How do you Define Investment?

Saving means keeping aside a part of your income. Investment means putting that money in financial
products to earn returns and grow your wealth.

We can define investment as the process of, “sacrificing something now for the prospect of gaining
something later”.

The investor who is having extra cash could invest it in securities or in any other assets like or gold or
real estate or could simply deposit it in his bank account. The companies that have extra income may
like to invest their money in the extension of the existing firm or undertake new venture. All of these
activities in a broader sense mean investment.

Your investment objectives may differ in accordance with your life stage and risk profile. Here's a list of
them.

An investment is made because it serves some objective for an investor. Depending on the life stage and
risk appetite of the investor, there are three main objectives of investment: safety, growth and income.
Every investor invests with a specific objective in mind, and each investment has its own unique set of
benefits and risks. Let us understand these objectives in detail.

Safety

While no investment option is completely safe, there are products that are preferred by investors who
are risk averse. Some individuals invest with an objective of keeping their money safe, irrespective of the
rate of return they receive on their capital. Such near-safe products include fixed deposits, savings
accounts, government bonds, etc.

Growth

While safety is an important objective for many investors, a majority of them invest to receive capital
gains, which means that they want the invested amount to grow.There are several options in the market
that offer this benefit. These include stocks, mutual funds, gold, property, commodities, etc. It is
important to note that capital gains attract taxes, the percentage of which varies according to the
number of years of investment.

Income

Some individuals invest with the objective of generating a second source of income.Consequently, they
invest in products that offer returns regularly like bank fixeddeposits, corporate and government bonds,
etc.

Other objectives

While the aforementioned objectives are the most common ones among investors today, some other
objectives include:

 Tax exemption
some people invest their money in various financial products solely for reducing their tax
liability. Some products offer tax exemptions while many offer tax benefits on long-term profits.
  Liquidity
many investment options are not liquid. This means they cannot be sold and converted into cash
instantly. However, some people prefer investing in options that can be used during
emergencies. Such liquid instruments include stock, money market instruments and exchange-
traded funds, to name a few.

Difference between Investor & Speculator

Investor Speculator

1. Interested in long-term holding. Interested in short-term holding.

2. Assume moderate risk. Assume high risk

3. Interested in dividend, interest income Primarily interested in capital gains.

as well as capital gains.

4. Moderate rate of return. High rate of return

5. Decision to buy is made after careful analysis Decision to buy is based on intuitions,

Of the past performance

rumor, charts or market analysis.

6. Use own money Usually borrowed money

PORTFOLIO MANAGEMENT
Introduction

Portfolio is nothing but the combination of various stocks in it. Understanding the dynamics of Market is
the essence of Portfolio Management. This means Portfolio Management basically deals with three
critical questions of investment planning.

1. Where to Invest?

2. When to Invest?

3. How much to Invest?

Portfolio is the combination of assets. Modern portfolio theory suggest that the traditional approach to
portfolio analysis, selection, and management may well yield less than optimal results – that a more
scientific approach is needed, based on estimates of risk and return of the portfolio and the attitudes of
the investor towards a risk return trade off stemming from the analysis of the individual securities. The
return of the portfolio is nothing more than the weighted average of the returns of the individual stocks.
The weights are based on the percentage composition of the portfolio. The total risk of the portfolio is
more complex. Here we need only point that when securities combined may have a greater or lesser risk
than the sum of their component risk. This fact arises from the fact that the degree to which the return
of individual securities move together or interact

Portfolio Management Process

Portfolio management is a complex activity which may be broken down into following steps:

1. Specification of Investment Objectives & Constraints: The typical objectives sought by investors
are current income, capital appreciation and safety of principal. The relative importance of
those objectives should be specified. Further, the constraints arising from liquidity, time horizon,
tax and special circumstances must be specified.
2. Choice of the Asset Mix: The most important decision in the portfolio management is the asset
mix decision. Very broadly, this is concerned with the proportion of the stocks and bonds in the
portfolio. The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and
investment horizon of the investor
3. Formulation of Portfolio Strategy: Once a certain asset mix is chosen, an appropriate portfolio
strategy has to be formulated. Two broadly classified strategies are: an active portfolio strategy
or a passive portfolio strategy. An active portfolio strategy strives to earn superior risk-adjusted
return by resorting to market timing or sector adjustment or security selection or some
combination of these. A passive portfolio strategy involves, on the other hand, holding a broadly
diversified portfolio and maintaining a pre-defined level of risk exposure.
4. Selection of Securities: Generally, investors pursue an active stance with respect to security
selection: for stock selection, investors commonly go by Fundamental Analysis and/or Technical
Analysis. The factors that are considered in selecting bonds are yield to maturity, credit rating,
term to maturity, tax shelter and liquidity.
5. Portfolio Execution: This is the phase of portfolio management which is mainly concerned with
the implementation of Portfolio plan by actually buying or selling the securities in given amount.
6. Portfolio Revision: The value of portfolio as well as its composition – the relative proportion of
bond and stock components – may change as stock and bond fluctuates. Of course, the
fluctuation in stocks is often dominant factor underlying the change. In response to such
changes, periodic rebalance of the portfolio is required. This primarily involves a shift from
stocks from bonds or vice-versa. In addition, it may call for sector rotation as well as security
switches.
7. Portfolio Evaluation: The performance of the portfolio should be evaluated periodically. The key
dimensions of portfolio performance evaluation risk and return and the key issue is whether the
portfolio return is commensurate with its risk exposure. Such a preview may provide useful
feedback to improve quality of the portfolio management process on a continuing basis