Investment Decision Process..NMBA-62

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INVESTMENTDECISION PROCESS

NMBA-62


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INVESTMENT

Definition:

q

Investment refers to - commitment of fundsto one or more assets that will be held oversome future time period

q An investment is a commitment of fundsmade in the expectation of some positiverate of return


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We can define investment as Postponedconsumption

q When you postpone consumption,

sacrifice takes place in the present andis certain whereas the benefits occur infuture and are uncertain. Therefore, risk

and return from the investment are thetwo key determinants of investmentprocess.


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Why Invest ?

-We invest in order to improve our futurewelfare.

q How do we invest ?

- Making Investment decisions today willhave direct affect on our future welfare, somaking a financial plan can reaptremendous benefits.


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Financial planning

It is the process of meeting our life goalsthrough the proper management of ourfinances.

[Life goals can include buying a home, saving forchildrens education or planning for retirement]

Financial planning provides direction andmeaning to our financial decisions.


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INVESTMENT DECISION PROCESS

q The Investment process describes howan investor should go about making

decisions with regard to :

What marketable securities to invest in?

How extensive the investments shouldbe ?

When the investments should be made?


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A typical investment decision undergoesa five step procedure which forms thebasis of the investment process.

Determine the investment objectivesand policy

Undertake Security analysis

Construct a portfolio

Review the portfolio

Evaluate the performance of theportfolio


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Investment objectives and policy

Setting investment policy, involves determiningthe investors objectives and the amount ofhis/her investable wealth.

Investment objective should be stated in terms ofboth risk and return.

Investment policy is the corner stone of theinvestment process. (However, it is often the stepthat receives the least attention from investors.)


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Security Analysis

Involves examining several individual securities(orgroup of securities)

Here, the purpose for conducting suchexaminations is to identify those securities thatcurrently appear to be mispriced.

Approaches:

Fundamental analysis

Technical analysis


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Portfolio construction

Involves identifying those specific assets in whichto invest, as well as determining the proportions ofthe investors wealth to put into each one.

In this step, issues ofselectivity, timing, anddiversification need to be addressed by theinvestor.


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Portfolio Revision

Reviewing the portfolio.

q Portfolio Performance Evaluation

Involves determining periodically how theportfolio performed, in terms of not only the return

earned but also the risk experienced by theinvestor.

Thus, appropriate measures of risk and return aswell as relevant standards (or benchmarks) are

needed.


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SOURCE OF INFORMATION

Book Name: Security Analysis and Portfolio Management

Author Name: Sudhindra Bhatt

Publication: Excel Books, 2009

Chapter-1:Nature and Scope of Investment Decisions Page no: 4-7

Book Name: Investments

Author Name: William F. Sharpe, Gordon J. Alexander & Jeffery V.Bailey

Publication: PHI Learning Private Limited, Sixth Edition

Chapter-1: Introduction

Page no: 11-14


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Investment Decision Process..NMBA-62