Introduction¶
Investment¶
Sacrificing current resources with the expectation of future gains
- Sacrificing current resources is certain
- Future returns has risk & uncertainty
It is nearly impossible to “beat the market” consistently
Investment vs Speculation¶
| Investment | Speculation | |
|---|---|---|
| Buying undervalued, holding for a long time and selling high, hence making a large capital gain | Buying and selling of high-risk securities with anticipation of earning higher returns in the short-term | |
| Horizon | Long | Short |
Return¶
Total income an investor gets from their investment every year
Compensation for
- Time
- Inflation
- Risk
- Opportunity cost (Compensation for postponing consumption)
Investment Amount Factors¶
- Income
- Expenses (Necessary/Optional)
- Time Horizon
- Expected Return
- Risk tolerance
Investment Steps¶
- Set investment objectives (Factors)
- Major asset allocation
-
Portfolio generation
-
Asset/Security selection
-
Proportion
-
Execution
- Performance Review
- Portfolio Revision: Inclusion/exclusion of assets in an existing portfolio or changing the ratio of funds invested
Compare portfolio with benchmark returns and revise portfolio 7. Go to step 1
Investment Objectives¶
- Returns
- Regular Income
- Stock Dividends
- Bond Coupon
- Zero-coupon bond maturity repayment should not be taken as capital appreciation; it is interest income
- Capital Appreciation
- Stock Value
- Bond Value increment due to change in market interest rate
- Safety/Risk
- Liquidity
-
Tax factors: Govt security bonds are free from tax
-
Ease of management
- Legal & regulatory factors
- Unique needs & preferences
- Duration of investment
- Frequency of performance evaluation
Asset Allocation¶
| Strategic | Tactical | |
|---|---|---|
| Approach | buy-and-hold | |
| Duration | Long-term | Short-term |
Security Selection¶
| Value Stock | Growth Stock | |
|---|---|---|
| Valuation | Under-valued | Overvalued |
| Price to earnings | Low | High |
| Volatility | Low | High |
| Dividends | High | Low/No |
| Source of Return | Dividends | Expected capital gain |
| Cyclical Stock | Defensive Stock | |
|---|---|---|
| Volatility | High | Low |
| Sensitivity to market trends | High | Low |
| Company usually deals with | Luxury goods | Necessities |
| Comment | Follow all cycles of economy: expansion, peak, and recession, recovery | Outperform market during economic slowdown |
Security¶
Always invest in business, not stocks
Stocks don’t always ‘win’ in the long-run. Index funds are better, as they keep revising the portfolio. Easier to invest in index funds for passive income rather than evaluating yourself.
Yield on bond market actually is more volatile than stock market, due to fluctuations in the interest rate
Taxes¶
Dividends¶
Fully-taxable regardless of the dividend amount
Exception: if you are below the taxable income slab
Capital Gains¶
| Tax in India | Taxable when | |
|---|---|---|
| STCG Short-Term Capital Gains | 15% | Any gain |
| LTCG Long-Term Capital Gains | 10% | Only if gain > 1 lakh |
Note¶
- When comparing investments, remember about Survivorship Bias