INVESTORESULT

Chapter 1
INVESTMENT LANDSCAPE
 INVESTORESULT

Why Investments?

• Investments are crucial for financial

growth and wealth accumulation. By
allocating funds strategically, individuals
can generate returns that outpace
inflation, preserving and enhancing their
purchasing power over time.
• Investments provide a means to achieve
long-term goals such as retirement,
education, and homeownership.
 INVESTORESULT

Financial Goals
• When we assign amounts and timelines to objectives, we convert
these into financial goals.
• Goal setting is an essential exercise while planning for investments.
• The first step in goal setting is identifying major life events.
• After identifying the events, one needs to assign priorities–which are
more important than the others.
• A financial advisor may only guide and help one make an appropriate
decision.
• After that, one must assign a timeline and the funding required during
such events.
• The timeline and amount are critical for one to plan to achieve the
goal.
 INVESTORESULT

Savings vs
Investment
• The word “saving” originates from the same root as
“safe”. The safety of money is of critical importance
here. Whereas when one invests money, the primary
objective is earning profits.
• The critical point to note here is that there is a trade-
off between risk and return.
• The other difference is evident from the dictionary
definition of “saving”– reducing the amount of money
used. This definition refers to reducing consumption
so that some money is saved.
• It is this saved money that can be invested. In other
words, saving and investing are not to be considered
as two completely different things but two steps of the
same process – to invest money, one needs to save
first.
• Thus, saving precedes investing.
 INVESTORESULT

Inflation
• Inflation refers to the general increase in prices or the
money supply, both of which can cause the purchasing
power of a currency to decline.
• Suppose you have 5,000 rupees today, and the inflation
rate is 3%. In a year, due to inflation, the prices of goods
and services may increase by 3%. Therefore, the things
that cost 5,000 rupees today might cost 5,150 rupees a
year later. This means that if your money doesn't grow or
earn interest, you may find it more challenging to afford
the same items with the same amount of rupees as time
goes on. Inflation illustrates the decrease in purchasing
power of a currency over time.
 INVESTORESULT

Real Return vs Nominal

Return
• Nominal return is the total percentage change in an
investment, including the actual return and the impact of
inflation.
• Real return adjusts for inflation, providing a more accurate
measure of an investment's purchasing power. It
represents the increase or decrease in wealth, helping
investors assess the value gained or lost after accounting
for the cost-of-living (Inflation) changes.
 INVESTORESULT

Factors to evaluate
investments:-
• The three most important factors in evaluating
investments are:-
1. Safety
2. Liquidity
3. Returns
 INVESTORESULT

Different Asset
Classes
• The four broad categories:-
1. Real estate
2. Commodities
3. Equity
4. Fixed income
 INVESTORESULT

Real Estate
• It is considered the most important and popular asset
class. However, the popularity of this asset category is
largely because of a reason unrelated to investment.
• Real estate could be further classified into various
categories: residential, land, commercial, etc.
• Some unique characteristics of real estate-
1. Location is the most important factor impacting the
performance of an investment in real estate
2. Real estate is illiquid
3. It is not a divisible asset
4. One can invest in physical real estate, as well as in
the financial form
5. Apart from capital appreciation, it can also generate
current income in the form of rents
 INVESTORESULT

Commodities
• One can invest in commodities in two ways- commodities
derivatives are available on many commodities.
• It may not be wise to call these “investments” for two reasons,
1. These are leveraged contracts, i.e., one can take
considerable exposure with a small of money, making it
highly risky.
2. These are usually short-term contracts, whereas the
investors’ needs may be for more extended periods.
• Another way is investing in precious metals like gold and silver.
It is easy to understand the prices of gold and silver across
countries by looking at the foreign exchange rate between the
two countries’ currencies and adjusting for various costs and
restrictions imposed by any of the countries.
 INVESTORESULT

Fixed Income
• Bonds are generally considered to be safer than
equity. However, these are not free from risks.
• Bonds can be classified into subcategories based
on issuer type, i.e., issued by the government or
corporates, or based on the maturity date: short-
term bonds (ideal for liquidity needs), medium
and long-term bonds (income generation needs).
 INVESTORESULT

Equity
• This is the owner’s capital in a business. Someone who
buys shares in a company becomes a part-owner of the
business.
• In that sense, this is risk capital since the owner’s earnings
from the business are linked to the business’s fortunes,
and hence the risks.
• When one buys the shares of a company through the
secondary market, the share price could be high or low
compared to the fair price.
• Historically, equity investing has generated returns over
inflation, which means the purchasing power of one’s
money has increased over the years.
 INVESTORESULT

Investment avenues
classified under
different asset
categories
 INVESTORESULT

Liquidity Risk
• Investments in fixed-income assets are usually considered less
risky than equity. Even within that, government securities are
considered the safest.
• To avail the full benefits of the investments or to earn the
promised returns, there is a condition attached. The
investment must be held till maturity. If one needs liquidity,
there could be some charges, or such an option may not be
available.
• Some investment options offer instant access to funds, but the
value of the investment may be subject to fluctuations.
• Equity shares, listed on stock exchanges, exemplify this.
• While it is easy to sell shares to get cash in the case of most of
the listed shares, the equity prices go up and down
periodically. Such investments are not appropriate for funding
short-term liquidity needs.
 INVESTORESULT

Investment Risks
• Inflation Risk: Inflation or price inflation is the general rise in the prices of
various commodities, products, and services we consume. Inflation erodes
the purchasing power of the money.
• Liquidity Risk: This risk is also very closely associated with real estate,
where liquidity is very low, and often it takes weeks or months to sell the
investment.
• Credit Risk: Any delay or default in the repayment of principal or payment
of interest may arise due to a problem with one or both two reasons: (1)
the ability of the borrower or (2) the intention of the borrower.
• Market Risk and Price Risk: Market risk is the risk of losses in positions
arising from movements in market prices. There is no unique classification,
as each may refer to different aspects of market risk. The risk occurs when
the asset’s prices and futures contracts are not in tandem. Location-based
risk arises when the underlying asset is in a different location from where
the futures contract is traded. So, in a way, both risks are similar.
• Interest Rate Risk: Interest rate risk is the risk that an investment's value
will change because of a change in interest rates. This risk affects the value
of bonds/debt instruments more directly than stocks. Any reduction in
interest rates will increase the device’s value and vice versa.
 INVESTORESULT

• Today • After 6 Months

Interest Rate • Interest Rate in market = • Interest Rate in Market=
Risk 10% 15%
• Investment in bonds= Rs. • Investment in bonds= Rs.
Example 1000 1000
• Interest Received= Rs. 100 • Interest Received= Rs. 150
 INVESTORESULT

Behavioural Biases in Investment Decision-

Making

Availability Confirmation
Familiarity Bias Herd Mentality
Heuristic Bias

Loss Aversion Overconfidence Recency Bias

 INVESTORESULT

Risk Profiling
• To ascertain the risk appetite, the following must be
evaluated:
1. The need to take risks
2. The ability to take risks, and
3. The willingness to take risks
 INVESTORESULT

Understanding Asset Allocation

Strategic Asset Allocation is allocation aligned to the individual’s financial goals. It considers
the returns required from the portfolio to achieve the goals, given the time horizon for the
corpus creation and the individual’s risk profile.

Tactical Asset Allocation is when one may choose to change the allocation between the asset
dynamic categories. The purpose of such an approach may be to take advantage of the
opportunities presented by various markets at different points in time. Still, the primary
reason for doing so is to improve the portfolio’s risk-adjusted return.

Rebalancing: An investor may select any of the asset allocation approaches; however, there
may be a need to make modifications in the asset allocations. This rebalancing of the portfolio
as per the initially agreed ratios is called rebalancing.
 INVESTORESULT

Thank You