2 Investment Overview

8/11/2019 2 Investment Overview

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Investments

Dr. Shital Jhunjhunwala

Institute of Public Enterprise


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SJ

Why Do Individuals Invest ?

By investing money (instead ofspending it), individuals tradeoff

present consumption for a future largerconsumption.

Investment = Postponed Consumption

Should I Invest ?

Should I Consume Now or Later?


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Defining an Investment

A current commitment of X amount offunds for a period of time ( generally

greater > 1) to derive future paymentsthat will compensate for:

the time the funds are committed

the expected rate of inflation

uncertainty of future payments.

These are the components of requiredrate of return.


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Real Vs Financial Investments

Behaves like afinancial asset

Investment=FA + RA

(that behavelike FA)


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Investment Decision

The decision to -

acquire,

hold or

dispose

of assets by rational , risk averse

individuals or organizations


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Saving and Investment

Saving Investment


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SJ

Saving and Investment


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Power of Compounding

Suppose you put aside Rs. 1 each day. Atthe end of 20 years assuming a return of8% (compounded annually) it will become

Rs. 18,040.



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Power of Compounding- onetime

Suppose you put aside Rs.1000 for 30 years at

8%. It will become

1,000 * 1.08 ^ 30 = 1000*10.062 = Rs. 10062



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Importance of saving early


Let us assume your friend at the age of 20 startsinvesting Rs. 3000 at a rate of 8% and stops after10 years at the age of 30. You at the age of 30

start putting aside Rs. 3000 each year. Who isbetter off when you both turn 65.

You will have put Rs. 3000 aside for 35 years andyou worth about Rs. 5,58,000 = FV(8%,35,-3000,,1)

You friend saved only Rs. 3000 for 10 years and isnow worth Rs. 6,94,000.

=FV(8%,10,-3000,,1) * POWER(1.08,35).


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Rule of 72

In order to find the number of yearsrequired to double your money at agiven interest rate, you divide the

compound return into 72. The result isthe approximate number of years that itwill take for your investment to double.

For example, if you want to know how longit will take to double your money at 12%interest, divide 12 into 72 and you get sixyears



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Financial Goal



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Goal Setting : Hands on


http://www.financialliteracymonth.com/30Steps/Step12.aspx
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Investment ObjectiveSAFETY RETURN

LIQUIDITYRISK

TAX BENEFITS

- Capital Preservation

- Growth

- Income


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A Portfolio

A Portfolio is Simply

a Group of Assets

Held at the SameTime for an Objective

Think of the portfolio as a pie: each piece is divided up into specificassets such as bonds, equities, etc.


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Key Concepts

Saving

Investment Investment Decision

Investment Objective

Portfolio


2 Investment Overview

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