The risk or variation in return of a security is caused by two types of factors. The first type of factors will affect the return of almost all securities in the market. Examples of such sources of risks are changes in the interest rates and inflation of the economy, movement of stock market index and exchange rate movement. The risk caused by such factors is known as systematic risk. Apart from systematic risk, the variation in return of a security is also caused by some other factors which are specific to a security, like a strike in a company or the caliber of the management of a company. The risk caused by such factors is known as unsystematic or specific risk. The unsystematic risk of a security can be diversified away by combining different securities into a portfolio. But systematic risk cannot be diversified away by the construction of a Continue reading
Investment Terms
Socially Responsible Investment (SRI)
Socially responsible investment (SRI) can be defined broadly as an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. SRI funds aim to integrate personal, social and environmental concerns with financial considerations, their objective is to increase investors’ wealth while ensuring that the selected companies have a positive impact on people and the Planet. Often called ethical investments or sustainable investments, this type of investment has become increasingly popular in recent years. The early stages of the SRI movement can be traced back to the nineteenth century, especially amongst religious movements such as the Quakers and Methodists. Specifically, these groups excluded investments that would go against their beliefs. Such non-financial ‘exclusionary’ behavior in investment choice became a highlight in 1960s during the Vietnam War, where funds like the PAX World Fund was set up with a mission Continue reading
Treasury Bills and Inflation Control
Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bonds issued by the RBI Treasury. These securities were first issued in 1997. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation. TIPS are currently offered in 5-year, 7-year, 10-year and 20-year maturities. 30-year TIPS are no longer offered. In addition to their value for a borrower who desires protection against inflation, TIPS can also be a useful information source for policy makers: the interest-rate differential between TIPS and conventional Treasury bonds is what borrowers are willing to give up in order to avoid inflation risk. Therefore, changes in this differential are usually taken to indicate that market expectations about inflation over the term of the bonds have changed. The interest payments Continue reading
Mutual Fund Prospectus
A mutual fund prospectus is an offer document issued at the time of new issue of mutual funds, as an invitation to the public to subscribe to the units of a particular scheme. It contains the key information about the terms, conditions and the features of the mutual fund schemes and the application form. All mutual funds are required to give information about their schemes as per the format of the offer document prescribed by SEBI. Everyone agrees that the prospectus is the single best source of information about a mutual fund, yet as many of mutual fund investors do not use this critical document when investing their savings and retirement assets. The reason being the prospectus contains more information and is full of detailed information and uses complex terminology. As the minimum, an understanding of the following important aspects is necessary: Highlights of the Scheme: The main features of Continue reading
Defensive and Aggressive Securities
Defensive securities are kind of securities that exhibits less volatility than the market as a whole (i.e., its BETA is less than 1.0), providing lower, but more stable, returns. Investors often acquire defensive securities during periods of financial turmoil or uncertainty. Defensive securities tend to remain more stable in value than the overall market, especially when prices in general are falling. In times of market downturn, investors tend to seek defensive securities to provide a steady rate of return, or at least to lose less money than the market as a whole. Examples include stocks in utility companies and the health care industry. Defensive securities include stocks in companies whose products or services are always in demand and are not as price-sensitive to changes in the economy as other stocks. Aggressive in finance means relating to an investment or approach to investing that seeks above-average returns by taking above-average risks. Continue reading
Investment – Meaning, Definition and Types
What is Investment? Investment is the activity, which is made with the objective of earning some sort of positive returns in the future. It is the commitment of the funds to earn future returns and it involves sacrificing the present investment for the future return. Every person makes the investment so that the funds he has increases as keeping cash with himself is not going to help as it will not generate any returns and also with the passage of time the time value of the money will come down. As the inflation will rise the purchasing power of the money will come down and this will result that the investor who does not invest will become more poor as he will not have any funds whose value have been increased. Thus every person whether he is a businessman or a common man will make the investment with the objective Continue reading