INVESTMENT DECISION PROCESS

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INVESTMENT
Definition:
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Investment refers to - commitment of funds to one or more assets that will be held over some future time period An investment is a commitment of funds made in the expectation of some positive rate of return
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We can define investment as Postponed consumption When you postpone consumption, sacrifice takes place in the present and is certain whereas the benefits occur in future and are uncertain. Therefore, risk and return from the investment are the two key determinants of investment process.
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Why Invest ?

-We invest in order to improve our future welfare.

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How do we invest ?

- Making Investment decisions today will have direct affect on our future welfare, so making a financial plan can reap tremendous benefits.
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Financial planning It is the process of meeting our life goals through the proper management of our finances.

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

Financial planning provides direction and meaning to our financial decisions.

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INVESTMENT DECISION PROCESS

The Investment process describes how an investor should go about making decisions with regard to : What marketable securities to invest in? How extensive the investments should be ? When the investments should be made? 4/14/12

A typical investment decision undergoes a five step procedure which forms the basis of the investment process. Determine the investment objectives and policy Undertake Security analysis Construct a portfolio Review the portfolio Evaluate the performance of4/14/12 the portfolio

Investment objectives and policy

Setting investment policy, involves determining the investors objectives and the amount of his/her investable wealth. Investment objective should be stated in terms of both risk and return. Investment policy is the corner stone of the investment process. (However, it is often the step that receives the least attention from investors.)
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Security Analysis
Involves examining several individual securities(or group of securities) Here, the purpose for conducting such examinations is to identify those securities that currently appear to be mispriced. Approaches: Fundamental analysis Technical analysis
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Portfolio construction
Involves identifying those specific assets in which to invest, as well as determining the proportions of the investors wealth to put into each one. In this step, issues of selectivity, timing, and diversification need to be addressed by the investor.

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Portfolio Revision
Reviewing the portfolio.

Portfolio Performance Evaluation

Involves determining periodically how the portfolio performed, in terms of not only the return earned but also the risk experienced by the investor. Thus, appropriate measures of risk and return as well as relevant standards (or benchmarks) are 4/14/12 needed.

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 4/14/12

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