Basics of Invesment

The purpose of this blog is to discuss in length the concepts and issues related to investment. The readers at times may find the views expressed being naive, where the insightful comments would be very useful. If the blog is about investment, it is better to first clarify the very term. Simply put, investment can be defined as the process of parting from your money today in an expectation of a greater return tomorrow. Now comes the question of how you invest? The answer is following the sequential steps of investment process which is - understanding your specific situation, formulating an investment strategy, implementing your investment strategy and monitoring your portfolio. To explain it in simple terms, one has to identify one's risk appetite depending on one's situation and return needs, then select securities to invest in and monitor the performance of those securities.So why can't we do it ourselves, why do we need an investment manager? The answer is simple, investment process requires the expert knowledge of an investment professional to evaluate the fundamentals of  many different asset classes and decide where to invest (asset selection) and how much to invest (asset allocation) to generate the maximum return. Asset allocation would depend on the risk appetite of the investor. Considering only two types of assets, stocks and bonds, a more risk averse investor would invest more in bonds than stocks because bonds are safer. After deciding the allocation of the assets, we would have to select the assets where the important concept of valuation comes into play. We would like to buy the assets that are undervalued, hoping that it would rise in value and we would get a return. Similarly if we have an overvalued security in our portfolio, we would sell it to avoid the future loss. Starting from my next post, we would discuss the topic valuation in more details as it is in the center of the investment process.