Investment activity involves creation of assets or exchange of assets with profit motive. Investment in safe or risky assets with a view to earning some gain over a given period of time is called as financial investment and such assets are called financial assets. Risk in the field of investment management, refers to possibility of incidence of financial loss.

The degree of risk varies depending on the type of investment asset chosen. An investment programme should consist of safety of principal, liquidity, income stability, adequate income, purchasing power stability, appreciation, legality and transferability. Various investment avenues like equity shares, preference shares, debentures, bonds are available with different degrees of risk and return. A trade off between risk and return is necessary for better investment management firms.

FINANCIAL MARKETS CAPITAL MARKET INSTRUMENT

All the business firms viz. corporate, partnership firms, single proprietor firms etc. obtain funds from various sources. These sources may be broadly classified into share capital and debts. Since equity shares do not mature, they are a permanent source of funds. Equity shareholders enjoy an unlimited participation in the firm s earnings and are entitled to vote at the typical shareholders meeting. Equity dividends are paid to the shareholders out of after tax profits. Preference shares enjoy certain types of preferential treatment, which are not accorded to the company s equity shares.

They occupy a position similar to that of a limited partner in a general preference in the distribution of assets in the event of liquidation of the business with respect to distribution of earnings. Broadly there are two categories of preference shares viz. cumulative and non-cumulative preference shares. Debt or debenture is a financing instrument that has a contractual claim on the cash flows of a firm, creates tax deductible expenses, has a fixed life, is a charge against operating profits and has priority in the matter of repayment in case of liquidation, debenture holders are entitled to a pre-determined and agreed interest amount and redemption of principal amount. The debt instruments investment management firms can be tailor made to suit the requirements of the investors like, secured and unsecured, convertible, debentures with equity and tradable warrants etc. Mutual funds are collective savings and investment vehicles where savings of small and sometimes bid investors are pooled together to invest for their mutual benefit and returns distributed proportionately. Pooling of monies ensures that small investors get the benefit of advice and expertise that is normally available only to very large investors.

EMPLOYEES STOCK OPTION PLANS (ESCOPs)

Employee stock option plan (ESOP) is an employee benefit plan which makes the employees of company owners of stock in that company. Most companies, both domestic and worldwide, are utilizing this scheme as an essential tool to rewardand retains their employees. Internationally many companies use ESOPs as a technique of corporate finance for a variety of purposes to finance expansion, make an acquisition, spin off a division, take a company private, and so on.

MUTUAL FUNDS

Mutual fund is an investment management firms scheme by which the resources pooled from different investors are invested in securities of different companies. The main objective of mutual funds is to reduce risk and this is achieved by investing funds by diversification of portfolio. The securities are spread across a wide cross section of industries and sectors, which reduces risk since all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

ROLLING SETTLEMENT

A rolling settlement is one in which trades outstanding at the end of the day have to be settled at the end of the settlement period. Internationally, most developed countries follow the rolling settlement system. For instance, both the US and the UK follow a rolling settlement (T+3) system and the German stock exchanges follow T+2 settlement cycle.

MONEY MANAGEMENT

The process of budgeting, saving, investing, spending or otherwise in overseeing the cash usage of an individual or group. The predominant use of the phrase in financial markets is that of an investment professional making investment decisions for large pools of funds, such as mutual funds or pension plans.

RISK MANAGEMENT

Existence of volatility in the occurrence of an expected incident is called risk. Risk and returns are two sides of the investment coin. Risk can be caused due to wrong. Method of investments, wrong period of investment, wrong quantity of investment, wrong combination of securities etc. There are different types of the systematic and unsystematic risks, credit risk.

Market risk, financial risk, business risk, purchasing power risk etc. Risk management does not mean elimination of risk but proper assessment of risk and to determining as to whether it is worth taking or not. Portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. An investor can reduce expected risk and also can estimate the expected return and expected risk level of a given portfolio of assets is he makes a proper diversification of portfolio. The risk of portfolio depends not only on the risk of its securities considered in isolation, but also on the extent to which they are affected similarly by underlying events. Efforts have been made by researches, expert analysis, theorists and academicians in the field of investment to develop methods for measuring risk in assessing the returns on investments. Quantification of risk is necessary to ensure uniform interpretation and comparison of alternative investment opportunities. The pre-requisite for an objective evaluation and comparative analysis of various investment management firms alternatives is a rational method for quantifying risk and return. Variance, co-variance, standard deviation etc. are used in quantifying the risk.

PORTFOLIO MANAGEMENT

Portfolio management deals with the study risk return analysis for individual securities and entails choosing the best set of portfolios to maximize the returns of the rational investor. It refers to the investment of funds in efficient combination of securities. It encompasses the analysis, selection, diversification and evaluation of portfolios. Precisely planning one s portfolio as per risk return profile and managing it efficiently so as to secure highest return for lowest risk at a particular level of investment is called portfolio management.