock price goes up or down, they hold on
to them for years, benefiting from the company's long-term growth, dividends,
and compounding returns.

Advantages of Buy and Hold:

●​ Lower Costs: Fewer trades mean fewer fees and taxes.

●​ Compounding Growth: Holding investments over time allows compounding
(earning returns on previous returns).
●​ Historical Market Growth: The strategy capitalizes on the historical upward
trend of stock markets over long periods, despite short-term volatility.
●​ Simplicity: It’s easy to implement and doesn’t require constant attention or
research.

Disadvantages of Buy and Hold:

●​ Risk of Long-Term Volatility: If markets experience long-term downturns, such

as during a recession, the value of investments can drop significantly.
●​ No Flexibility: Investors may miss opportunities if they don’t actively adjust their
portfolios for changes in the market or individual assets.

6. Asset Allocation is an investment strategy that involves distributing your

investments across different asset classes (such as stocks, bonds, real estate, and
cash) in order to balance risk and reward based on your financial goals, risk tolerance,
and investment time horizon. The main goal of asset allocation is to maximize returns
by investing in a mix of asset types that behave differently in various market conditions,
thus helping to reduce the overall risk in a portfolio.

Key Concepts of Asset Allocation:

●​ Diversification:Asset allocation is essentially a form of diversification, where

you spread your investments across different asset classes. This reduces the risk
of a large loss because not all asset classes are likely to perform poorly at the
same time. For example, when the stock market is down, bonds or real estate
may perform better.
●​ Types of Asset Classes:​

○​ Stocks (Equities): These are shares of companies, which offer the

potential for higher returns but come with higher risk and volatility.
○​ Bonds (Fixed-Income): Bonds are loans to governments or companies.
They tend to provide more stable returns and are less volatile than stocks,
but they also typically offer lower returns.
○​ Cash (Money Market): Cash equivalents include savings accounts,
certificates of deposit (CDs), and money market funds. These provide the
least risk but offer the lowest returns.
○​ Real Estate: Direct investments in property or through real estate funds,
which can provide income and appreciation.
○​ Commodities: Investments in natural resources like gold, oil, or
agricultural products. They can act as a hedge against inflation or market
downturns.
●​ Risk Tolerance:Your risk tolerance (how much risk you're willing to take on) will
influence how much of your portfolio you allocate to riskier asset classes (like
stocks) versus safer, more stable asset classes (like bonds or cash). Generally,
younger investors with a longer time horizon might take on more risk by investing
heavily in stocks, while older investors closer to retirement might prioritize safer
investments like bonds to preserve capital.
●​ Time Horizon:The time period over which you plan to invest affects your asset
allocation. A longer time horizon allows for greater risk (such as more stocks), as
you have time to recover from short-term market fluctuations. A shorter time
horizon often requires a more conservative approach (more bonds or cash) to
preserve capital.
●​ Rebalancing:Over time, the value of different assets in your portfolio may shift
due to market performance. Rebalancing is the process of adjusting your asset
allocation back to your target distribution. For example, if stocks have performed
 well and now make up a larger portion of your portfolio than desired, you might
sell some stocks and invest more in bonds to maintain your desired balance.

Example of Asset Allocation:

●​ Aggressive Portfolio (for younger investors with a long-term horizon and higher
risk tolerance):​

○​ 80% Stocks (Equities)

○​ 15% Bonds (Fixed-Income)
○​ 5% Cash
●​ Moderate Portfolio (for investors with a medium risk tolerance):​

○​ 60% Stocks
○​ 30% Bonds
○​ 10% Cash
●​ Conservative Portfolio (for older investors or those nearing retirement):​

○​ 40% Stocks
○​ 50% Bonds
○​ 10% Cash