The investment process details various steps which need to be undertaken in order to make an informed decision about making an investment. Following are the main stages involved in the process of an investment.
1) Set Investment Policy: It involves determining the purpose of making the investment as well as the corpus available for this process. Ideally, the required rate of return and risk should be clearly laid out. This is done because investment products generally show direct link between return and risk.
2) Perform Security Analysis: While designing a portfolio it is important to pay attention to each individual component. This also helps in identifying the securities which may be mispriced. The investors tend to derive their profits by the identification of such mispriced securities. Such analysis may be ‘technical analysis’ which is the first classification or ‘fundamental analysis’ which is the second classification. The person who uses technical analysis is known as technical analyst or technician and the person who uses fundamental analysis is known as fundamentalist, or fundamental analyst. However, it is recommended to use both the types of analysis to reach at the proper conclusion.
3) Portfolio Construction: This step involves identifying the securities and then determining the quantities of such instruments to be included in the portfolio. Following three factors should be kept in mind while constructing a portfolio:
i) Selectivity: The proper analysis of each and every instrument should be done to ensure that it fits the overall objective of the portfolio. It is also known as micro forecasting.
ii) Timing: This process is known as macro-forecasting and it entails the forecast of security price in relation to other fixed income securities.
iii) Diversification: This step includes the construction of investor’s portfolio so that the risk is minimised.
4) Portfolio Revision: Portfolio should be revised on periodical basis to see that its various constituents still confirm to the overall portfolio objective. If a security has met its investment objective, then it may be replaced by a new one.
5) Evaluate Performance of Portfolio: Portfolio performance should be taken into account to see that it is up to set standards. It is done to ensure that the objectives of portfolio investments are achieved.
Importance of Investment
An investment is an important and useful factor in the context of present day conditions. Some factors are important. They are as explained below:
1) Longer Life Expectancy: As the life expectancy increases, the number of years to be lived post retirement also increases, which provides more fund after retirement. It is important to carefully invest the savings to ensure proper income during the retirement time.
2) To Save Tax: Various tax exemptions make certain investments more worthwhile. Investing funds in ULIP, Pension Fund or National Savings Certificates provide higher effective return.
3) To Earn Interest: It is important to ensure that the investments earn appropriate amount of interest. Different investments provide different rate of return. The interest rate will be different because of different benefit schemes given by the institutions. It is not necessary that high rate of interest will favour the investment. The stable interest is an important way for receiving a high rate of interest.
4) Fear of Inflation: Inflation is said to be on-going process. Inflation involves the fall in purchasing power of the money over a period of time. It is important to ensure that the investments generate adequate returns after taking inflation into account. There are various problems which are related in lowering the standard of living.
5) Income: It is important to generate sufficient income to ensure proper amount of investment for future use. The government provides jobs to unemployed person to ensure the increase in the saving of the people. The more incomes and avenues of investment offers the people to save and invest.
6) Future Need Expectation: The amount of investment is largely impacted by the anticipation of the funds requirement in the future. It is important to properly assess the funds required in the future.
