All Types of Investment Models

Traditional Models:

Contemporary’ macro-economic framework revolved around growth models and growth a function of both savings as well as investments but largely determined by the overall levels of savings, in the earlier concept of closed economy. India in its initial years, post-independence, suffered from low savings and it resulted in low investments leading to low growth. India was believed to be caught in the low growth cycle and unable to break through this cycle, known as ‘Hindu rate of growth’. It may be appropriate to define savings of an economy as the difference between income and consumption.

1. Financial savings are money put in banks, government securities shares, bonds, debentures, insurance, pension funds, etc.
2. Physical savings which could be assets such as real estate, gold and commodities.

Savings can be across household sector, corporate sector and even through the departmental undertaking of the government like Department of Posts, etc. However, more than 70 per cent of the savings is accounted for by the household sector. It can well be known that India is a ‘household sector savings driven economy’. The recent increase in saving, post reforms, is known as a ‘macro-economic fundamental strength of India’. Traditionally there are two models of investment:

1. Top down investment: In top down investment the investment is in basic, capital and core industries such as crude oil, steel, cement, power generation, etc.
2. Bottom up investment: In bottom up investment the investment is in small and village industries.

Neo-Investment Models

Neo-Investment model comes after post-reforms, post-liberalization and with the beginning of transformation of India from a closed to an open economy. Neo-investment models are Private Sector Investment, Leveraged Investment, Foreign Direct Investment, Sector Specific Investment, Venture Capital, Cluster Investment. Private Sector Investment: Opening of the economy and welcoming of the new avenues of the investments is termed as private sector investments. This helped to raise the investment levels in the economy but with a difference, of investment earlier being in the public sector domain now to private sector investment. Leveraged Investment: Another investment model was introduced in India, is the concept of public private sector partnership (PPP) which is being used for infrastructure projects which is known as Leverages investment. Briefly, This model seek to take advantage of the strengths of both the government as well as the private sector for execution of various infrastructure projects and operations by the private sector. In recent times, there were a few question marks on this model, due to lack of transparency and ambiguities in the model concessionaire agreement (MCA) executed between the government and private players. MCA: It helps considerably in streamlining the administrative process by reducing the time in preparing such documents and getting them cleared from the concerned government agencies. Model concession/contract agreements or MCAs also reduce the cost of legal fees in preparing contract documents. Foreign Direct Investment (FDI): As a result of opening up of the economy, this allowed the foreign direct investment (FDI) into the country and also foreign portfolio investment (FPI).The government recently clubbed all the FII (Foreign institutional investment) investment as FPI.FDI which is ‘direct interest of a foreign investor in production or rendering of services’ (having control of over 51 per cent shares). It can also be indirect if the foreign investor has a control of minimum 26 per cent shares which would give it ‘management control’. This model used by China for increasing the overall investment and becoming the fastest growing economy of the world. Various forms of FDI in India:

1. Wholly owned subsidiary (WOS).
2. Wholly owned company incorporated in India (WOC).
3. Joint venture (JV) company incorporated in India (JV with an Indian partner with management control or controlling share of 51 per cent to directly manage the business).
4. JV into an existing line of business with management control. (All Options are open in India).

Sector Specific Investment: Another investment model was introduced in India for setting up of special economic zones (SEZ) to attract investment for increasing exports from India. In seventies this investment model was adopted by china and this lead china to emerging as the largest exporter of manufactured goods, a position enjoyed by US in the past. Such investment can be known as ‘sector specific investment models’. Another example of sector specific investment model is setting up of National Manufacturing Investment Zones (NMIZs) which will be integrated in industrial townships. Venture Capital: Venture capital is form of financing through which the investors provide capitals to start-up companies and small businesses. This capital generally comes from well-off investors, investment banks and any other financial institutions. Cluster Investment:   A model in which investments are made in such business clusters is known as a cluster based investment model. While sector specific investment can be multi-dimensional, cover different industry groups, cluster investment can be there to promote specific set of industries, such as handlooms, leather, garments, brassware, electronic goods, etc., PUBLIC PRIVATE PARTNERSHIP MODEL (PPP): The Public-Private Partnership (PPP) model is a collaborative arrangement between the public sector (government or government-owned entities) and the private sector (private companies or investors) to execute projects or provide services that traditionally fall under the purview of the public sector. This model aims to leverage the strengths of both sectors to deliver infrastructure, services, or projects efficiently and effectively. PPP means bringing the best from both public and private investments. Some of them are as follows: BOT (Build-Operate-Transfer) BOOT (Build-Own—Operate-Transfer) BOO (Build-Own-Operate) BLT (Build-Lease-Transfer) DBFO (Design-Build-Finance-Operate) DBOT (Design-Build-Operate-Transfer) DCMF (Design-Construct-Manage-Finance)   Hybrid Annuity Model: In this model government will provide a percentage of the project cost to the developer to start work while the remaining investment has to be made by the developer. Swiss Challenge Model: Swiss challenge model is a new process of giving contracts. Any person with credentials can submit a development proposal to the government. That proposal will be made online and a second person can give suggestions to improve and beat that proposal. Viability Gap Funding: It means a grant provided to private players to support infrastructure projects which takes long period of time. Such projects are economically justified but fall short of financial viability. To cover that financial short fall government provide assistance to the private players. The Right Model for India: At a broad level, investment in India has to be driven by private sector and FD1. However, this will require a bigger hand from the government side in providing policy support and all. The policy support will require well-drafted ‘futuristic policies’ in different areas especially in the areas of ‘pricing and tax matters’. These are the areas of grave concerns affecting investment in the economy. Reviewing various acts which influence such investments like mining and minerals (development and regulations) act, land acquisition and various labour laws all of which date back to 1950s.There is a need to review them completely and make them more relevant to the present context. If we see the present trend, India is the one among the few countries requiring huge levels of both resources as well as technology intensive investment and requires a big support from the government side as well to facilitate the private and foreign investments in India.    

MCQs on Types of Investments Question: Which investment model involves pooling funds from various investors and deploying them in a diversified portfolio managed by professionals? A) Hedge Fund B) Private Equity C) Mutual Fund D) Venture Capital Answer: C) Mutual Fund Question: In which investment model do investors directly purchase ownership in a company, often providing capital for growth or expansion? A) Sovereign Wealth Fund B) Private Equity C) Real Estate Investment Trust (REIT) D) Exchange-Traded Fund (ETF) Answer: B) Private Equity Question: Which investment model typically involves high-risk investments in startups or small businesses in exchange for equity ownership? A) Venture Capital B) Angel Investing C) Hedge Fund D) Sovereign Wealth Fund Answer: A) Venture Capital Question: Which investment model involves pooling funds from various investors to invest in a diversified range of real estate assets? A) Hedge Fund B) Real Estate Investment Trust (REIT) C) Exchange-Traded Fund (ETF) D) Mutual Fund Answer: B) Real Estate Investment Trust (REIT) Question: Sovereign Wealth Funds (SWFs) are primarily funded by: A) Individual investors B) Government revenues or foreign exchange reserves C) Institutional investors D) Venture capitalists Answer: B) Government revenues or foreign exchange reserves