Unit 1 introduction to investment & portfolio management

An investment is the current commitment of rupee for a period of time in order to derive future payments that will compensate the investor for

1. Introduction to
Investment &
Portfolio
Management
By
Shaik Mohammad Imran
SHAIK MOHAMMAD IMRAN

2. Content
a)Introduction
b)Definition of Individual Investor
c)Meaning of Investment
d)Concepts of Investment
a)Economic Investment
b)Financial Investment
e)Investment Objectives
a)Classification of Objectives
b)classified on the basis of the investors approach
objectives with regard to the investment of their
capital.
SHAIK MOHAMMAD IMRAN

3. INTRODUCTION
Formostoftheinvestorsthroughouttheirlife,theywillbeearning
andspendingmoney.Rarely,investor’scurrentmoneyincome
exactlybalanceswiththeirconsumptiondesires.Sometimes,
investorsmayhavemoremoneythantheywanttospend;atother
times,theymaywanttopurchasemorethantheycanafford.These
imbalanceswillleadinvestorseithertoborrowortosaveto
maximizethelong-runbenefitsfromtheirincome.
SHAIK MOHAMMAD IMRAN

4. INTRODUCTION
Aninvestmentisthecurrentcommitmentofrupeeforaperiodof
timeinordertoderivefuturepaymentsthatwillcompensatethe
investorfor
(1) The time the funds are committed,
(2) The expected rate of inflation, and
(3) The uncertainty of the future payments.
SHAIK MOHAMMAD IMRAN

5. Definition of Individual investor
“Anindividualwhopurchasessmallamountsofsecuritiesfor
themselves,asopposedtoaninstitutionalinvestor,Alsocalledas
RetailInvestororSmallInvestor.”
Intoday’sworldeverybodyisrunningformoneyanditisconsideredasarootof
happiness.Forsecurelifeandforbrightfuturepeoplestartinvesting.Everytime
investorsareconfusedwithinvestmentavenuesandtheirriskreturnprofile.So,
evenifResearcherfocusesonpast,presentorfuture,investmentissuchatopic
thatneedsconstantupgradationaseconomychanges.
SHAIK MOHAMMAD IMRAN

6. MEANING OF INVESTMENT
•Investmentistheemploymentoffundswiththeaimofgetting
returnonit.
•Ingeneralterms,investmentmeanstheuseofmoneyinthehope
ofmakingmoremoney.
•Infinance,investmentmeansthepurchaseofafinancialproduct
orotheritemofvaluewithanexpectationoffavourablefuture
returns.
SHAIK MOHAMMAD IMRAN

7. There are Two concepts of
Investment:
1.Economic Investment
2.Financial Investment
SHAIK MOHAMMAD IMRAN

8. There are Two concepts of
Investment:
1.EconomicInvestment:Theconceptofeconomicinvestmentmeans
additiontothecapitalstockofthesociety.Thecapitalstockofthe
societyisthegoodswhichareusedintheproductionofothergoods.The
terminvestmentimpliestheformationofnewandproductivecapitalin
theformofnewconstructionandproducersdurableinstrumentsuchas
plantandmachinery.Inventoriesandhumancapitalarealsoincludedin
thisconcept.Thus,aninvestment,ineconomicterms,meansanincrease
inbuilding,equipment,andinventory.
SHAIK MOHAMMAD IMRAN

9. There are Two concepts of
Investment:
2.FinancialInvestment:Thisisanallocationofmonetaryresourcestoassets
thatareexpectedtoyieldsomegainorreturnoveragivenperiodoftime.It
meansanexchangeoffinancialclaimssuchassharesandbonds,realestate,
etc.Financialinvestmentinvolvescontrastswrittenonpiecesofpapersuch
assharesanddebentures.Peopleinvesttheirfundsinshares,debentures,
fixeddeposits,nationalsavingcertificates,lifeinsurancepolicies,provident
fundetc.intheirviewinvestmentisacommitmentoffundstoderivefuture
incomeintheformofinterest,dividends,rent,premiums,pensionbenefits
andtheappreciationofthevalueoftheirprincipalcapital.
SHAIK MOHAMMAD IMRAN

10. Investment Objectives
1.Classification of Objectives
1.Financial
2.Personal
2.Classified on the basis of the investors approach
3.objectives with regard to the investment of their
capital.
SHAIK MOHAMMAD IMRAN

11. INVESTMENT OBJECTIVES
Investingisawidespreadpracticeandmanyhavemadetheir
fortunesintheprocess.Thestartingpointinthisprocessisto
determinethecharacteristicsofthevariousinvestmentsandthen
matchingthemwiththeindividualsneedandpreferences.All
personalinvestingisdesignedinordertoachievecertainobjectives.
Theseobjectivesmaybetangiblesuchasbuyingacar,houseetc.and
intangibleobjectivessuchassocialstatus,securityetc.
SHAIK MOHAMMAD IMRAN

12. Classification of Objectives
Financial
Safety,
Profitability,
Liquidity
Personal
Status,
Dependents,
Educational requirements
Income,
Consumption
Provision for retirement
SHAIK MOHAMMAD IMRAN

13. The objectives can be classified on the basis of
the INVESTORS APPROACH as follows
a)Shorttermhighpriorityobjectives:Investorshaveahighpriority
towardsachievingcertainobjectivesinashorttime.Forexample,a
youngcouplewillgivehighprioritytobuyahouse.Thus,investors
willgoforhighpriorityobjectivesandinvesttheirmoneyaccordingly.
b)Longtermhighpriorityobjectives:Someinvestorslookforward
andinvestonthebasisofobjectivesoflongtermneeds.Theywant
toachievefinancialindependenceinlongperiod.Forexample,
investingforpostretirementperiodoreducationofachildetc.
investors,usuallypreferadiversifiedapproachwhileselecting
differenttypesofinvestments.
SHAIK MOHAMMAD IMRAN

14. The objectives can be classified on the basis of
the INVESTORS APPROACH as follows
c)Lowpriorityobjectives:Theseobjectiveshavelowpriorityin
investing.Theseobjectivesarenotpainful.Afterinvestinginhigh
priorityassets,investorscaninvestintheselowpriorityassets.For
example,provisionfortour,domesticappliancesetc.
d)Moneymakingobjectives:Investorsputtheirsurplusmoneyin
thesekindsofinvestment.Theirobjectiveistomaximizewealth.
Usually,theinvestorsinvestinsharesofcompanieswhichprovide
capitalappreciationapartfromregularincomefromdividend.
SHAIK MOHAMMAD IMRAN

15. objectives with regard to the
investment of their CAPITAL.
The importance of each objective varies from investor to investor and
depends upon the age and the amount of capital they have. These
objectives are broadly defined as follows.
a.Lifestyle –Investors want to ensure that their assets can meet their
financial needs over their lifetimes.
b. Financial security –Investors want to protect their financial needs
against financial risks at all times.
c. Return –Investors want a balance of risk and return that is suitable
to their personal risk preferences.
SHAIK MOHAMMAD IMRAN

16. objectives with regard to the
investment of their CAPITAL.
d. Value for money –Investors want to minimize the costs of managing
their assets and their financial needs.
e. Peace of mind –Investors do not want to worry about the day to day
movements of markets and their present and future financial security.
Achieving the sum of these objectives depends very much on the
investor having all their assets and needs managed centrally, with
portfolios planned to meet lifetime needs, with one overall investment
strategy ensuring that the disposition of assets will match individual
needs and risk preferences.
SHAIK MOHAMMAD IMRAN

17. What is a 'Portfolio'
Aportfolioisagroupingoffinancialassetssuchasstocks,
bondsandcashequivalents,aswellastheirfundscounter
parts,includingmutual,exchange-tradedandclosedfunds.
SHAIK MOHAMMAD IMRAN

18. Investment Process
Investmentmanagementprocessistheprocessofmanagingmoney
orfunds.Theinvestmentmanagementprocessdescribeshowan
investorshouldgoaboutmakingdecisions.
Investmentmanagementprocesscanbedisclosedbyfive-step
procedure,whichincludesfollowingstages:
1.Setting of investment policy.
2.Analysis and evaluation of investment vehicles.
3.Formation of diversified investment portfolio.
4.Portfolio revision
5.Measurement and evaluation of portfolio performance.
SHAIK MOHAMMAD IMRAN

19. Investment Process
Setting of
investment
policy
Analysis and
evaluation of
investment
Formation of
diversified
investment
portfolio
Portfolio
revision
Measurement
and evaluation
of portfolio
performance
Source : Click Here
SHAIK MOHAMMAD IMRAN

20. 1.Settingofinvestmentpolicyisthefirstandveryimportantstepin
investmentmanagementprocess.Investmentpolicyincludessetting
ofinvestmentobjectives.Theinvestmentpolicyshouldhavethe
specificobjectivesregardingtheinvestmentreturnrequirementand
risktoleranceoftheinvestor.
2.AnalysisandevaluationofinvestmentWhentheinvestmentpolicy
issetup,investor’sobjectivesdefinedandthepotentialcategoriesof
financialassetsforinclusionintheinvestmentportfolioidentified,the
availableinvestmenttypescanbeanalysed.Mostfrequentlytwo
formsofanalysisareused:technicalanalysisandfundamental
analysis.
SHAIK MOHAMMAD IMRAN

21. 3.Formationofdiversifiedinvestmentportfolioisthenextstepininvestment
managementprocess.Inthestageofportfolioformationtheissuesof
selectivity,timinganddiversificationneedtobeaddressedbytheinvestor.
Selectivityreferstomicroforecastingandfocusesonforecastingprice
movementsofindividualassets.Timinginvolvesmacroforecastingofprice
movementsofparticulartypeoffinancialassetrelativetofixed-income
securitiesingeneral.Diversificationinvolvesformingtheinvestor’sportfoliofor
decreasingorlimitingriskofinvestment.
2techniquesofdiversification:
•RandomDiversification,whenseveralavailablefinancialassetsareputtotheportfolio
atrandom;
• Objective Diversification when financial assets are selected to the portfolio following
investment objectives and using appropriate techniques for analysis and evaluation of
each financial asset.
SHAIK MOHAMMAD IMRAN

22. 4.Portfoliorevision.Thisstepoftheinvestmentmanagement
processconcernstheperiodicrevisionofthethreeprevious
stages.Thisisnecessary,becauseovertimeinvestorwithlong-
terminvestmenthorizonmaychangehis/herinvestment
objectivesandthis,inturnmeansthatcurrentlyheldinvestor’s
portfoliomaynolongerbeoptimalandevencontradictwiththe
newsettledinvestmentobjectives.Investorshouldformthe
newportfoliobysellingsomeassetsinhisportfolioandbuying
theothersthatarenotcurrentlyheld.Itcouldbetheother
reasonsforrevisingagivenportfolio:overtimethepricesofthe
assetschange,meaningthatsomeassetsthatwereattractiveat
onetimemaybenolongerbeso.
SHAIK MOHAMMAD IMRAN

23. 5.Measurementandevaluationofportfolioperformance.This
thelaststepininvestmentmanagementprocessinvolves
determiningperiodicallyhowtheportfolioperformed,interms
ofnotonlythereturnearned,butalsotheriskoftheportfolio.
Forevaluationofportfolioperformanceappropriatemeasuresof
returnandriskandbenchmarksareneeded.Abenchmarkisthe
performanceofpredeterminedsetofassets,obtainedfor
comparisonpurposes.Thebenchmarkmaybeapopularindexof
appropriateassets–stockindex,bondindex.
SHAIK MOHAMMAD IMRAN

24. Investment and speculation
“Speculationisanactivity,quitecontrarytoitsliteralmeaning,in
whichapersonassumeshighrisks,oftenwithoutregardforthe
safetyoftheirinvestedprincipal,toachievelargecapitalgains.”The
timespaninwhichthegainissoughttobemadeisusuallyvery
short.Investmentinvolvesputtingmoneyintoanassetwhichisnot
necessarilymarketableinordertoenjoyaseriesofreturns.The
investorsacrificessomemoneytodayinanticipationofafinancial
returninfuture.Heindulgesinabitofspeculation.Thereisan
elementofspeculationinvolvedinallinvestmentdecisions.
However,itdoesnotmeanthatallinvestmentsarespeculativeby
nature.Genuineinvestmentsarecarefullythoughtoutdecisions.On
theotherhand,speculativeinvestment,arenotcarefullythought
outdecisions.Theyarebasedontips,andrumours.
SHAIK MOHAMMAD IMRAN

25. Speculationhasaspecialmeaningwhentalkingaboutmoney.Thepersonwhospeculatesis
calledaspeculator.Aspeculatordoesnotbuygoodstoownthem,buttosellthemlater.The
reasonisthatspeculatorwantstoprofitfromthechangesofmarketprices.Onetriestobuy
thegoodswhentheyarecheapandtosellthemwhentheyareexpensive.Speculation
includesthebuying,holding,sellingandshortsellingofstocks,bonds,commodities,
currencies,realestatecollectibles,derivativesoranyvaluablefinancialinstrument.Itisthe
oppositeofbuyingbecauseonewantstousethemfordailylifeortogetincomefromthem
(asdividendsorinterest).Speculationshouldnotbeconsideredpurelyaformofgambling,
asspeculatorsdomakeaninformeddecisionbeforechoosingtoacquiretheadditionalrisks.
Additionally,speculationcannotbecategorizedasatraditionalinvestmentbecausethe
acquiredriskishigherthanaverage.Moresophisticatedinvestorswillalsouseahedging
strategyincombinationwiththeirspeculativeinvestmentinordertolimitpotentiallosses.
SHAIK MOHAMMAD IMRAN

26. SHAIK MOHAMMAD IMRAN