Investment analysis and portfolio management

Section A
Concept of investment: Investment is the employment of funds with the aim of
getting return on it. In general terms, investment means the use of money in the hope of
making more money. In finance, investment means the purchase of a financial product or
other item of value with an expectation of favorable future returns.

Objectives of investment:

 Safety
 return
 growth
 Capital appreciation
 Tax minimization
 Investing for retirement plans.
 Liquidity
 Risk
 Hedge against inflation

Difference bw investment and speculation

BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Meaning The purchase of an asset Speculation is an act of

with the hope of getting conducting a risky financial
returns is called transaction, in the hope of
investment. substantial profit.
 BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Time horizon Longer term Short term

Risk involved Moderate risk High risk

Intent to profit Changes in value Changes in prices

Expected rate of Modest rate of return High rate of return

return

Funds An investor uses his own A speculator uses borrowed

funds. funds.

Income Stable Uncertain and Erratic

Behavior of Conservative and Daring and Careless

participants Cautious

Investment and gambling

Gambling
Gambling is defined as staking something on a contingency. Also known
as betting or wagering, it means risking money on an event that has an
uncertain outcome and heavily involves chance.
Meaning of investment management: Investment
management (or financial management) is the professional asset management of
various securities (shares, bonds, and other securities) and other assets (e.g., real estate)
in order to meet specified investment goals for the benefit of the investors.

Investment management is the activity of overseeing and

making decisions regarding the investments of an individual,
company, or other institution.
Investment management process:

1. Assess your goals and circumstances

The investment plan process begins during our first meeting with a discussion of
your financial and non-financial values and goals, as well as your existing assets.

2. Set long-term investment objectives

Taking into account the long-term nature of successful investing, we set objectives
for your portfolio that are appropriate for your attitude towards risk and investment
horizon.

3. Plan your asset allocation

Because it is so important, asset allocation is the first investment decision. During
this process, we decide how much of your portfolio to invest in each of the different
investment types, or asset classes, including stocks, bonds, real estate,
commodities, cash, short-term investments, domestic and international.

4. Select your investment approach

With an asset allocation in place, we now select the investment vehicles that you will
use to implement your portfolio strategy. Two key investing principles guide these
decisions: the importance of diversification and the value of remaining invested.

5. Build your portfolio

Building on the first four steps, we construct a portfolio suited to your needs, goals,
investment horizon, and risk tolerance. The building blocks for the portfolio are
ETF’s and low cost, tax efficient index funds which provide the optimal way to
implement a diversified portfolio.
6. Report, Rebalance, Review Progress
When our ongoing review of your situation indicates that changes and re-balancing
in your portfolio are warranted, we make those changes as needed. On a quarterly
basis, we review: portfolio performance, tax planning, progress towards your
personal financial planning goals, and any changes in your personal
circumstances that might warrant a change in strategy.

Investment alternatives:

 Equity share
 Preference shares
 Debentures and bonds
 Derivatives
 Life insurances
 Real estate
 Bank deposits
 Money market securities
 Mutual funds

Features of investment avenues

 Safety of Principal:
The investor, to be certain of the safety of principal, should
carefully review the economic and industry trends before
choosing the types of investment.

 Liquidity: Even investor requires a minimum liquidity in

his investments to meet emergencies.
  Income Stability:
Regularity of income at a consistent rate is necessary in any
investment pattern.

 Appreciation and Purchasing Power Stability:

Investors should balance their portfolios to fight against any
purchasing power instability. Investors should judge price
level inflation, explore the possibility of gain and loss in the
investments available to them, limitations of personal and
family considerations.

 Legality and Freedom from Care:

All investments should be approved by law. Law relating to
minors, estates, trusts, shares and insurance be studied.
Illegal securities will bring out many problems for the
investor.

 Tax implications
While planning an investment programme, the tax
implications related to it must be seriously considered. In
particular, the amount of income an investment provides and
the burden of income tax on that income should be given a
serious thought.

Approaches to investment
1. Fundamental approach: The Fundamental Approach is
an attempt to identify overvalued and undervalued
 securities. If stock is undervalued, investors buy it and
vice versa.
2. Psychological approach: the prices of securities are
guided on the investor’s psychology and emotions. If
investors have positive sentiments, the price of shares
will appreciate and vice versa.
3. Academic approach: investors use academics and views
of scholars such as risk and return analysis etc.
4. Technical Analysis: attempts to forecast the direction of investment prices by
studying past market data. Patterns in past price behavior of a security
in question and the overall market can be used to direct
profitable trading strategies.

Concept of risk
A probability or threat of damage, injury, liability, loss, or any other negative occurrence that
is caused by external or internal vulnerabilities, and that may be avoided through
preemptive action.

in finance The probability that an actual return on an investment will be lower than the
expected return. Financial risk is divided into the following categories: Basic risk, Capital
risk, Country risk, Default risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate
risk, Liquidity risk, Operations risk, Payment system risk, Political risk, Refinancing risk,
Reinvestment risk etc.

components of investment risk:

 Financial Risk
This is the risk associated with a company's ability to manage the
financing of its operations. Essentially, financial risk is the
company's ability to pay its debt obligations. The more obligations
a company has, the greater the financial risk and the more
compensation is needed for investors.

 Liquidity Risk
 Exchange-Rate Risk
This is the risk associated with investments denominated in
a currency other than the domestic currency of the investor. For
example, an American holding an investment denominated in
Canadian dollars is subject to exchange-rate, or foreign-
exchange, risk.

 Country-Specific Risk
This is the risk associated with the political and economic
uncertainty of the foreign country in which an investment is made.

 Business risk: The market value of your investment in equity

shares depends upon the performance of the company you invest
in. If a company's business suffers and the company does not
perform well, the market value of your share can go down
sharply.

 Purchasing power risk, or inflation risk

 Interest rate risk

 Market risk: Market risk is the risk of movement in security

prices due to factors that affect the market as a whole. Natural
disasters can be one such factor.

Concept of return: Return, also called return on investment, is

the amount of money you receive from an investment.