Investments

Dr. Shital Jhunjhunwala

Institute of Public Enterprise

SJ
Why Do Individuals Invest ?

By investing money (instead of
spending it), individuals tradeoff
present consumption for a future larger
consumption.

Investment = Postponed Consumption
Should I Invest ?
Should I Consume Now or Later ?
SJ
Defining an Investment
A current commitment of X amount of
funds for a period of time ( generally
greater > 1) to derive future payments
that will compensate for:
the time the funds are committed
the expected rate of inflation
uncertainty of future payments.
These are the components of required
rate of return.

Real Vs Financial Investments
Behaves like a
financial asset
Investment
=FA + RA
(that behave
like FA)
SJ
Investment Decision
The decision to -
acquire,
hold or
dispose
of assets by rational , risk averse
individuals or organizations
Dr. Shital Jhunjhunwala

Saving and Investment
Saving
Investment
SJ
Saving and Investment
Power of Compounding
Suppose you put aside Rs. 1 each day. At
the end of 20 years assuming a return of
8% (compounded annually) it will become
Rs. 18,040.

Dr. Shital Jhunjhunwala
Power of Compounding- one
time
Suppose you put aside Rs.1000 for 30 years at
8%. It will become
1,000 * 1.08 ^ 30 = 1000*10.062 = Rs. 10062


Dr. Shital Jhunjhunwala
Importance of saving early
Dr. Shital Jhunjhunwala
Let us assume your friend at the age of 20 starts
investing Rs. 3000 at a rate of 8% and stops after
10 years at the age of 30. You at the age of 30
start putting aside Rs. 3000 each year. Who is
better off when you both turn 65.
You will have put Rs. 3000 aside for 35 years and
you worth about Rs. 5,58,000 = FV(8%,35,-
3000,,1)
You friend saved only Rs. 3000 for 10 years and is
now worth Rs. 6,94,000.
=FV(8%,10,-3000,,1) * POWER(1.08,35).

Rule of 72
In order to find the number of years
required to double your money at a
given interest rate, you divide the
compound return into 72. The result is
the approximate number of years that it
will take for your investment to double.
For example, if you want to know how long
it will take to double your money at 12%
interest, divide 12 into 72 and you get six
years
Dr. Shital Jhunjhunwala
Applying Rule of 72
In how many years will your money
quadruple if your interest rate is 6%.

If your money has doubled in 7.2
years what interest rate were you
earning ?
Dr. Shital Jhunjhunwala
Financial Goal
Dr. Shital Jhunjhunwala
Goal Setting : Hands on
Dr. Shital Jhunjhunwala
http://www.financialliteracymonth.co
m/30Steps/Step12.aspx
SJ
Investment Objective
SAFETY
RETURN
LIQUIDITY
RISK
TAX BENEFITS
- Capital Preservation
- Growth
- Income
A Portfolio
A Portfolio is Simply
a Group of Assets
Held at the Same
Time for an Objective
Think of the portfolio as a pie: each piece is divided up into specific
assets such as bonds, equities, etc.
Key Concepts

Saving
Investment
Investment Decision
Investment Objective
Portfolio

Dr. Shital Jhunjhunwala