Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.

About the Class
We bring you an online class titled 'Elementary Finance'. This will have 12 lessons - one a month. Each lesson is further subdivided into 4 chapters. And we will give you one new chapter every week.

Chapter 7 Lesson B - Investments
Financial planning is essential to ensure a secure future. Financial planning involves proper cash management, savings and investments. In this lesson we will get to know what investments are all about. Investments can be investments in either financial assets or real assets.

Financial Assets - take the form of equity ownership of a company or evidence that someone owes you a debt or implies your right to buy or sell an ownership interest on a later date. They also include savings and money market securities, stocks, warrants, bonds and mutual funds. These financial assets are denominated in monetary terms.

Real Assets - are investments that you can put your hands on. They are physical goods, like real estates-land, buildings, houses, precious metals like gold silver and other precious stones, other art objects like paintings and sculptures and antiques. Real assets are not denominated in monetary terms like rupees.

Investments may be long-term investments or short-term investments based on the period of investments.

Investments that are held for one year or less are short-term investments, and those held for more than a year are long-term investments.

An example of a short-term investment is a fixed deposit in a bank for one year, and a long-term investment is a ten-year bond.

Generally equities are considered long-term investments but although long-term they become short-term when sold within a year.

Fixed return and variable return investments
Fixed returns investments have a specific income guaranteed in advance while in the case of variable return investments, no principal or income is guaranteed. Examples of fixed return investments are Government securities and examples of variable return investments are shares and stock.

Formulating an investment strategy
While formulating an investment strategy the financial position and the expectations in future have to be considered. The investments would depend to a large extent on the current needs and the future needs of the individuals, the extent to which a person is willing to take risks, the rate of returns, the security of the principal as well as the interest.

Before taking any decisions on investments the following points should be considered.

• The maturity period of the investments.
• How diversified can the investment portfolio be?
• Is the investor ready to take higher risk to yield higher returns?
• What is the safety and liquidity requirement of the investor?
• Is the investor going to consider tax-free securities?

Investment policies may be aggressive or conservative.
An aggressive investment policy aims at maximum profits with a little more risks. Aggressive investments include buying shares and securities on credit to enhance profits. It could also imply a concentration in few securities with an anticipation of high returns.

A conservative investment policy aims at minimising risks. Hence these investments yield a low return. The aim here will be to buy stock and hold them. A defensive investment policy involves diversified investments.

Investments can also be marketable or liquid.
A marketable investment implies a ready market for the investment at any point of time.
A liquid investment is one, which not only has a ready market but also has a stable price.

Where the investments are limited liquidity of the investments is a must and no compromise can be made on this. The returns on highly liquid investments will be low.
Some of the liquid investments are savings accounts, fixed deposits, money market funds.

Sources of investment money.
Investments can be financed in any of the following ways.

• Income: Any disposable income after tax is available either for spending or saving. After utilising a portion of this disposable income for the various expenses a certain amount can be utilised for investment purposes.
• Any gifts can be utilised for the purpose of investments.
• Loans on life insurance policies.

What does one invest for?

• If the requirement is a safe investment with steady but low returns, invest in banks, Government securities, NSC's and PPF, Post office time deposits and Kisan Vikas Patra.
• In the case of retired persons, the aim would be safe investments with fixed monthly or yearly returns. The priority would be safety and stable income rather than appreciation in the investment. Risky investments should not be considered. This would normally be fixed deposits in companies, banks, highly rated debt instruments etc.
• Where a very high return is the prerogative, the risk taken will also be high. A higher return can be earned by investing in scrips.

Investment Strategies.
During times of inflation the interest rates will increase while bonds prices will fall. Hence, at such times fixed income securities should be avoided. During inflation real estate prices as well as gold and silver prices will go up.

During times of depression the safest bet would be Government bonds which are safe and secure. Investments that provide long-term growth are shares and stock, convertible securities, mutual funds and real estates. Investments that provide a continual cash flow are shares and stocks that pay high dividends, bonds, fixed deposits and Government investments.

The economy and investments

• Investments at risk with changing interest rates.
  Government notes, bonds issued by corporations sometimes offer changing interest rates. These instruments are not very common.
• Investments that offset the risk of interest rate changes.
  These investments offer returns, which are more than the current inflation rate. This would ensure that there is no depreciation in investment value as inflation is covered.
• Investments which are affected by changing conditions in the economy.
  Returns on floating rate bonds issued by private companies, dividends from shares, mutual funds, are susceptible to changing conditions in the economy.
• Investments not affected by changes in the economy.
  Returns from Government guaranteed bonds, gold, and investments in PPF, NSC etc are normally not affected by changes in the economy.
• Investments that are affected by market cycles.
  Shares of joint stock companies, real estate, loans and gold are affected by market cycles.
• Investments that offset market cycle risk
  Normally, investments in Government securities, Government guaranteed bonds offset market cycle risks

Questions on Chapter 7 Lesson A
1. What are the deductions from total income?
2. Name a few tax-free incomes.