INVESTMENTS AVENUES:-

There are various investments avenues provided by a country to its people depending upon the development of the country itself. The developed countries like the USA and the Japan provide variety of investments as compared to our country. In India before the post liberalization era there were limited investments avenues available to the people in which they could invest. With the opening up of the economy the number of

investments avenues have also increased and the quality of the investments have also improved due to the use of the professional activity of the players involved in this segment. Today investment is no longer a process of trial and error and it has become a systematized process, which involves the use of the professional investment solution provider to play a greater role in the investment process.

Earlier the investments were made without any analysis as the complexity involved the investment process were not there and also there was no availability of variety of instruments. But today as the number of investment options have increased and with the variety of investments options available the investor has to take decision according to his own risk and return analysis.

RISK RETURN OF VARIOUS INVESTMENT AVENUES

Every investment is characterized by return & risk. Investors intuitively understand the concept of risk. A person making an investment expects to get some return from the investment in the future. But, as future is uncertain, so is the future expected return. It is this uncertainty associated with the returns from an investment that introduces risk into an investment. Risk arises where there is a possibility of variation between expectation and realization with regard to an investment.

Meaning of Risk Risk & uncertainty are an integrate part of an investment decision. Technically risk can be defined as situation where the possible consequences of the decision that is to be taken are known. Uncertainty is generally defined to apply to situations where the probabilities cannot be estimated. However, risk & uncertainty are used

interchangeably.

Types of risks

1. Systematic risk: Systematic risk is non diversifiable & is associated with the securities market as well as the economic, sociological, political, & legal considerations of prices of all securities in the economy. The affect of these factors is to put pressure on all securities in such a way that the prices of all stocks will more in the same direction.

Example: During a boom period prices of all securities will rise & indicate that the economy is moving towards prosperity. Market risk, interest rate risk & purchasing power risk are grouped under systematic risk.

RISKS

SYSTAMATIC
 Market Risk  Interest Rate Risk  Purchasing power Risk Business Risk Financial Risk

UNSYSTAMATIC

1. Systematic Risk

(A) Market risk

Market risk is referred to as stock variability due to changes in investors attitudes & expectations. The investor reaction towards tangible and intangible events is the chief cause affecting market risk.

(B) Interest rate risk

There are four types of movements in prices of stocks in the markets. These may term as (1) long term, (2) cyclical (bull and bear markets), (3) intermediate or within the cycle, and (4) short term. The prices of all securities rise or fall depending on the change in interest rates. The longer the maturity period of a security the higher the yield on an investment & lower the fluctuations in prices.

(C) Purchasing Power risk

Purchasing power risk is also known as inflation risk. This risk arises out of change in the prices of goods & services and technically it covers both inflation and deflation periods. During the last two decades it has been seen that inflationary pressures have been continuously affecting the Indian economy. Therefore, in India purchasing power risk is associated with inflation and rising prices in the economy.

2. Unsystematic Risk: The importance of unsystematic risk arises out of the uncertainty surrounding of particular firm or industry due to factors like labor strike, consumer preferences and management policies. These uncertainties directly affect the financing and operating environment of the firm. Unsystematic risks can owing to these considerations be said to complement the systematic risk forces.

(A) Business risk Every corporate organization has its own objectives and goals and aims at a particular gross profit & operating income & also accepts to provide a certain level of dividend income to its shareholders. It also hopes to plough back some profits. Once it identifies its operating level of earnings, the degree of variation from this operating level would measure business risk. Example:If operating income is expected to be 15% in a year, business risk will be low if the operating income varies between 14% and 16%. If the operating income were as low as 10% or as high as 18% it would be said that the business risk is high.

(B) Financial Risk: -

Financial risk in a company is associated with the method through which it plans its financial structure. If the capital structure of a company tends to make earning unstable, the company may fail financially. How a company raises funds to finance its needs and growth will have an impact on its future earnings and consequently on the stability of earnings. Debt financing provides a low cost source of funds to a company, at the same time providing financial leverage for the common stock holders. As long as the earnings of the company are higher than the cost of borrowed funds, the earning per share of common stock is increased. Unfortunately, a large amount of debt financing also increases the variability of the returns of the common stock holder & thus increases their risk. It is found that variation in returns for shareholders in levered firms (borrowed

funds company) is higher than in unlevered firms. The variance in returns is the financial risk.