CHAPTER 1 INVESTMENT LANDSCAPE

- The discussion of investments must start with the purpose of investment. “Why is one investing?”

- When we assign amounts and timelines to dreams or objectives, we convert them into financial goals.

- After identifying the events, one needs to assign priorities toeach goals.

- Goals should be categorised on the basis of “responsibilities” and “good-to-have” goal.

- Prioritization can also be done by classifying the goals in terms of the timeline. (I.e time left for the goals)

- The current cost of the financial goals should be adjusted for inflation. (The cost of education has been going up at a very fast pace over the last few decades.)

- Inflation has more impact onlong-term goals, rather than short-term goals.

- The main objective of “savings” is to save money, while the main objective of “investments” is to earn return.

- Saving precedes investing.

- The three most important factors to evaluate investments are safety, liquidity, and returns. In addition to these, there are few more parameters such as convenience, ticket size, taxability of earnings, tax

the deduction, etc.

- Safety means safety of capital invested along with the degree ofsurety of income from investment.

- Liquidity means, how easily can one liquidate the investment and convert it to cash.

- Returns may be in the form of regular (or periodic) income, also known as current income; and capital appreciation, or capital gains.

- Tax deduction is the deduction available to eligible investors on taxable income.

- In majority of the cases individualspurchase real estate for self occupation, hence itis considered as expense and not investment.

- Real estate are classified into various categories, such as residential real estate, land, commercial real estate, etc.

- Gold and silver are the most common commodities in which the investors invest.

- Generally investors do not prefer to invest in commodities derivatives, this is because

1.) these are leveraged contracts, i.e. one can take large exposure with a small of money making it highly risky and

2.) these are normally short term contracts, whereas the investors’needs may be for longer periods.

- Fixed income securities are marketable instruments like bonds and debentures.

- Bonds can be classified into subcategories on the basis of issuer type i.e. issued by the government or corporates or on the basis of the maturity date: short term bonds (ideal for liquidity needs),

medium term bonds, and long term bonds (income generation needs).

- Someone who buys shares in a company becomes a part-owner in the business

- Equity has given highest real returns to the investor,i.e returns in excess of inflation.

- Investments in equity and bonds can be done only in financial form, while real estate and commodities can be bought either in financial or in physical form.

- Real estate and commodities can either be bought as investments or for consumption purposes.

- Inflation, or price inflation is the general rise in the prices of various commodities, products, and services that we consume. It erodes the purchasing power of the money.

- When one seeks total safety of invested capital, along with liquidity at any time, the investment returns are usually lower than inflation.

- The returns on investment without factoring inflation is known as“nominal rate”.

- Liquidity risk means that it is difficult to sell an investment when desired, or it has to be sold below its fair value.

- Liquidity risk is high in real-estate investment.

- Credit risk is when the issuer, does not pay principal and the interest on time or even defaults. There is no credit risk in government bonds.

- Market risk is a type of risk associated with the market as a whole rather than with individual stocks or business sectors. It is the risk that the market overall will lose value, rather than that one or more stocks or sectors.

- Price risk is the risk that the value of a security or investment will decrease.

- Interest rate risk is the risk that an investment's value will change as a result of change in interest rates. Bonds/debt instruments are more affected by interest rate risk than stocks.

- The relationship between interest rates and bond prices is inverse.

- Bonds with longer maturity would witness higher price fluctuations in comparison to those with shorter maturities.

- Strategies for management of the investment risks are:

1.) Avoid

2.) Take a position to benefit from some event/development.

3.) Diversify.

- The availability heuristic describes our tendency to use information that comes to mind quickly and easily when making decisions about the future.

- Confirmation bias is the tendency of people to favor information that confirms their existing beliefs or hypotheses.

- Familiarity Bias s the preference of the individuals to remain confined to what is familiar to them.

- Herd mentality bias refers to investors’ tendency to follow and copy what other investors are doing.

- Loss aversion is a tendency in behavioral finance where investors are so fearful of losses that they focus on trying to avoid a loss more so than on making gains. The more one experiences losses, the

more likely they are to become prone to loss aversion.

- Overconfidence bias is a tendency to hold a false and misleading assessment of our skills, intellect, or talent. In short, it’s an egotistical belief that we’re better than we actually are.

- Recency bias is a cognitive bias that favors recent events over historic ones.

- Risk Profiling is the process to identify,

 The need to take risks.

 The ability to take risks

 The willingness to take risks

- Asset Allocation is a process of allocating money across various asset categories in line with a stated objective.

- StrategicAssetAllocation is allocation aligned to the financial goals of the individual.

- Tactical asset allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors.

- The portfolio should be rebalanced to restore the target asset allocation. The rebalancing approach can work very well over the years when the various asset categories go through many market cycles of ups and downs.

- If one do not have the ability and willingness to take the risk and one can afford to outsource, it is better to invest the fund through mutual fund.