01-09-2012, 03:24 PM
Investment Avenues In The Present Financial Year
Investment Avenues.docx (Size: 607.61 KB / Downloads: 34)
Executive Summary
India created millionaires at the fastest pace in the world in 2007 according to an annual Merrill Lynch Capgemini report. The combined investment of the Indian millionaires reaches as high as $600 billion. Thus as our society becomes increasingly affluent, a growing number of high net-worth individuals and families are looking for ways to optimize investment management. Given the complexity that goes along with investment and the sheer number of financial options to consider, adopting a casual approach to managing their finances and investments can lead to distortion in their investment and can severely affect their financial health. Not only that, it can come in the way of achieving their financial goals in life. Thus a need for an investment manager is rising exponentially in recent times, which can facilitate all of their investing, borrowing, and trust needs while helping them accumulate, preserve, and transfer investment.
Large banks and brokerage houses create separate sales forces, provide premium services and other 'benefits' to retain or attract HNIs (High Net worth Individuals). The primary reason for the preferred banking and premium services is the higher profitability and economies of scale. These investment management outfits manage the investment of these HNIs and their social group’s investment across various asset classes ranging from equities, debt, private equity, real estate investments, art, mutual fund, structured products and commodities.
Introduction
"The Poor Make Money by Working for it; While the Rich Make Money by having their assets works for Them"
The above is a simple message by Robert T Kiyosaki from his book "Rich Day Poor Dad", to motivate Kids (new to investment) start investing, so that your assets work for U.
Many individuals find investments to be fascinating because they can participate in the decision making process and see the results of their choices. Not all investments will be profitable, as investor wills not always make the correct investment decisions over the period of years; however, you should earn a positive return on a diversified portfolio. In addition, there is a thrill from the major success, along with the agony associated with the stock that dramatically rose after you sold or did not buy. Both the big fish you catch and the fish that get away can make wonderful stories.
“An investment is a voyage with a purpose” which succeeds only if it has been planned in advance .In other words it is a process that never succeeds if it has not been calculated and planned in advance. But, nowadays, as market conditions change and new financial products appear and disappear, making decisions about investments and portfolios is no easy task. Individuals are bombarded with a dizzying array of investment options. Information abounds, advice comes from all quarters, recommendations often contradict one another, and new products and asset classes are invented at breakneck speed.
Methodology used
Expert opinions are collected from the investment advising and financial planning community during the stint of the project
Also opinion of clients and prospects are collected by way of filling up of a questionnaire to analyze their risk profile and their style of investment.
Extensive study of research reports and journals published by top notch investment advisory firms , and then their analysis and interpretation.
Reading of various research reports, latest news and articles related to topic on websites,magazines, references, etc.
Know yourself
Invest in shares or mutual funds based on your needs and after doing proper homework. Don't buy something because your neighbor believes he has a winner on hand, or your broker is issuing a big buy report on a stock.
Carefully choose securities that fit your profile. It is important to relate the risk perceived in a given security not only to returns, but also to your attitude towards risk. It is important to understand your emotions towards money and comfort levels with risk. For instance, what would be your reaction if your stock investments plummet by 35 per cent in a month? ow would that affect your medium term or long term plans?
The risk/return trade-off
There is no harm in assuming a big risk in the quest for higher long term returns, and your profile does not preclude taking of such risks. Equities promise higher long term returns but the period taken to realize these returns too can be uncertain. As far as debt mutual funds are concerned, they are more stable tenure but returns are much lower. As an investor, you should be able to judge whether the perceived risk is worth taking in order to get the expected return and whether a higher return is possible for the same level of risk (or a lower risk is possible for the same level of return). Smart investing will involve choices, compromises and trade-offs. And you have to decide the combination of factors that suit you best.
Don't overpay for growth
Seek out shares that are capable of delivering sustainable earnings growth but don’t fall into the trap of overpaying for growth. Even the best growth stock may not deliver dream returns if your purchase price was too high to begin with. Warren Buffet, one of the most successful investors in the world, said back in 1983: "For the investor, a too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments." So growth riding on the back of a reasonable purchase price may be a good motto to stick with.
The reinvestment risk
If it suits your plan, choose a fund that reinvests your dividends or interest. That won't leave you exposed to the risk of reinvesting the amount at equivalent or higher returns for the same level of risk. Such alternatives are more than often not easily available. The reinvestment risk is implicitly defined for a debt instrument. Yield-to-maturity, which is the actual yield on a bond if held to maturity, may be a familiar term to those who invest in fixed income. But few know that this YTM assumes that each interest cheque received by the investor is reinvested at the coupon rate. In reality, however, most investors are probably spending this interest on full filing current needs. So even if investors are getting a coupon of 18 per cent on a semi-annual debt instrument, their YTM is much lower.
Evaluate your future
A lot of investing is about how you see your future, financially speaking. We all make certain assumptions while estimating our future needs, and how we intend to meet those needs. But circumstances can change. Hence it is important that you review your portfolio at least once a year. Also try to evaluate the performance of your investments against the level of risk you are assuming for achieving the returns you want. And when necessary re-balance your portfolio to stay on track with your long term financial goals.
Beware of the law of averages
The average, or mean, acts like a powerful magnet that pulls stock prices down sharply, often causing returns to deteriorate after they exceed historical norms by substantial margins. Stocks display runaway tendencies by appreciating sharply. Subsequently, prices may plateau causing disappointment. In such a situation, investors may profit from selling out earlier than originally planned. And if the fundamental story is still intact, you could even buy back your shares at a lower price. So stay tuned to any short-term movements in the stock market that affect your stocks. However, if your goals are long term, don't get into the trading mode, where you compromise on the big picture for short-term gains. It is important that you still think long term. As Benjamin Graham, author of the investment classic The Intelligent Investor wrote: "In the short term, the stock market is a voting machine-reflecting a voter registration test that requires only money, not intelligence or emotional stability-but in the long run the market is a weighing machine.