CENTRAL UNIVERSITY OF SOUTH BIHAR, GAYA

SCHOOL OF LAW AND GOVERNANCE

PROJECT WORK
INVESTMENT LAW
“INVESTMENT: MEANING, FEATURES AND RISKS ASSOCIATED
WITH IT”

Submitted to Dr. P.K. Das

By- Aadya Sanskar

Ba.Llb(h)

7th semester

cub1413125001

CUSB, Gaya

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 ACKNOWLEDGMENT

During the course of writing this project, I have received the help, encouragement and assistance from my
teacher, colleagues, friends, library staff and other. I am thankful to all of them.

I am very thankful to my Investment Law teacher, Dr. P.K. Das for encouragement and support that he
provided during the preparation of the project.

I am deeply indebted to the works of eminent legal experts and law scholars and other scholars of repute,
whose valuable work has been highly useful in writing this project.

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LITRATURE REVIEW
There exists a large body of literature that provides insight into investment, its objectives,
features and risks associated with it.

BOOKS REFFERED
1. Dr. Avtar Singh, Company Law; Eastern Book Company, 34, Lalbagh, Lucknow – 226
001.
2. Class Notes
3. G.K. Kapoor, Company Law; Taxmann, 59/32, New Rohtak Road, New Delhi-110 005.
4. S.R.Myneni, Laws of Investment and Securities

RESEARCH METHODOLOGY
The method used is doctrinal and descriptive. No data collection is done in this regard and this is
based merely on the descriptive sources.

RESEARCH HYPOTHESIS
This study is based on the hypothesis that A good investment programme is one which is
consistent with the objectives of the investor, i.e., it should have all the advantages of fruitful
investment. Risk is an important component in assessment of the prospects of an investment.
Most investors while making an investment consider less risk as favorable. The lesser the
investment risk, more lucrative is the investment.

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RESEARCH QUESTIONS
Based on this hypothesis the following research questions have been formulated:

 What is an Investment? (meaning and concept)

 What are essential features of investment?
 How risks affect the investment programmes?

LAW JOURNALS & WEBSITES REFFERED

 https://economictimes.indiatimes.com/definition/investment-risk
 https://investmentbank.com/investment-objectives/
 https://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/types-
investment-risks.asp
 https://accountlearning.com/7-essential-features-investment-programme/

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CONTENTS

SR.NO. CHAPTERS PAGE NO.

1. CH.1 INTRODUCTION 06

2. CH.2 INVESTMENT 07

3. CH.3 FEATURES OF INVESTMENT 13

4. CH.4 RISKS ASSOCIATED WITH INVESTMENT 16

5. CH.5 CONCLUSION 15

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CH.1 INTRODUCTION

In the financial industry, there are two concepts that form the basis of most transactional
activities. One is savings and the other is investments. There is a huge overlap between the two
concepts though, it terms of execution.

Investment in terms of financial terms, mean any money that is spent today in the hope of
financial benefits that may be reaped in a future time frame. Any investment is the act of buying
or creating assets with an expectation that the same would yield interest earnings or dividend or
capital appreciation or any other return that is profitable as compared to the money put in
initially. Almost all investments are differentiated from other kinds of transactions based on the
aim of the money spent. Money spent on making investments is primarily with the aim of
obtaining some sort of return in a specific period of time.1

A lot of times people confuse savings with investments. Savings and investment are different
from each other in their approach of utilizing the money involved. While saving may be
understood as a passive way of accumulating wealth, investment can be seen as a more
aggressive way of securing returns. Mostly, under savings, customers avail a savings account and
stash away cash in that account. This cash can be used as and when required by the account
holder.

1
https://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/types-investment-risks.asp

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CH.2 INVESTMENT

An investment is an asset or item that is purchased with the hope that it will generate income or
will appreciate in the future. In an economic sense, an investment is the purchase of goods that
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 will be
sold at a higher price for a profit.2

Investments made in the finance industry can be divided into two distinct types namely,
Traditional and Alternative. Let us look into each of these types one by one and see what
investment categories fall into which type.

1. Traditional Investments

Investing in well-known financial products falls into the category of traditional investments.
These include bonds, shares, real estate etc. These are categories which are quite popular among
investors as active investment strategies to make your money grow. Following are the investment
products that fall under the category of traditional investment.

• Bonds

A Bond can be understood as an IOU which is issued by an issuer (borrower) and to a lender.
Generally, bonds are instruments used by public and private sector enterprises to raise huge sums
of money which any bank is incapable of lending. These bonds are then issued in the public
market by the borrowing entity and are bought by lenders for specific amounts of money.
Thousands of lenders then come together to lend the required amount and the borrowing
organization is able to raise capital for its operational or growth purposes.

However, since money is being lent to the issuer of bonds, there is also an interest component
involved that is paid back to the investor in turn for his/her money. This interest is paid at a
predetermined rate and for a specific period of time. Bonds fall under the category of fixed
2
https://www.bankbazaar.com/investment.html

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income securities since the interest on these can be exactly calculated for the time for which the
bond is held. Bonds fall under the debt category and are therefore, comparatively safer financial
instruments to invest in. However, with all financial tools risk is inversely proportional to returns
and as such the low-risk attribute of this tool makes it a low return instrument as well.

• Stocks

Stocks or equity are shares that are issued by companies and are bought by the general public.
This offers an avenue to companies to raise funds. Stocks entitle a customer ownership of a
company. Shares, stocks and equity all imply the same thing. Shares are one of the most popular
investment avenues in the world. This is because the returns offered by stocks are generally
higher than any other financial instrument. However, to balance out the high return associated
with stocks, the risk associated with these products is also quite high.

Any business may issues different types of shares based on the financial urgency and need. In
exchange for the money, shareholders are issued Stock certificates.

Stocks are mostly divided into two basic types, common stocks and preferred stocks.

• Small Saving Schemes

Small savings is another popular savings tool in the Indian financial market. The name itself
suggests that these tools are meant for saving money in small amounts. The idea behind this
financial tool is to enable the habit of saving in people from almost all economic sections. Some
of the most common small savings tools are Sukanya Samriddhi Scheme, EPF (Employees
Provident Fund), NPS (National Pension Scheme, Kisan Vikas Patra, Personal Provident Fund
(PPF) etc. Almost all small savings schemes are initiated and facilitated by the government so as
to enhance the spread and penetration of savings schemes in the country. Let us look into some
of the most prominent schemes out of these.

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• Mutual Funds

Mutual funds are financial instruments that are professionally managed and that invest money on
behalf of any investor, in different securities. These mutual funds are classified into various types
based on the type of securities that they invest in. Some of the most popular mutual fund types
are balanced funds, stock funds, open-ended funds etc. These funds are classified based on their
percentage allocation in different securities. So, an equity fund invests purely is equity and is a
high risk high return product while a debt fund invests purely in debt and money market
instruments and is hence a low risk low return financial product.

• Fixed Deposits

As the name itself indicates, fixed deposits are financial instruments that are one of the oldest
and safest ways to save money. These are not necessarily active investment tools, but are rather a
passive way to save and earn returns. A fixed amount of money is kept aside with a financial
institution for a fixed number of days or months or years. In turn, interest is earned on this
money. The rate of interest differs with the deposit tenure and also with the banking entity.

Similar to fixed deposit is the concept of recurring deposit. However, the only point of difference
in the two investment tools is that while a lump-sum amount needs to be fixed in case of fixed
deposit, a smaller amount needs to be deposited at regular intervals in case of a recurring deposit.
Hence, customers who do not have a large chunk of money to fix in a single go can opt for a
recurring deposit wherein money is usually deposited monthly for a specific deposit tenure. The
rate of interest earned on recurring deposit is similar and comparable to that earned on fixed
deposit.

• Real Estate

Property rates are soaring with every passing day which has made real estate a hot investment
avenue for investors. Buying, selling and leasing of property offers substantial returns to
investors. Appreciation of property makes real estate a good investment tool. With urbanization
gaining ground rapidly, real estate prices in certain major cities like Mumbai, Bangalore, New
Delhi, are skyrocketing. This has made these places hot hubs for real estate investors. Most

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investors take loans from banks to purchase real estate and then lease out or sell the same
property to enjoy returns offered due to appreciation in price of the property.

2. Alternative Investments

Alternative Investments are those that are not regular investments like stocks, bonds etc. These
are investments made in order to acquire jewelry, precious metals etc. which are expected to
yield returns in future. Hedge funds, some real estate types, venture capital and derivatives also
form a part of alternative investment. Alternative investments are so called due to their non-
traditional as well as complex nature. Also, another distinguishing feature of alternative
investments is relatively low liquidity and well as very high minimum investment limits.

While a common investor may not access alternative investments like hedge funds or derivatives
due to their complex nature, others like gold and real estate are available to even the common
man. Let us look into some of the most prominent alternative investment tools known to
investors.

• Hedge Funds

These can be understood as a professionally managed private investment company or partnership

structure. Techniques to manage the fund can be those that are not commonly allowed for SEC
regulated companies. Hedge funds invest in both financial derivatives and/or publicly traded
securities. These are popular as an alternative investment tool owing to their high leverage and
high returns. However, they are characterized by high fees as well as low liquidity. It is seen that
managers of hedge funds generally have a personal stake in the fund.

• Private Equity

Private equity is trading in shares of an operating company that is not publicly listed and whose
shares are not available on the stock market. Institutional investors employ various strategies to
indulge in private equity trading. Private equity is popular since it offers diversification of
financial portfolio by allowing investment in avenues that are not tightly coupled to normal
investments.

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• Venture Capital

Venture Capital is one of the most popular investment strategies currently being deployed by
investors in the Indian start-up scene. The idea behind this investment strategy is to invest
substantial capital in a budding company in return for stocks of the same. This is done with
companies who are either in their initiation phase or in their growth phase. Venture capitalism is
generally based on ideas that find substance with the investors or any new technology that the
investors feel might take the market by storm in future.3

• Managed Futures

This type alternative investment involves managers using futures also as part of their investment
portfolio. Managed futures are a great tool to offer portfolio diversification and therefore are a
great alternative to minimize risk and maximize returns. In general, a managed futures account
will have sufficient exposure to different markets like energy, agriculture, commodities, currency
etc.

• Structured Products

Structured products are alternative investment tools that generally combine two or more financial
instruments to make a packaged investment strategy in a single product. Most often, derivatives
are combined with securities or with other derivatives. Structured products have a fixed maturity
date like bonds. These offer a convenient strategy to implement a complex investment strategy
across various financial products.

• Collectible items

Collecting artifacts that have substantial value and those that have historical and artistic
significance is one of the most difficult types of alternative investments. This requires knowledge
of the article that you are purchasing. Mostly, collectibles like stamps, jewelry, boats, planes, art
works etc. tend to appreciate in value and are considered good and profitable assets to own. The

3
G.K. Kapoor, Company Law; Taxmann

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value of artifacts is generally expected to appreciate and keep pace with inflation and hence
collectibles make a good form of alternative investment.4

There are a few more alternative investment instruments available in the financial world.
However, their use is limited since these are more complex products and hence not considered by
the common investor. Seasoned investors and professional investors tend to consider these
alternative investment strategies to increase wealth.

4
Dr.Avtar Singh, Company Law; Eastern Book Company

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CH.3 ESSENTIAL FEATURES OF AN INVESTMENT

A good Investment Programme is one which is consistent with the objectives of the investor, i.e.,
it should have all the advantages of fruitful investment. The following are the essential
ingredients of a good investment programme.

Essential features of an Investment Programme

1. Safety of principal

Safety of funds invested is one of the essential ingredients of a good investment programme.
Safety of principal signifies protection against any possible loss under the changing conditions.
Safety of principal can be achieved through a careful review of economic and industrial trends
before choosing the type of investment. It is clear that no one can make a forecast of future
economic conditions with utmost precision. To safeguard against certain errors that may creep in
while making an investment decision, extensive diversification is suggested.

The main objective of diversification is the reduction of risk in the loss of capital and income. A
diversified portfolio is less risky than holding a single portfolio.

Diversification refers to an assorted approach to investment commitments. Diversification may

be of two types, namely,

i. Vertical diversification; and

ii. Horizontal diversification.

Under vertical diversification, securities of various companies engaged in different stages of

production (from raw material to finished products) are chosen for investment.

On the contrary, horizontal diversification means making investment in those securities of the
companies that are engaged in the same stage of production.

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Apart from the above classification, securities may be classified into bonds and shares which
may in turn be reclassified according to their types. Further, securities can also be classified
according to due date of interest, etc. However, the simplest diversification is holding different
types of securities with reasonable concentration in each.

2. Liquidity and Collateral value

A liquid investment is one which can be converted into cash immediately without monetary loss.
Liquid investments help investors meet emergencies. Stocks are easily marketable only when
they provide adequate return through dividends and capital appreciation. Portfolio of liquid
investments enables the investors to raise funds through the sale of liquid securities or borrowing
by offering them as collateral security. The investor invests in high grade and readily saleable
investments in order to ensure their liquidity and collateral value.5

3. Stable income

Investors invest their funds in such assets that provide stable income. Regularity of income is
consistent with a good investment programme. The income should not only be stable but also
adequate as well.

4. Capital growth

One of the important principles of investment is capital appreciation. A company flourishes

when the industry to which it belongs is sound. So, the investors, by recognizing the connection
between industry growth and capital appreciation should invest in growth stocks. In short, right
issue in the right industry should be bought at the right time.

5. Tax implications

While planning an investment programme, the tax implications related to it must be seriously
considered. In particular, the amount of income an investment provides and the burden of income
tax on that income should be given a serious thought. Investors in small income brackets intend
to maximize the cash returns on their investments and hence they are hesitant to take excessive
5
Investment law, S.R.Myneni

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risks. On the contrary, investors who are not particular about cash income do not consider tax
implications seriously.

6. Stability of Purchasing Power

Investment is the employment of funds with the objective of earning income or capital
appreciation. In other words, current funds are sacrificed with the aim of receiving larger
amounts of future funds. So, the investor should consider the purchasing power of future funds.
In order to maintain the stability of purchasing power, the investor should analyze the expected
price level inflation and the possibilities of gains and losses in the investment available to them.

7. Legality

The investor should invest only in such assets which are approved by law. Illegal securities will
land the investor in trouble. Apart from being satisfied with the legality of investment, the
investor should be free from management of securities. In case of investments in Unit Trust of
India and mutual funds of Life Insurance Corporation, the management of funds is left to the
care of a competent body. It will diversify the pooled funds according to the principles of safety,
liquidity and stability.

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CH.4 RISKS ASSOCIATED WITH INVESTMENT

Investment risk can be defined as the probability or likelihood of occurrence of losses relative to
the expected return on any particular investment. Stating simply, it is a measure of the level of
uncertainty of achieving the returns as per the expectations of the investor. It is the extent of
unexpected results to be realized.6

 Interest Rate Risk

Interest rate risk is the possibility that a fixed-rate debt instrument will decline in value as a
result of a rise in interest rates. Whenever investors buy securities that offer a fixed rate of return,
they are exposing themselves to interest rate risk. This is true for bonds and also for preferred
stocks.

 Business Risk

Business risk is the measure of risk associated with a particular security. It is also known as
unsystematic risk and refers to the risk associated with a specific issuer of a security. Generally
speaking, all businesses in the same industry have similar types of business risk. But used more
specifically, business risk refers to the possibility that the issuer of a stock or a bond may go
bankrupt or unable to pay the interest or principal in the case of bonds. A common way to avoid
unsystematic risk is to diversify - that is, to buy mutual funds, which hold the securities of many
different companies.

 Credit Risk

This refers to the possibility that a particular bond issuer will not be able to make expected
interest rate payments and/or principal repayment. Typically, the higher the credit risk, the higher
the interest rate on the bond.

6
http://www.tflguide.com/types-of-risk/

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  Taxability Risk

This applies to municipal bond offerings, and refers to the risk that a security that was issued
with tax-exempt status could potentially lose that status prior to maturity. Since municipal bonds
carry a lower interest rate than fully taxable bonds, the bond holders would end up with a lower
after-tax yield than originally planned.

 Call Risk

Call risk is specific to bond issues and refers to the possibility that a debt security will be called
prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below,
because the bondholder must find an investment that provides the same level of income for equal
risk. Call risk is most prevalent when interest rates are falling, as companies trying to save
money will usually redeem bond issues with higher coupons and replace them on the bond
market with issues with lower interest rates. In a declining interest rate environment, the investor
is usually forced to take on more risk in order to replace the same income stream.

 Inflationary Risk

Also known as purchasing power risk, inflationary risk is the chance that the value of an asset or
income will be eroded as inflation shrinks the value of a country's currency. Put another way, it
is the risk that future inflation will cause the purchasing power of cash flow from an investment
to decline. The best way to fight this type of risk is through appreciable investments, such as
stocks or convertible bonds, which have a growth component that stays ahead of inflation over
the long term.

 Liquidity Risk

Liquidity risk refers to the possibility that an investor may not be able to buy or sell an
investment as and when desired or in sufficient quantities because opportunities are limited. A
good example of liquidity risk is selling real estate. In most cases, it will be difficult to sell a
property at any given moment should the need arise, unlike government securities or blue chip
stocks.

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  Market Risk

Market risk, also called systematic risk, is a risk that will affect all securities in the same manner.
In other words, it is caused by some factor that cannot be controlled by diversification. This is an
important point to consider when you are recommending mutual funds, which are appealing to
investors in large part because they are a quick way to diversify. You must always ask yourself
what kind of diversification your client needs.

 Reinvestment Risk

In a declining interest rate environment, bondholders who have bonds coming due or being
called face the difficult task of investing the proceeds in bond issues with equal or greater
interest rates than the redeemed bonds. As a result, they are often forced to purchase securities
that do not provide the same level of income, unless they take on more credit or market risk and
buy bonds with lower credit ratings. This situation is known as reinvestment risk: it is the risk
that falling interest rates will lead to a decline in cash flow from an investment when its principal
and interest payments are reinvested at lower rates.

 Social/Political/Legislative Risk

Risk associated with the possibility of nationalization, unfavorable government action or social
changes resulting in a loss of value is called social or political risk. Because the U.S. Congress
has the power to change laws affecting securities, any ruling that results in adverse consequences
is also known as legislative risk.

 Currency/Exchange Rate Risk

Currency or exchange rate risk is a form of risk that arises from the change in price of one
currency against another. The constant fluctuations in the foreign currency in which an
investment is denominated vis-à-vis one's home currency may add risk to the value of a security.

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CH.5 CONCLUSION

Investment in terms of financial terms, mean any money that is spent today in the hope of
financial benefits that may be reaped in a future time frame. Any investment is the act of buying
or creating assets with an expectation that the same would yield interest earnings or dividend or
capital appreciation or any other return that is profitable as compared to the money put in
initially.

Almost all investments are differentiated from other kinds of transactions based on the aim of the
money spent. Money spent on making investments is primarily with the aim of obtaining some
sort of return in a specific period of time.

Risk is an important component in assessment of the prospects of an investment. Most investors

while making an investment consider less risk as favorable. The lesser the investment risk, more
lucrative is the investment. However, the thumb rule is the higher the risk, the better the return.

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Remarks

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