Investment Landscape

Investors and their Financial Goals: Understanding the purpose of investment, identifying financial objectives, and converting them into financial goals.
Financial Goals: Assigning amounts and timelines to objectives, such as funding a child's education, retirement, or buying a house.
Goal Setting: Identifying events in life, assigning priorities, and creating an emergency fund to achieve financial goals.
Short-term Needs vs. Long-term Goals: Classifying goals based on timeline and importance, using a matrix to prioritize goals.
Financial Goals, Time Horizon, and Inflation: Assigning amounts to goals, considering inflation, and adjusting goal values accordingly.
The Pool Approach: Managing a pool of savings/investments to meet financial requirements, but knowing the horizon is crucial for investment decisions.
Savings or Investments: Understanding the difference between saving and investing, and determining which is better based on individual financial goals.

Key concepts:

Financial Objectives: Requirements such as funding a child's education or retirement.
Financial Goals: Assigning amounts and timelines to objectives, such as saving for a house or retirement.
Inflation: The rise in prices of products and services, impacting long-term goals and requiring adjustment of goal values.
Time Horizon: The time period for achieving financial goals, crucial for investment decisions.
Emergency Fund: A fund created to cover unexpected expenses or financial shortfalls.
Risk Management: Understanding and mitigating risks associated with investments to achieve financial goals.

Investment Landscape

Introduction to Investment: The primary objective of investing is to earn profits, which involves a trade-off between risk and return.
Saving vs. Investing: Saving is the reduction in the amount of money used, and it precedes investing. In other words, one needs to save first to invest.
Factors to Evaluate Investments: The key factors to evaluate investments are:
- Safety: The safety of capital invested and the degree of surety of income from investment.
- Liquidity: How easily can one liquidate the investment and convert it to cash?
- Returns: The returns from investment, which may be in the form of regular income or capital appreciation.
- Convenience: The ease of investing, taking money out, and checking the value of the investment.
- Ticket Size: The minimum amount required for investment.
- Taxability of Income: The taxation of earnings from investment.
- Tax Deduction: The tax deduction available for certain investments.

Different Asset Classes

Asset Classes: Investments can be grouped into categories called asset classes, which exhibit similar characteristics.
Broad Asset Categories: The four broad asset categories are:
- Real Estate: Considered the most important and popular asset class, but often purchased for self-occupation rather than investment.
- Commodities: Includes gold, silver, and other commodities that can be used as investments or storage of value.
- Equity: The owner's capital in a business, which involves risk capital and potential for high returns.
- Fixed Income: Investments that provide regular income, such as bonds and debentures, which are generally considered safer than equity.
Characteristics of Asset Classes:
- Real Estate:
  - Location is a key factor impacting performance.
  - Illiquid and not divisible.
  - Can generate current income through rents.
  - High transaction costs and maintenance expenses.
- Commodities:
  - Gold and silver are popular investment avenues.
  - Prices are globally accepted and in sync across countries.
  - No current income, only capital appreciation.
- Fixed Income:
  - Provides regular income through interest payments.
  - Generally considered safer than equity.
  - Can be classified into subcategories based on issuer type and maturity date.
- Equity:
  - Involves risk capital and potential for high returns.
  - Historically generated returns in excess of inflation.
  - Can be volatile, with share prices fluctuating in the secondary market.

Investment Landscape

Equity Shares: Apart from long-term capital appreciation, equity share owners may also receive dividends from the company, which are shared out of the profit generated from its business operations.
Characteristics of Asset Classes: Investments in equity and bonds can be done only in financial form, whereas real estate and commodities can be bought in either financial or physical form.
Key Differences: Real estate and commodities differ from equity and bonds in that they can be bought for consumption purposes or as an investment, and they provide a sense of safety due to their tangible nature.

Investment Avenues

Asset Categories: Different investment avenues can be categorized into various asset categories, including:
- Equity: Blue-chip companies, mid-sized companies, small-sized companies, unlisted companies, foreign stocks, equity mutual funds, exchange-traded funds, and index funds.
- Fixed Income: Fixed deposits, recurring deposits, endowment policies, money back policies, public provident fund, Sukanya Samruddhi Yojana, senior citizens' savings scheme, post office monthly income scheme, company fixed deposits, debentures, and debt mutual funds.
- Real Estate/Infrastructure: Physical assets such as residential or commercial properties, and financial assets such as real estate mutual funds, real estate investment trusts, and infrastructure investment trusts.
- Commodities: Gold, silver, gold funds, and commodity ETFs.
- Hybrid Asset Classes: Hybrid mutual funds or multi-asset funds.
- Others: Rare coins, art, and rare stamps.

Investment Risks

Inflation Risk: The general rise in prices of commodities, products, and services that erodes the purchasing power of money.
Liquidity Risk: The risk that an investment may not be easily convertible to cash without a significant loss in value.
Credit Risk: The risk that a borrower may default on their debt obligations, resulting in a loss for the lender.

Investment Landscape (Part 4)

Introduction to Risk: A lender assesses the ability and willingness of a borrower to repay a loan, and expects compensation if the ability appears to be low. In the case of debentures or bonds, investors expect higher interest from bonds with low safety.
Safest Bonds: Bonds issued by the government of their own country are considered the safest for investors, offering the lowest interest rates due to the high safety of capital.

Market Risk and Price Risk

Definition: Market risk and price risk are two types of risks associated with securities traded in an open market. Market risk refers to the risk that the overall market will decline, while price risk refers to the risk that the price of a specific security will fluctuate.
Examples: A country getting into a warlike situation can lead to a market-wide fall in stock prices, while a company's share price may fall due to technological changes or the arrival of a better product.
Industry-Specific Factors: Government policy changes or new technologies can impact all firms within the same industry.

Interest Rate Risk

Definition: Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates.
Impact on Bonds: Interest rate risk affects the value of bonds/debt instruments more directly than stocks. A reduction in interest rates will increase the value of the instrument, while an increase in interest rates will decrease the value.
Example: If an investor sells a bond in the secondary market, the price will depend on many factors, including changes in interest rates. If interest rates increase, the price of existing bonds will decrease.

Risk Measures and Management Strategies

Avoid: Avoiding certain investment products to avoid risk, but potentially giving up opportunities for returns.
Take a Position: Taking an investment position in anticipation of market developments, such as selling short maturity bonds and investing in long maturity bonds if interest rates are expected to decrease.
Diversify: Diversifying across various investment options to spread risk and reduce the probability of loss.

Behavioural Biases in Investment Decision Making

Availability Heuristic: Relying on examples or experiences that come to mind immediately, leading to inadequate research and missing critical information.
Confirmation Bias: Looking for information that confirms existing beliefs or views, and interpreting new information to support those views.
Familiarity Bias: Preferring familiar investments over novel ones, potentially preventing exploration of better opportunities and meaningful diversification.
Herd Mentality: Following the crowd and investing in popular assets, rather than making independent decisions.
Loss Aversion: Preferring to avoid losses over acquiring equivalent gains, potentially leading to missed opportunities.
Overconfidence: Overestimating one's abilities or judgment, leading to taking on excessive risk.
Recency Bias: Extrapolating recent events into the future and expecting a repeat, potentially leading to poor investment decisions.

Investment Landscape (Part 5)

Introduction to Investment Biases: Investment biases can derail the entire investment process and set back existing efforts. These biases prevent investors from gathering enough information to identify opportunities or evaluate risks related to investment avenues.
Importance of Avoiding Behavioral Biases: It is crucial to avoid behavioral biases in investment decisions. To detach emotions from investments, it is better to take the opinion of a third person, i.e., a Registered Investment Advisor (RIA) or Mutual Fund Distributor (MFD).

Risk Profiling

Definition: Risk profiling tries to ascertain the risk appetite of the investor to ensure they are not sold mutual fund schemes that carry higher risk than they can handle.
Evaluation Parameters: The following must be evaluated to ascertain the risk appetite:
- The need to take risks
- The ability to take risks
- The willingness to take risks
Approaches to Risk Profiling: There are various approaches to creating a risk profile, and the distributor can choose from these options or design their own method.

Understanding Asset Allocation

Definition: Asset allocation is the process of allocating an investor's money across asset categories to achieve a stated objective.
Importance of Process: Asset allocation is a process that involves several steps, and these steps should not be ignored or skipped.
Objective: The whole idea behind asset allocation is to achieve some objective, and the approach selected should help achieve this objective.

Approaches to Asset Allocation

Strategic Asset Allocation: This approach involves allocating assets based on the financial goals of the individual, considering the returns required, time horizon, and risk profile.
Tactical Asset Allocation: This approach involves dynamically changing the allocation between asset categories to take advantage of market opportunities and improve risk-adjusted returns.

Rebalancing

Definition: Rebalancing involves modifying asset allocations to restore the target asset allocation.
Benefits: Rebalancing offers the benefit of making the investor buy low and sell high, and it can work well over the years when asset categories go through market cycles.
Types of Rebalancing: Rebalancing is required in both strategic and tactical asset allocation approaches.

Do-it-yourself versus Taking Professional Help

Introduction: Investors can manage their investments themselves or outsource the job to a professional.
Mutual Funds as a Professional Option: Mutual funds are managed by a team of professionals, known as the asset management company, and investing through mutual funds means outsourcing the entire job of investing.
Questions to Consider: When deciding between managing investments oneself or taking professional help, consider the following:
1. Can one do the job oneself?
2. Does one want to do it?
3. Can one afford to outsource?
Hidden Costs of DIY: The hidden costs of managing investments oneself include the cost of one's time and the potential mistakes that an individual investor is likely to make.

Investment Landscape (Part 6)

Investment Avenues: The investment avenue that does not offer income on a regular basis is:
- Real estate: Although real estate can generate income through rental yields, it is not typically considered a regular income-generating investment avenue like debentures or stocks with consistent dividend payments.
- Physical Gold: Gold is a store of value and a hedge against inflation, but it does not generate regular income.
- Stocks: Some stocks pay dividends, which can provide regular income, but not all stocks do.
- Debentures: Debentures typically offer regular interest payments.
Purchasing Power: The purchasing power of currency changes due to:
- Inflation: This is the correct answer, as inflation directly affects the purchasing power of money by reducing the value of currency over time.
- Asset allocation, Compound interest, and Diversification are important investment concepts but do not directly cause changes in purchasing power.
Real Rate of Return: The real rate of return is defined as:
- Return after adjusting for inflation: This is the correct answer. The real rate of return is the return on investment after accounting for inflation, which gives a clearer picture of the actual gain in purchasing power.
Interest Rate Impact on Bonds: When the interest rate in the economy increases, the price of existing bonds:
- Decreases: This is the correct answer. When interest rates rise, newly issued bonds will offer higher interest rates, making existing bonds with lower rates less attractive and causing their prices to decrease.