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Ch-1 Investment A Conceptual Framework

Investment is committing funds to assets that are held over time to build wealth. There are three main types of assets for investing: primary securities like stocks and bonds, derived instruments like mutual funds, and physical assets. In finance, an investment purchases monetary assets to provide future income or appreciation. The investment process involves setting a policy, analyzing securities, constructing a diversified portfolio, revising it over time, and evaluating performance. Risks include credit risk, inflation risk, interest rate risk, and market risk. Common errors include lacking a clear plan, becoming bored with the plan, being emotionally attached to investments, and overdosing on information. Quality investors have a consistent plan, are patient, and make decisions without emotion.

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38 views18 pages

Ch-1 Investment A Conceptual Framework

Investment is committing funds to assets that are held over time to build wealth. There are three main types of assets for investing: primary securities like stocks and bonds, derived instruments like mutual funds, and physical assets. In finance, an investment purchases monetary assets to provide future income or appreciation. The investment process involves setting a policy, analyzing securities, constructing a diversified portfolio, revising it over time, and evaluating performance. Risks include credit risk, inflation risk, interest rate risk, and market risk. Common errors include lacking a clear plan, becoming bored with the plan, being emotionally attached to investments, and overdosing on information. Quality investors have a consistent plan, are patient, and make decisions without emotion.

Uploaded by

Hiren Painter
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Ch-1 Investment – A conceptual

Framework
Meaning of Investment

Investment is the means of providing for dreams and


plans for the future buying a home, sending your
children to college etc.
It is the safest, most convenient and most effective
way to build wealth.
Investing is committing your funds to one or more
assets that will be held over some future time period.
It is putting your money to work for you.
Assets for Investing

Primary securities- stock, government bonds,


treasury bills etc
Derived Instruments – Mutual funds, forward
contracts etc
Physical assets- House, land & building etc
Financial & Economic meaning of investment

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.
Example: Building a factory that is used to produce
goods.
In finance, an investment is a monetary asset
purchased with the idea that the asset will provide
income in the future or appreciate and be sold at a
higher price.
Investment & Speculation

According to Benjamin Graham – he makes


distinction between speculation and investing- “ an
investment operation is one which, upon through
analysis, promise safety of principle and an adequate
return.
Speculation occurs when an assets is purchased with
hope that price will rise rapidly, leading to quick
profit.
Example: buying IPO, on the first day.
Investment & Gambling

The risks of investment can be managed so that the


odds are in your favor.
But in gambling risk is not manageable.
Gambling is putting money at risk by betting on
uncertain outcome, with the hope that you might win
money.
The investment process

It is rare to find investors investing their savings in a


single security. Instead, they tend to invest in a
group of securities. Such group of securities is called
a Portfolio.
For constructing the effective portfolio, an investor
has to follow various steps.
Set investment policy
Perform security analysis
Construct a portfolio
Revise the portfolio
Evaluate the performance of portfolio.
Setting investment policy

Asset allocation – Debt or equity or both


Time horizon- long term or short term
Risk tolerance- risk taker or risk averse
Active portfolio management- “undervalued stock”-
buy- “overvalued stock”- sell
Passive management- trying to match portfolio
index- stock market index.
Performing security Analysis

For selection of securities for buying.


Fundamental Analysis- to study financial data of the
issuer
Technical Analysis- by studying market statistics- to
predict how security will perform.
Portfolio Construction

This step identifies those specific assets in which to


invest, as well as determining the proportion of the
investor’s wealth to put into each one.
Here Selectivity, timing and diversification issues are
addressed.
Selectivity refers to security analysis and focuses on
price movements of individual securities.
Timing involves forecasting of price movement of
stock relative to price movements of fixed income
securities.
Diversification aims at constructing a portfolio in
such a way that the investor’s risk is minimized.
Portfolio Revision

This step is the repetition of the three previous steps,


as objective might change and previously held
portfolio might not be the optimal one.
Portfolio performance evaluation: how portfolio
performed time to time.
Risks of Investment

Credit risk
Inflation risk
Interest rate risk
Market risk
Credit risk: This is the possibility that the company
holding your money will not pay the interest or
dividend.
Inflation Risk: inflation risk is the chance that the
purchasing power of the invested rupees will decline.
This is the risk that the rupee you get when you sell your
asset will buy less than the rupee you originally invested
in the asset.
Interest rate risk: changes in the interest rate.
Market Risk: result in fluctuation in stock market
index
Common errors in investment Management

Not having clearly defined investment plan


Investors become bored with their plan
Investors tend to fall in love with security that rise in
price and forget to book their profits.
Investors often overdose themselves on information.
Investors are constantly in search of a shortcut.
Quality of smart investor

Smart investors have a plan for investing.


Smart investors invest consistently
Smart investors are patient
Smart investors are not emotionally tied to their
investment poisiton.
THANK
YOU

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