Unit 1: Investment fundamentals
Security Analysis & Portfolio Management notes · PTU syllabus (BCOP 611-18)
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Unit summary
Investing means committing money today for returns tomorrow — but not every bet is an investment. This unit covers the meaning, nature, objectives and process of investment, investment vs speculation vs gambling, investment avenues, value and growth investing, and individual and institutional investors.
After this unit you can
- Define investment and explain its nature, objectives and process
- Distinguish investment, speculation and gambling
- Describe the investment avenues available in India
- Compare value and growth investing and individual and institutional investors
PTU syllabus topics
- Meaning
- nature
- objectives and process of investment
- investment vs. speculation vs. gambling
- investment avenues
- value investing and growth investing
- individual and institutional investors
Investment
Long term
Analysis of fundamentals
Speculation
Short term
Price movements, higher risk
Gambling
Very short
Chance
Topic 1
Meaning, nature and objectives of investment
Investment is the commitment of funds to one or more assets that will be held over some future period in anticipation of a return (Sharpe). In finance, it means buying financial assets (shares, bonds) or real assets (property, gold).
- Nature: sacrifice of current consumption, return expected, risk involved, time element, liquidity varies.
Return
Income and capital appreciation
Safety
Protection of principal
Liquidity
Easy conversion into cash
Hedge against inflation
Real returns above inflation
Other objectives: tax benefits, marketability, regular income, wealth creation for goals.
Topic 2
The investment process
- 1Set investment policy
Objectives, constraints, investible funds, risk tolerance
- 2Security analysis
Fundamental and technical analysis to find mispriced securities
- 3Portfolio construction
Asset allocation, selection, diversification
- 4Portfolio revision
Rebalance as conditions change
- 5Portfolio evaluation
Measure risk-adjusted performance
Topic 3
Investment vs speculation vs gambling
Time horizon
Long term
Short term
Risk
Moderate, calculated
High
Return expected
Moderate, steady (income + growth)
High, from price changes
Basis of decision
Fundamentals
Market sentiment, tips, technical patterns
Use of funds
Own funds
Often borrowed (leverage)
- Gambling: outcome depends on chance (lottery, betting) — no analysis, negative expected return, risk created artificially for entertainment.
Exam tip
Graham's definition: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
Topic 4
Investment avenues
Financial — marketable
Equity shares, bonds and debentures, mutual funds, ETFs, government securities, REITs and InvITs
Financial — non-marketable
Bank deposits, post office schemes, PPF, NSC, company FDs, EPF
Insurance and pension
Life insurance, ULIPs, NPS, annuities
Real assets
Real estate, gold and silver (physical, ETFs), art and collectibles
Derivatives and alternatives
Futures, options, commodities, AIFs, crypto assets (high risk, unregulated as securities)
| Avenue | Return | Risk | Liquidity |
|---|---|---|---|
| Equity shares | High | High | High (listed) |
| Bonds/debentures | Moderate | Low–moderate | Moderate |
| Bank FDs | Low | Very low | Moderate |
| PPF | Moderate (tax-free) | Very low | Low (15-year lock-in) |
| Real estate | Moderate–high | Moderate | Low |
| Gold | Moderate | Moderate | High |
Topic 5
Value vs growth investing; types of investors
Idea
Buy undervalued stocks below intrinsic value
Buy companies with high expected earnings growth
Indicators
Low P/E, low P/B, high dividend yield
High P/E, high revenue and earnings growth
Proponents
Benjamin Graham, Warren Buffett
Philip Fisher, Peter Lynch (GARP)
Risk
Value traps
Overpaying for growth
Who
Individuals, HNIs
Mutual funds, insurers, pension funds, banks, FPIs
Size
Small
Very large
Expertise
Limited
Professional research teams
Influence on prices
Low individually
High
Regulation
Investor protection focus
Prudential and disclosure norms
- Institutional investors in India: FPIs (foreign portfolio investors) and DIIs (mutual funds, LIC, EPFO, insurers) — DIIs have become a major counterweight to FPIs thanks to monthly SIP inflows.
Key terms
- Investment
- Commitment of funds now for expected future return
- Speculation
- Short-term high-risk dealing for gains from price changes
- Investment avenue
- Type of asset in which funds can be invested
- Value investing
- Buying securities below their intrinsic value
- Institutional investor
- Organisation investing large pooled funds
Quick revision
- Objectives: return, safety, liquidity, inflation hedge.
- Process: policy → analysis → construction → revision → evaluation.
- Investment vs speculation vs gambling.
- Avenues: marketable, non-marketable, insurance, real assets, derivatives.
- Value vs growth; retail vs institutional (FPIs, DIIs).
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define investment.
- Q2.State the objectives of investment.
- Q3.Distinguish investment and speculation.
- Q4.What is value investing?
- Q5.Name four non-marketable financial assets.
- Q6.Who are institutional investors?
Long-answer questions
- Q1.Explain the meaning, objectives and process of investment.
- Q2.Distinguish investment, speculation and gambling.
- Q3.Discuss the investment avenues available in India.
- Q4.Compare value and growth investing and individual and institutional investors.
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