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Explain the meaning of real asset and financial Asset Explain the meaning of real asset and financial Asset Define investment, security, security analysis and portfolio

management

Explain different modes of investment Explain various characteristics of investment Differentiate between investment and speculation and between

investment and gambling List the investment process Analyze common errors in Investment Management Identify the qualities of a Smart List the investment processAnalyze common errors in Investment ManagementIdentify the qualities of a Smart Investor

Introduction

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Real Asset Financial Asset

Appear only on the asset side of thebalance sheet

Always appears on both assets side andliabilities of the balance sheet

It is destroyed only by accident or by

wearing out overtime.It is created and destroyed in the ordinarycourse of business

Difference between Real Asset and Financial Asset

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Definitions

An investment is a sacrifice of current money or otherresources for future benefit. It denotes conversion of cash ormoney into a monetary asset or claim on future money for areturn. The two key factors that determine investmentdecisions are return and risk which are dealt in subsequentunits

Securities are financial assets in various categories withdifferent characteristic. Securities take the form of shares,bonds, debenture, money market instruments, derivativesetc.

Portfolio is the combination of assets held by the investors.These combinations may be of various asset classes likeequity, debt corporate debentures, warrants, money marketinstruments etc.

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Security analysis involves the projection of future earnings,forecast of the share price in the future and estimating theintrinsic value of a security. Intrinsic value is derived byforecasting the future cash flows of the security both annualcash flows (dividends/interest) and terminal value(redemption value) of the security.

Portfolio analysis includes portfolio construction, selection ofsecurities, revision, evaluation and monitoring of theperformance of the portfolio on a regular basis.

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Security form of investment (Marketable)

Equity shares

Bonds/ Debentures

Money Market Instruments Mutual funds scheme

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Non

Security form of investment (Non-marketablefinancial assets)

National saving scheme

National saving certificate

Recognized provident fund

Public provident fund

Post office saving scheme

National pension scheme

Corporate fixed deposit

LIC Unit scheme of UTI

Bank Fixed deposit / recurring deposit

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Characteristics of Investment

Rate of return

Risk

Marketability

Tax shelter

Convenience

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Types of Assets

Primary Securities - Common stock, Preferred

stock, Govt. bonds, Corporate bonds, Treasury

Bills, Commercial Papers.

Derived Instruments Mutual Fund, Options,

Forward, Futures.

Physical Assets - House, land, building, gold,

diamond, art objects etc.

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Investment & Gambling

Investment Gambling

Investment decision is based on theperformance of the economy

Gambling is based on randomoutcomes

Chances of gaining is high if the

investment horizon is for a longerperiod of time

Chances of losing is high if the

gambling process is continued for along time.

Risk is directly linked to economicbenefit.

It creates risk without expectationof economic benefit.

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Investment Process

1. Set Investment Policy

2. Perform Security Analysis

3. Construct a Portfolio

4. Revise the Portfolio

5. Evaluate the performance of Portfolio

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1. Setting Investment Policy

Involves asset allocation decision Important factors are:

Time Horizon

Risk Tolerance

Styles: Active Management and Passive Management.

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2. Performing Security Analysis

It involves security selection decision Examining a number of individual securities

Identify mispriced securities through fundamental and technical

analysis

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3. Portfolio Construction

Three factors involved are:1. Selectivity

2. Timing

3. Diversification

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How a portfolio is constructed?

Asset Allocation Security Selection

Active Investor Market Timing Stock Picking

Passive Investor Maintain pre-determined selections Try to track a well-known market indexlike Nifty, SenSex.

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4. Portfolio Revision:- Repetition of the three previous steps.

5. Portfolio Performance Evaluation

- Periodic review of the performance of the portfolio.

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Risks of Investment

Risk is the degree of uncertainty about the expected return from aninvestment:

Credit risk / Counterparty risk

Inflation risk

Interest rate risk

Market risk

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Common Errors

Not having a clearly-defined investment plan Investors become bored with their plan

Investors fail to book profit when price rises.

Information overdose.

Investors are constantly in search of a shortcut or gimmick

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Qualities of a Smart Investor

Smart investors have a plan for investing, and they stick to it. They invest consistently

They are patient

They are not emotionally tied to their investment positions.

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