BlogInvestment Adviser Level 17. Introduction to Investment

7. Introduction to Investment


Investment is the process of allocating resources, such as money or time, in the expectation of generating a profit or other financial return. Investment involves taking calculated risks with the expectation of earning a return greater than what was originally invested.

Investment can take various forms, such as stocks, bonds, real estate, commodities, or mutual funds. Each type of investment has its unique characteristics and risks, and investors should carefully consider their financial goals, risk tolerance, and investment horizon before making investment decisions.

Investments can be made by individuals, institutional investors, or governments. The ultimate goal of investment is to increase wealth, but investment decisions can also have a significant impact on the economy, industries, and society as a whole.

Investment is often seen as a long-term strategy, and investors should consider factors such as inflation, taxes, and market volatility when making investment decisions. Successful investors often have a diversified portfolio, spreading their investments across different assets and sectors to minimize risk and maximize returns.


Equity represents ownership in a company and entitles its holders to a share in profits and the right to vote on the company’s affairs. Equity shareholders are residual owners of the firm’s profits after other contractual claims on the firm are satisfied and have ultimate control over how the firm is operated. Investments in equity shares can reward investors in two ways: through dividend payments and capital appreciation. Equity investments have proven time diversification benefits and are considered a rewarding long-term investment. Fluctuations in equity returns tend to cancel out through time, which diversifies away more risk over longer holding periods. Therefore, investment in equities offer better risk-adjusted returns if held for long periods.

Fixed Income-

Fixed income instruments, also known as debt instruments, are contracts that promise to pay a stream of cash flows to investors during the term of the contract. These contracts can be transferable or non-transferable and establish financial requirements and restrictions for the borrower. Debt securities are issued by various entities to finance different projects and activities.

Government securities (G-Secs) are tradeable instruments issued by the Central Government or State Governments, acknowledging the Government’s debt obligation. G-Secs carry practically no risk of default and are considered risk-free gilt-edged instruments. Corporate debt securities are issued by companies and can be listed or unlisted. They pay higher interest rates than government securities due to the default risk involved.

The probability of default on a fixed income paper is captured by ratings given by rating agencies such as CRISIL. Higher ratings denote lower default risk, and the convention in the market is to classify bonds with a rating of BBB and above as investment grade and bonds below BBB as high yield or junk bonds. Many institutional investors are prohibited from investing in junk bonds due to their high default risk.


Commodities are an important investment avenue for investors looking to diversify their portfolio and hedge against inflation. Soft commodities like corn, wheat, soybean, soybean oil, and sugar are grown and subject to higher business cycle risk, making them highly volatile in their prices. Soft commodities also have low correlation to stocks and bonds, providing diversification benefits to a portfolio.

Investing in soft commodities requires a careful understanding of the risk involved, including weather patterns that can impact crop yields. Exposure to soft commodities can be taken through derivative contracts like forwards or futures.

Hard commodities like gold, silver, oil, copper, and aluminum are mined and subject to global demand and supply. Gold and silver have been used as reserve assets for centuries due to their global acceptability and status as a safe haven asset. Investing in hard commodities can provide diversification benefits to a portfolio.

It’s important to note that commodities don’t generate any current income, and investors in these commodities can only rely on capital appreciation. Investors must carefully understand the risks involved in investing in commodities and have a well-diversified portfolio to manage those risks.

Real Estate-

Real estate investment involves the purchase, ownership, management, rental or sale of real estate properties for the purpose of generating profit. This can be done through direct investment in properties or through indirect investment in real estate securities such as Real Estate Investment Trusts (REITs).

REITs are investment vehicles that own and operate income-producing real estate properties. They are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, making them an attractive option for investors seeking regular income. REITs can invest in various types of real estate, including commercial, residential, industrial, and healthcare properties.

One of the main advantages of investing in REITs is their liquidity. They can be bought and sold on stock exchanges, providing investors with the ability to easily enter and exit the market. Additionally, REITs provide investors with access to a diversified portfolio of real estate properties that would otherwise be difficult or expensive to acquire on an individual basis.

However, investing in REITs also comes with its own set of risks, including fluctuations in interest rates, changes in real estate market conditions, and potential regulatory changes. Investors should carefully consider these risks before investing in REITs, and may want to consult with a financial advisor or investment professional for guidance.

Structured Products, Distressed Securities & Other Investments opportunities

Structured products are complex investments that use derivatives to create desired risk exposures, often linked to market indices, currencies, or commodities. They are designed to provide risk-adjusted returns and can be customized to meet investor requirements, but require larger investments and should not be seen as guaranteed or capital-protected products. Distressed securities are those of companies in financial distress, and while they may be available at a discount, they require greater skills in business valuation and are considered high-risk. Art and rare collectibles provide a low-correlation, long-term investment opportunity that requires specialized knowledge, but are illiquid and do not provide income.

Channels for making investments

  1. Direct Investment: This channel involves an investor making direct investments in stocks, bonds, real estate, or other assets, without any intermediaries. Direct investments require a significant amount of time and expertise to analyze and research the assets before investing. Investors need to have a good understanding of the market conditions and the underlying fundamentals of the assets they plan to invest in.
  2. Registered Investment Advisors (RIAs): RIAs are investment professionals who offer personalized investment advice to clients. They are registered with regulatory bodies and are held to a fiduciary standard, which means that they are legally required to act in the best interest of their clients. RIAs provide a range of services, including investment planning, asset allocation, portfolio management, and financial planning.
  3. Investment through managed portfolios: Managed portfolios are a type of investment service where a portfolio manager invests on behalf of the client. These managers create a customized investment portfolio based on the client’s investment goals, risk tolerance, and investment horizon. Managed portfolios can include a mix of stocks, bonds, mutual funds, and other assets.
  4. Mutual Funds: A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase securities such as stocks, bonds, and other assets. Mutual funds are designed to provide diversification, liquidity, and professional management to investors. They offer investors exposure to a wide range of assets, which they may not be able to invest in directly.
  5. Alternative Investment Funds (AIFs): AIFs are investment vehicles that invest in assets other than traditional investments like stocks and bonds. AIFs can invest in real estate, private equity, hedge funds, and other alternative assets. These funds are generally available only to accredited investors due to the high risk and complex nature of the investments.
  6. Portfolio Management Services (PMS): PMS is a specialized service offered by investment management companies. PMS provides personalized investment advice, asset allocation, and portfolio management services to high net worth individuals or institutions. PMS services are tailored to the specific investment goals and risk profile of the client. The portfolio manager invests in a diversified portfolio of assets on behalf of the client.

Investors can choose the channel that best suits their investment goals, risk tolerance, and investment horizon. Each channel has its own advantages and disadvantages and investors should carefully evaluate these before making an investment decision. It is always recommended to seek the advice of a qualified professional before making any investment decision.

Compare and Contrast between Mutual Funds, Alternate Investment Funds, and Portfolio

Criteria Mutual Funds Alternate Investment Funds (AIFs) Portfolio Managers (PMs)
Regulation Regulated by SEBI Regulated by SEBI Regulated by RBI
Investor Types Open to all investors Only open to HNIs and institutional investors Only open to HNIs and institutional investors
Investment Strategies Invest in publicly traded securities Can invest in private equity, venture capital, and real estate Provide customized investment strategies based on client risk tolerance and goals
Fees Charge an expense ratio Charge a management fee and a performance-based fee Charge a management fee and a performance-based fee
Liquidity Highly liquid May have lock-in periods and restrictions on redemption May have lock-in periods and restrictions on redemption
Disclosure Required to disclose portfolio holdings and performance regularly May not be as transparent in operations and have limited reporting requirements May not be as transparent in operations and have limited reporting requirements

In summary, while Mutual Funds, AIFs, and PMs all allow individuals to invest in diversified portfolios of assets, there are key differences in their regulation, investor types, investment strategies, fees, liquidity, and disclosure. Mutual Funds are suitable for all investors and invest in publicly traded securities, while AIFs and PMs are only open to high-net-worth individuals and institutional investors, and have the ability to invest in a wider range of assets. Fees and liquidity also differ among the three options, with Mutual Funds being highly liquid and charging an expense ratio, and AIFs and PMs charging management fees and performance-based fees and may have lock-in periods and restrictions on redemption. Disclosure requirements also differ among the three options.

Mock Test:-

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Investment Advisor Level 1


1 / 30

1. What is the minimum investment value required to open a portfolio management account?

2 / 30

2. What is the minimum investment value required in an Alternative Investment Fund (AIF)?

3 / 30

3. What is the term used to describe securities of companies that are in financial distress or near bankruptcy?

4 / 30

4. Which investment options are more stringently regulated compared to AIF and Portfolio Managers?

5 / 30

5. What is the key difference between listed and unlisted investments?

6 / 30

6. What are the two generic types of financial instruments based on claims on future cash flows?

7 / 30

7. Which investment category is known for its unregulated market and relatively more illiquid nature?

8 / 30

8. What is the regulatory body that licenses professionals as Registered Investment Advisers (RIAs)?

9 / 30

9. Which investment vehicle allows investors to avail professional expertise at lower costs?

10 / 30

10. Which investment avenue is historically viewed as a good inflation hedge?

11 / 30

11. Which investment vehicle collects funds from select sophisticated investors?

12 / 30

12. What are the two main ways to classify financial investments based on the markets they trade?

13 / 30

13. What is the term used to describe the extra compensation demanded by investors for bearing illiquidity risk in unlisted investments?

14 / 30

14. What type of investors typically invest in Alternative Investment Funds (AIFs)?

15 / 30

15. What are AIFs and PMS commonly referred to as?

16 / 30

16. What is the term used to describe the notion that fluctuation in investment returns tend to cancel out through time?

17 / 30

17. Which type of investment offers benefits of risk diversification when held in a portfolio along with stocks and bonds?

18 / 30

18. What regulates the portfolio management services provided by portfolio managers?

19 / 30

19. Which investment avenue offers exposure to assets that are otherwise difficult to obtain?

20 / 30

20. What is the convention in the market to classify bonds with ratings BBB and above?

21 / 30

21. Which type of investment carries practically no risk of default and is considered risk-free?

22 / 30

22. Which investment category has low correlation with financial investments like equities and bonds?

23 / 30

23. Which investment avenue is NOT considered a structured product?

24 / 30

24. What is the main purpose of a mutual fund?

25 / 30

25. Which of the following is NOT an investment avenue available to investors?

26 / 30

26. Which rating category denotes the highest degree of safety regarding timely servicing of financial obligations?

27 / 30

27. Which of the following is NOT a type of financial investment?

28 / 30

28. What is the role of a portfolio manager in managing investor funds?

29 / 30

29. Which type of financial investment offers dividend and capital appreciation as rewards for investors?

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30. Which managed portfolio option follows investor directions in managing funds?

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