The process of Investment: An organized view of the investment process involves analyzing the basic nature of investment decisions and organizing the activities in the decision process. This process creates a strong yet flexible framework for our investment professionals to work together, sharing ideas and challenging each other’s views. It is constantly evolving and we continue to invest in the resources required to ensure it remains robust. Investment managers participate in our Investment process, from company visits and internal discussions to analyzing external broker research and assessing investment themes. The process informs their decisions but your individual requirements remain paramount. So, the question is – What is the Process of Investment? Explains.
The Concept is to Explain the Process of Investment.
The investment process (pdf file) is governed by the two important facets of investment they are the risk and return. Therefore, we first consider these two basic parameters that are of critical importance to all investors and the trade-off that exists between expected return and risk.
Given the foundation for making investment decisions the trade-off between expected return and risk- we next consider the decision process in investments as it is typically practiced today. Although numerous separate decisions must be made, for organizational purposes, this decision process has traditionally been divided into a two-step process: security analysis and portfolio management. Security analysis involves the valuation of securities, whereas portfolio management involves the management of an investor’s investment selections as a portfolio (package of assets), with its own unique characteristics.
Security Analysis: (PDF File)
Traditional investment analysis, when applied to securities, emphasizes the projection of prices and dividends. That is, the potential price of a firm’s common stock and the future dividend stream are forecasted, then discounted back to the present. This intrinsic value is then compared with the security’s current market price. If the current market price is below the intrinsic value, a purchase is recommended, and if vice versa is the case sale is recommended.
Although modern security analysis is deeply rooted in the fundamental concepts just outlined, the emphasis has shifted. The more modern approach to common stock analysis emphasizes return and risk estimates rather than mere price and dividend estimates.
Portfolio Management: (PPT File)
Portfolios are combinations of assets. In this text, portfolios consist of collections of securities. Traditional portfolio planning emphasizes the character and the risk-bearing capacity of the investor. For example, a young, aggressive, single adult would be advised to buy stocks in newer, dynamic, rapidly growing firms. A retired widow would be advised to purchase stocks and bonds in old-line, established, stable firms, such as utilities.
Modern portfolio theory suggests that the traditional approach to portfolio analysis, selection, and management may yield less than optimum results. Hence a more scientific approach is needed, based on estimates of risk and return of the portfolio and the attitudes of the investor toward a risk-return trade-off stemming from the analysis of the individual securities.
Characteristics of Investment:
The characteristics of investment can be understood in terms of as:-
- Liquidity etc.
All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of driving return. The expectation of a return may be from income (yield) as well as through capital appreciation. Capital appreciation is the difference between the sale price and the purchase price. The expectation of return from an investment depends on upon the nature of the investment, maturity period, market demand and so on.
The risk is inherent in any investment. The risk may relate to the loss of capital, delay in repayment of capital, nonpayment of return or variability of returns. The risk of an investment is determined by the investments, maturity period, repayment capacity, nature of return commitment and so on.
Risk and expected return of investment are related. Theoretically, the higher the risk, the higher is the expected returned. The higher return is a compensation expected by investors for their willingness to bear the higher risk.
The safety of investment is identified with the certainty of the return of capital without loss of time or money. Safety is another feature that an investor desires from investments. Every investor expects to get back the initial capital on maturity without loss and without delay.
An investment that is easily scalable without loss of money or time is said to be liquid. A well-developed secondary market for security increases the liquidity of the investment. An investor tends to prefer maximization of expected return, minimization of risk, the safety of funds and liquidity of investment.
Investment generally involves a commitment of funds in two types of assets:
- Real assets
- Financial assets
Real assets are tangible material things like building, automobiles, land, gold etc.
Financial assets are a piece of paper representing an indirect claim to real assets held by someone else. These pieces of paper represent debt or equity commitment in the form of IOUs or stock certificates. Investments in financial assets consist of – Securities (i.e. security forms of) investment Non-securities investment.
The term ‘securities’ used in the broadest sense, consists of those papers which are quoted and are transferable.
Under section 2 (h) of the Securities Contract (Regulation) Act, 1956 (SCRA) ‘securities’ include:
Shares., scrip’s, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or another body corporate. Government securities. Such other instruments as may be declared by the central Government as securities, and, iv) Rights of interests in securities.
Therefore, in the above context, security forms of investments include Equity shares, preference shares, debentures, government bonds, Units of UTI and other Mutual Funds, and equity shares and bonds of Public Sector Undertakings (PSUs). Non-security forms of investments include all those investments, which are not quoted in any stock market and are not freely marketable. viz., bank deposits, corporate deposits, post office deposits, National Savings and other small savings certificates and schemes, provident funds, and insurance policies.
Another popular investment in physical assets such as Gold, Silver, Diamonds, Real estate, Antiques etc. Indian investors have always considered the physical assets to be very attractive investments. There are a large number of investment avenues for savers in India.
Some of them are marketable and liquid, while others are nonmarketable, Some of them are highly risky while some others are almost risking less. The investor has to choose proper avenues from among them, depending on his specific need, risk preference, and return expectation.
How to Earn a Profit process of investment:
Investment avenues can be broadly categorized under the following heads:
- Corporate securities: Equity shares, Preference shares, Debentures/Bonds, GDRs /ADRs, Warrants, and Derivatives.
- Deposits in banks and nonbanking companies.
- Post office deposits and certificates.
- Life insurance policies.
- Provident fund schemes.
- Government and semi-government securities.
- Mutual fund schemes, and.
- Real assets
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