Art of Investment

8/3/2019 Art of Investment

1/17

The Art of Investment

A Guide to Manage Savings

Authored by: R. Ajay Vishwanath


2/17

Investment. The term very often used by financial gurus,

which you hear almost every day. But what is Investment?

Or rather what is Investing? Or must the question be putas How to invest wisely?

To answer the last question, first you need to know what

Investment is. Investment is seen in everyday life. It is

something similar to use your resources wisely, with high

returns, low risk in the safest manner possible so that you

are prepared for any eventuality in future. Let me explain

this in the form of a story.

There was a boy called David, a shepherd. Daily he would

lead his sheep to the grasslands to graze and he would

watch over them. He would be sitting on top of a tree or a

small hill so that he can overlook them.

One day, he was so bored that he decided to play a prank

on the villagers nearby, and he began shouting suddenlyWOLF! WOLF! Somebody help me!! The wolf is eating

away my sheep!! The villagers came running with sticks

so that they can save his sheep only to find his sheep

intact and he laughing at them. The villagers warned David

not to do so again. David thought Man, they are boring

people, never laugh at jokes.

After a few days, David again shouted for help. Thevillagers came running, and he was laughing at them

again. The villagers gave him a last warning and went

away.

The very next day, a pack of wolves attacked his herd of

sheep and when he called for help no one turned up and

finally he lost all his sheep.


3/17

The moral of the story is that he invested the trust the

villagers had on him on pranks that gave him fun in the

short term. But in the long run, he suffered losses.

The same way, you must spend your money in such a way

that it helps you when needed and keeps you going for a

very long time. Let me present another example, a boy is

given ten rupees, he has a choice to either buy ice cream

and enjoy it for the next five minutes, or he can purchase a

pen and use it for months or even years. In the former, he

is using money to blow up for temporary enjoyment whilst

in the case of the latter, the money used in obtaining

service for a long time.

According to www.investopedia.com , investment is An

asset or item that is purchased with the hope that it will

generate income or appreciate in the future. In an

economic sense, an investment is the purchase of goodsthat are not consumed today but are used in the future to

create wealth. In finance, an investment is a monetary

asset purchased with the idea that the asset will provide

income in the future or appreciate and be sold at a higher

price.

According to www.businessdictionary.com , Money

committed or property acquired for future income.

Thus summing it up, Investment is the art of savings that

gives you returns for a more comfortable future.

When invested wisely, you dont need to bother about

inflation hitting hard on your hard earned money. A wise

investment will take care of your future for the rest of your

life.
http://www.investopedia.com/http://www.businessdictionary.com/http://www.businessdictionary.com/http://www.investopedia.com/


4/17

Now that you know what investment is, let me tell you

about the most successful investor to date, Mr Warren

Edward Buffett, an American investor, born in 1930 in

Omaha, Nebraska state of the USA.

As a child, he showed interest in making and saving

money. So he began delivering newspapers, and purchased

his first shares in the stock market; three shares of Cities

Service for himself and three for his sister. He worked as a

financial analyst and stock broker initially and began tosave and invest in the stock markets gaining partnerships

in firms and gradually became a billionaire when the value

of his stocks & companies grew exponentially.

So the first step to start investing is saving.

The immediate question in your mind, how do I save? ormy finances are tight, how can I start saving? Savings

are closely related to purchase decisions one makes.

When you want to purchase anything, just answer the

following questions.

Do I need really it and now?; Is there another

alternative? Is it available at reduced cost?, can I

postpone buying?


5/17

Once you answered the above questions, you will find that

you begin to save more than usual.

Next comes the question of diversification.

Diversification

Do not put all eggs

in one basket

Diversify your investments. It will minimize losses and

risks. Never invest all your money in one type of

investment. If the type of investment you make goes

wrong, you will have lost all your money. To safeguard

your investment, you diversify and invest in various options

so that even if one of the investment options fails, the

other investment options you invested in may offset the

loss.

Reliance Industries before Diversification:


6/17

Source: http://www.ril.com/

In 1980 Reliance Industries had Rs.207.67 Cr. as sales and

Rs.11.2 cr. net profit.

The above data was prior to diversification where Reliance

was concentrating only on textile industries. Post 1980s, it

began to diversify.

Reliance Industries after Diversification:
http://www.ril.com/http://www.ril.com/


7/17

Source: http://www.ril.com/

RIL after diversification, in a span of 10 years from 1980,

its sales grew from Rs.207.67 cr. to a whopping Rs.2098.34

cr. (i.e. about 10 times). Net profit also grew similarly fromRs.11.2 cr. to Rs.125.55 cr. (about10 times) in the financial

year 1990-91.

Concluding what RIL did, initially they put all their

investment in one basket i.e. textile industries. Later they

diversified into other fields like petroleum, petrochemicals

etc. Seeing the benefits of diversification which also led to

substantial increase in volumes and sales, they furtherdiversified into other fields like retail, jewellery, telecom,

infrastructure, power etc. for more growth. It generally

becomes easy to manage risks when one sector incurs

losses, anothers profits covers the loss.

In much the same way, a normal investor must also

diversify his investment so as not to lose the entire

investment and ensure his investment grows at a balancedrate. Diversification does not guarantee returns but helps
http://www.ril.com/http://www.ril.com/


8/17

you to control extreme losses. It again depends on how you

diversify your investments.

Investment Choices for Diversification

You can diversify your investments under the following

heads:

Shares and Securities

The capital of a business is divided into multiple shares, thetotal of which must be stated at the time of businessformation. Given the total amount of money invested in thebusiness, a share has a certain declared face value,commonly known as the par value of a share. The par

value is the de minimis (minimum) amount of money that abusiness may issue and sell shares and it is the valuerepresented as capital in the accounting of the business.However, shares may not have an associated par value atall. Such stock is often called non-par stock, either issuedat premium (more than face value) or discount (less thanface value). Shares represent a fraction of ownership in abusiness. A business may declare different types of shares,each having distinctive ownership rules, privileges, or facevalues.

Ownership of shares is documented by issuance of a stockcertificate. A stock certificate is a legal document thatspecifies the amount of shares owned by the shareholder,and other specifics of the shares, such as the par value, ifany, or the class of the shares. But these days it iselectronic and shares are credited or debited into onesDemat account created before starting to trade or invest.


9/17

(One of the earliest Share Certificates)Equity Investments

An equity investment generally refers to the buying and

holding of shares of stock on a stock market by individuals

and firms in anticipation of income from

dividends and capital gains, as the value of the stock rises.

Equity shares can be purchased in IPO (Initial Public Offer),FPO (Follow on Public Offer) or normally from other

investors in the open stock market.

An equity share holder will have voting rights and any

profits by the firm will be enjoyed by him in the form of

dividends or an increase in the value of the shares of the

firm, where dividends are not fixed and guaranteed. In case

of losses, he will lose his investment in the firm and theshare value of firm will fall. In case a firm is being

liquidated, the firm is not under the obligation to pay the

equity share holders their investment.

Debentures

A debenture is a document that either creates a debt or

acknowledges it. In corporate finance, the term is used for


10/17

a medium to long-term debt instrument used by large

companies to borrow money. In some countries the term is

used interchangeably with bond, loan stock or note. A

debenture is thus like a certificate of loan or a loan bond

evidencing the fact that the company is liable to pay a

specified amount with interest and although the money

raised by the debentures becomes a part of the company's

capital structure, it does not become equity share capital.

Debentures are generally freely transferable by the

debenture holder. Debenture holders have no rights to vote

in the company's general meetings of shareholders, but

they may have separate meetings or votes e.g. on changes

to the rights attached to the debentures. The interest paid

to them is a charge against profit in the

company's financial statements.

They get a fixed rate of interest called dividend irrespective

of the firms financial position; the firm also at times gives

option to the debenture holders to convert their

debentures into equity shares.

The firm, when liquidated, must pay back the debenture

holders their investment.

Preference shares

Preference shares are legally shares, but they are very

different from ordinary shares. The economic effect of

preference share is more like that of bond.

Like convertibles, they are regarded as hybrids of debt and

equity:


11/17

Dividends on preference shares have to be paid before

dividends on ordinary (equity) shares.

Dividends on ordinary shares will not be paid unless

the fixed rate of dividend for preference shares is paid

first.

Dividends are fixed like bond coupons, although there

are usually provisions to not pay, or delay payments.

In the case of cumulative preference shares, if the

dividend is not paid in full, the unpaid amount is

added to the next dividend due.

Preference dividends are fixed, so they do notparticipate in increases (or decreases) in profits as

ordinary shareholders do.

The firm also at times gives option to the preference

shareholders to convert their preference shares into

equity shares.

Preference shareholders have a higher priority if a

company is liquidated than ordinary shareholders,

although a lower priority than debt holders.

ETF

An exchange-traded fund (ETF) is an investment fund

traded on stock exchanges, much like stocks. An ETF holdsassets such as stocks, commodities, or bonds, and trades

close to its net asset value over the course of the trading

day. Most ETFs track an index, such as the S&P 500 or

MSCI EAFE.

So ETF is a security that tracks an index, commodity or a

basket of assets like an index fund. But trades like a stock

on an exchange. ETFs experience price changes


12/17

throughout the day as they are bought and sold.

Because it trades like a stock, an ETF does not have its net

asset value (NAV) calculated every day like a mutual fund

does.

By owning an ETF, you get the diversification of an index

fund as well as the ability to sell short, buy on margin and

purchase as little as one share. Another advantage is that

the expense ratios for most ETFs are lower than those of

the average mutual fund. When buying and selling ETFs,you have to pay the same commission to your broker that

you'd pay on any regular order.

One of the most widely known ETFs is called the Spider

(SPDR), which tracks the S&P 500 index and trades under

the symbol SPY.

Real Estate

Real Estate is taken to mean "Property consisting of land

and the buildings on it, along with its natural resources

such as crops, minerals, or water; immovable property of

this nature; an interest vested in this; (also) an item of real

property; (more generally) buildings or housing in general.

Also: the business of real estate; the profession of buying,selling, or renting land, buildings, or housing."

Real Estate is the purchase and sale of, and investment in

properties like land and buildings. Investment in real estate

must be done with great care and timing. Wrong decisions

may lead you to debt trap or the property you purchase

may have no value.

The different investment areas in real estate are:-


13/17

Land

Land is a good investment option when investing in longterm. Say for about ten to fifteen years. Its value can

multiply manifold. It is cheaply available on the outskirts of

the city, and when the town planning commission decides

to expand the city in the direction of your land, its value

increases manifold. This type of investment is generally

recommended to those who have spare cash to invest and

who do not expect any immediate returns.

Here a few precautions are imperative. One has to be

circumspect in selecting the location / ensuring its clear

title thru a legal opinion / pricing which are the most

important aspects. As a precaution, one can take the

local authoritys approval for building a small room, take

power and water connections, build a compound wall to

prevent unauthorised encroachments which are the bane

of such investments.

Commercial Properties

Commercial properties include shops and office spaces that

can either be used to setup shops by the owner or let outfor rent. Commercial properties cost more than residential

properties due to its location, size, availability and the type

of business determining the level of income earned from

the property.

Commercial properties can fetch returns in the region of 6

to 12 % p.a.


14/17

Flats

Flats are residential properties that will give you returnsdepending on the location, demand and features.

Typically, one gets return between 3-5 % as rent.

Generally one gets lesser return on investment on new

properties as the costs of new flats are higher. On the

other hand second hand properties cost less and the rental

return will be higher. There is a possibility of substantially

increasing the return to 8 % (almost doubling the RoI) by

simply furnishing the property and letting out by spending

some additional money. This is an untapped market and

its potential is not known to many.

Deposits

There are many types of deposits where you can deposit

your savings and let it grow.

A simple savings account with a bank is a type of deposit. It

earns interest on your simple savings. The other types of

deposits are:

Fixed Deposit (FD)

In a fixed deposit, you deposit your savings in the bank for

a period of time and collect it with interest after maturity.

The duration of the deposit is as short as a year or even

lesser to as long as a decade. The rate of interest depends

on the duration you invest. The longer the period, higher

will be the rate of interest as a thumb rule. This is a very

safe option to invest. However, in the event of

unfortunate closure of the bank for any reason, only a


15/17

maximum of Rs.100000/- will be paid to you as per RBI

rules.

Recurring Deposit (RD)

This is the type of fixed deposit where the investor must

keep depositing a fixed amount regularly every month into

the account.

Provident Fund

Provident fund is an avenue where an employee

contributes a part of his/her monthly salary (typically 8.33

% of his basic pay) to the fund which is paid at the time of

his retirement generally. This will come in handy for a

major expense like purchasing a house / clearing its

liability, childrens higher education / marriage / retirement

nest. Contributions are exempt from tax. In most cases

even the employer contributes a matching sum to the fund.

The employee can if he chooses can increase his own

contribution substantially which will yield a substantial

corpus at the time of his retirement. Presently, the

contributions attract 9.5 % interest p.a.

Mutual Fund

A totally market dependant fund where people with small

savings contribute to an Asset Management Company to


16/17

invest in the stock market. Any profit or loss on the

investment will be shared proportionately by the investors.

The firm will charge a nominal amount for rendering itsservices and undertakes to invest the amount wisely. But

the risks and returns are totally market dependant. So

there is no guarantee of safety of the investment or its

return. But this will have lower risk as compared to

investing directly in the market. It is better to check the

tract record of the AMC and invest small amount in this

avenue.

Gold & Silver

The rate of increase in the value of gold and silver has

been phenomenal in recent times. One can invest in gold in

various means as follows:-

One can buy gold biscuits or jewellery from the openmarket. But it is risky due to vulnerability to theft,

purity issues, cost issues like making / wastage

charges and bulky nature. If keeping in bank locker,

its annual rental charges are to be considered.

One can purchase gold in Demat form online from

Exchange Traded Funds. There are quite a few ETFs in

the market like UTI Gold, Kotak Gold, Goldbees, SBIGold etc. who physically buy the metal and its value is

distributed to investors in proportion to their

investment. The product here is pure, safe,

transparent and risk free, but dependent on market

conditions. On the flip side, you will not get to see the

metal physically as it is in Demat form.


17/17

However, if one analyses, silver has given far better returns

than gold in recent times. However, there are no ETFs

available to take the opportunity.

Worry not. One can invest in E-silver in 100 grams lots

which has recently been launched by National Spot

Exchange Limited. Rates are transparently available most

of the time and one can literally choose when to invest. E-

Gold is also available here. One can even invest in 1 gram

of gold!!! And seek physical delivery too. Here also one

can buy and sell the metals just like one does investments

in shares. One must have a Demat account for this type of

investment.

The Experience

My dad is a retired government employee and yet his

current income is more than his income when he was a

government employee.

How?

Because, he invested his savings wisely.

Documents

Art of Investment