Module -2

Investment
Planning
By Prof. Devita Movaliya
SEBI,NCFE,NISM,CED
Resource Person
 Content
• Investment Planning:
• Preparing for an Investment Program,
• Factors Affecting Choice of Investments,
• Asset Allocation & Investment Alternatives,
• Investing in Common Stocks, Bonds, Mutual
Funds, Insurance, Derivatives, Real Estate,
Commodities etc.
 Introduction
Investment plan involves more than just choosing
a few stocks to put money in. You have to
consider your current financial situation and your
goals for the future. It’s also important to define
your timeline and how much risk you’re willing to
take on in order to determine your optimal asset
allocation. All of these steps help to mitigate any
risk you might encounter in the stock market. In
turn, planning before you invest your hard-earned
money is extremely wise.
 Preparing for an Investment
Program/Plan
Planning is the key
to successful investing. Creating a plan will
help you find investments that fit your
investing time frame and risk tolerance, to
help you reach your financial goals sooner.
 1. Review your finances

Before you invest, review your financial

situation. Write down what you owe (your
debts) and what you own (your assets). For
your assets include your:
• salary
• home
• savings
• other investments
 2. Set your financial goals

Write down your financial goals. For each goal

include how much you'll need and how long you
have to reach it. For example, taking a $10,000
holiday in one year, or reaching $500,000 in
superannuation before you retire.
Then divide your goals into:
• short term (0 to 2 years)
• medium term (3 to 5 years)
• long term (5 years or more)
3. Understand investment risks
 4. Research your investment options
To find the right investments, you need to think about:
• Return — what is the expected return on the
investment? Does it come from income or capital
growth?
• Time frame — how long do you need to invest to get
the expected return?
• Risk — what types of risk does the investment involve?
Are you comfortable to take on these risks?
• Access to cash (liquidity) — how long will it take to sell
the investment and get your cash out?
• Cost to buy and sell — how much will it cost to buy
and sell the investment?
• Tax — how much tax will you pay on earnings (income
and capital gains) from the investment?
 5. Build your portfolio

• The way you structure your portfolio will depend on your financial
goals, investing time frame and risk tolerance.
• For short-term goals, lower-risk investment options are better.
Consider investments like a savings account , term deposit
or government bonds These investments are lower risk as they're
less likely to fall in value and you can access your money.
• For longer-term goals, investments with higher returns such
as shares and property, can be better. These investments are
higher risk but you're investing long term, so you can ride out any
short-term falls in value.
• It's important to make sure you diversify your portfolio across
different asset classes and within each asset class. This protects
you against losing too much if the value of one investment falls.
 6. Monitor your investments

• It's important to review your investments

regularly to make sure they're performing as
expected. And check whether you're on track
to reach your financial goals. See keep track of
your investments.
Factors affecting choice of investment
 Asset Allocation & Investment
Alternatives
• What Is Asset Allocation?
Asset allocation is an investment strategy that
aims to balance risk and reward by apportioning a
portfolio's assets according to an individual's
goals, risk tolerance, and investment horizon. The
three main asset classes—equities, fixed-income,
and cash and equivalents—have different levels of
risk and return, so each will behave differently
over time.
 Example of Asset Allocation

• Let’s say Joe is in the process of creating a financial plan for his retirement.
Therefore, he wants to invest his $10,000 saving for a time horizon of five
years. So, his financial advisor may advise Joe to diversify his portfolio
across the three major categories at a mix of 50/40/10 among stocks,
bonds, and cash. His portfolio may look like below:
• Stocks
– Small-Cap Growth Stocks – 25%
– Large-Cap Value Stocks – 15%
– International stocks – 10%
• Bonds
– Government bonds – 15%
– High yield bonds – 25%
• Cash
– Money market – 10%
• The distribution of his investment across the three broad categories,
therefore, may look like this: $5,000/$4,000/$1,000.
 Strategies for Asset Allocation
1. Age-Based Asset Allocation
• In general, stocks are recommended for holding
periods of five years or longer. Cash and money
market accounts are appropriate for objectives less
than a year away. Bonds fall somewhere in between.
In the past, financial advisors have recommended
subtracting an investor's age from 100 to determine
what percentage should be invested in stocks. For
example, a 40-year-old would be 60% invested in
stocks. Variations of the rule recommend subtracting
age from 110 or 120, given that the average life
expectancy continues to grow. As individuals approach
retirement age, portfolios should generally move to a
more conservative asset allocation to help protect
assets
 2.Asset Allocation Through Life-Cycle
Funds
• Asset-allocation mutual funds, also known as
life-cycle, or target-date, funds, are an
attempt to provide investors with portfolio
structures that address an investor's age, risk
appetite, and investment objectives with an
appropriate apportionment of asset classes.
 Investment in common stocks
• What Is Common Stock?
Common stock is a security that represents
ownership in a corporation. Holders of common stock
elect the board of directors and vote on corporate
policies. This form of equity ownership typically yields
higher rates of return long term. However, in the
event of liquidation, common shareholders have rights
to a company's assets only after bondholders,
preferred shareholders, and other debt holders are
paid in full. Common stock is reported in the
stockholder's equity section of a company's balance
sheet.
• What are the pre-requisites to invest in securities?
– Savings Account – Saving bank account with a commercial bank
– Trading Account - Trading account with a SEBI registered stock broker
of a recognized stock exchange to buy or sell securities on the Stock
Exchange
– Demat Account - Demat account with a SEBI recognized Depository
Participant (DP) of Depository for holding securities in
dematerialized/electronic form

• The Demat account can be opened with depository participant

(DP) of any of the Depository. National Securities Depository Ltd.
(NSDL) and Central Depository Services (India) Ltd. (CDSL) are two
SEBI registered depositories in India.
• The list of SEBI registered stock brokers and depository
participants may be obtained from SEBI’s official website
(www.sebi.gov.in) or from the websites of the respective stock
exchanges & depositories.
• Primary Market
• When a company publicly issues new stocks and bonds
for the first time, it does so in the primary market. In
many cases, this takes the form of an initial public
offer (IPO). SEBI examines the prospectus issued to the
public for subscription of shares to see that it meets
with the requirements of the SEBI Regulations.
Companies issuing securities via the primary market
hire merchant bankers who, on behalf of the
company, prepare the prospectus and ensure related
compliance for the issue of shares viz. finalization of
allotment process, listing of shares in the stock
exchanges, etc.
• Secondary Market
• Secondary market is the market where securities are traded after
the company has issued the stocks and bonds in the primary
market. The shares are listed and traded on the stock exchanges
which facilitates the buying and selling of stocks in the secondary
market. Major SEBI recognized stock exchanges in India are BSE
Ltd. (formerly Bombay Stock Exchange Ltd.) and the National Stock
Exchange of India Ltd. (NSE).

• Anyone can purchase securities on the secondary market as long

as they are willing to pay the price at which the securities are
being traded. Investment in securities market should be done
after carrying out research on the background of the company,
future prospects and financial strength of the company.
 Investments in bonds
• Bond is said to be a debt instrument in which the issuer company borrows money
from the lender (bond holder) and, in return, is obliged to pay interest on the
principle amount. The interest is called the coupon.
• The holder enters a formal contract where the issuer decides to repay borrowed
money along with interest at fixed intervals, such as on a semi-annual, annual or
monthly basis.
• Both bonds and stocks are capital market securities; however, the difference is that
stockholders have an equity stake in the company, while the bondholder has a
creditor stake in the company.
• It means that stockholders enjoy the status of owners and bondholders are lenders
for the company. Also, bonds usually have a pre-determined interest rate and
defined period or maturity, after which these are matured. Stocks, on the other
hand, remain outstanding indefinitely.
• Several business owners and the Government issue bonds to raise funds for
financing its long-term investments or current expenditures needs. While there are
many investment options in India, bonds are considered a safe instrument because
of the low risk involved in it. Lack of financial literacy and access to these markets in
India often prevents people from investing in the same.
2. Government Securities
Bonds issued by the Central and State Governments are called
Government security. Since these are issued by Governments they
carry no credit risk. These are one of the safest types of
investment options in India to earn periodic interests and principal
on maturity. These bonds pay interest on semi-annual basis.
3. Corporate Bonds
These are bonds issued by various corporates for their financing
needs and hence carry credit risk. The holder of the bonds earns
regular interest income. and principal amount at maturity.
Corporate bonds pay higher interest than Bank FD’s and
Government bonds.
4. Inflation-Linked Bonds
In such type of bond, both principal amount and interest
payments are indexed to inflation. Inflation indexed bonds are an
efficient way to counter the inflation risk.
5. Convertible Bonds
This kind of bond allows its holder the option to convert it into
equity based on pre-specified terms.
6. Sovereign Gold Bond
The Government of India also issues sovereign
Gold Bonds. Gold bonds are in form of a security
as it in the form of the Government of India stock.
It also carries interest rate which is paid regularly
and has zero risk of handling that exists in physical
gold.

7. RBI Bond
The Government of India decided to issue 7.75%
Taxable Bonds, 2018, with effect from January 10,
2018 [2], for enabling resident citizens/HUF to
invest in a taxable bond, without any monetary
ceiling.
Different Types of Bonds that You Can
Invest in India
1. Capital Gains Bonds
• Capital Gains Bonds are those instruments that allow you to
transfer your gains from long term assets such as land and house
property into specific bonds.
• The most significant advantage of investing in such a bond is that
it offers you tax exemption from Capital Gains Tax under Section
54EC of the Income Tax Act, 1961, for up to 6 months from the
sale of the asset sold.
• It means that an individual need to invest in capital gains bonds
within 6 months from the transfer of capital assets.
• Bonds eligible under Section 54EC of the Income Tax Act, 1961 are
issued by:
• NHAI (National Highways Authority of India)
• RECL (Rural Electrification Corporation Ltd)
 Mutual Fund

• A mutual fund pools in money from many investors and invests

the money in stocks, bonds, short-term money-market
instruments, other securities or assets, or some combination of
these investments. All mutual funds are required to be registered
with SEBI before they launch any scheme.

• Salient features of mutual funds are:

1. Professional management
2. Diversification
3. Economy of scale
4. Liquidity
5.Simplicity
6. Tax Benefits
 What is Systematic Investment Plan
(SIP)?
• An SIP or a Systematic Investment Plan allows an investor to invest a fixed amount of
money regularly in a mutual fund scheme. It lets you set aside a fixed sum of money
at regular intervals (weekly, monthly or quarterly) with an objective to gain capital
appreciation in the longer run. SIP investment inculcates the habit of savings.
Instead of trying to time the market, by investing on a regular basis, the investor
benefits from the rupee-cost averaging factor. As the investments are done over
different market cycles, the investor benefits from the market volatility by getting to
buy more units of the same fund when the markets are low and buying less units
when the prices are high.
• An investor can invest a pre-determined fixed amount as low as ₹500/- in a scheme
every month or quarter, depending on his/her convenience through post-dated
cheques, through Standing instruction (SI) facility or through ECS (Electronic Clearing
Service) facility. Investors need to fill up an application form and SIP mandate form
on which they need to indicate their choice for the SIP date (basically when the
pre-determined amount will be invested). Subsequent SIPs may be auto-debited
through a standing instruction, electronic clearing service or post-dated cheques.
 Derivative
• A derivative is a complex type of financial security that is set
between two or more parties. Traders use derivatives to
access specific markets and trade different assets. The most
common underlying assets for derivatives are stocks,
bonds, commodities, currencies, interest rates, and market
indexes. Contract values depend on changes in the prices of
the underlying asset.
• Derivatives can be used to hedge a position, speculate on
the directional movement of an underlying asset, or give
leverage to holdings. These assets are commonly traded on
exchanges or over-the-counter (OTC) and are purchased
through brokerages. The Chicago Mercantile
Exchange (CME) is among the world's largest derivatives
exchanges.
 Types of Derivatives

1. Futures
A futures contract, or simply futures, is an agreement between
two parties for the purchase and delivery of an asset at an
agreed-upon price at a future date. Futures are standardized
contracts that trade on an exchange. Traders use a futures
contract to hedge their risk or speculate on the price of an
underlying asset. The parties involved are obligated to fulfill a
commitment to buy or sell the underlying asset.
2. Forwards
Forward contracts or forwards are similar to futures, but they do
not trade on an exchange. These contracts only trade
over-the-counter. When a forward contract is created, the buyer
and seller may customize the terms, size, and settlement process.
As OTC products, forward contracts carry a greater degree of
counterparty risk for both parties.
3. Options
An options contract is similar to a futures
contract in that it is an agreement between two
parties to buy or sell an asset at a predetermined
future date for a specific price. The key difference
between options and futures is that with an
option, the buyer is not obliged to exercise their
agreement to buy or sell. It is an opportunity only,
not an obligation, as futures are. As with futures,
options may be used to hedge or speculate on the
price of the underlying asset.
 Risk Faced by Various Stakeholders
• Various stakeholders face many risks in
commodity trading, especially farmers, such as:
– Price volatility and price risk
– Lack of quality storage facilities
– Need for finance at the time of sowing of crops
– Dependence on local middlemen and agents for
selling their crops
– Small farm holdings — no bargaining power
– Opaque/manipulated prices at Mandis
 Benefits of Commodity Derivative
Exchange
Commodity derivative exchange offers following
benefits to producers and consumers of
commodities:
• Price discovery: Helps producers / sellers and
consumers / buyers and also exporters &
importers of a commodity to discover price for a
future date and helps them take informed
decision.
• Price risk management: Helps hedge price risk or
insure against adverse price movement and
locks-in profit margin.
 commodity derivative exchanges
• The trading rules and procedures of recognized Commodity
Derivatives Exchanges and Commodity Brokers are regulated by
Securities and Exchange Board of India (SEBI) — a statutory body
established under SEBI Act, 1992. In India, major commodity
derivative exchanges are as follows:

• Multi Commodity Exchange of India Ltd (MCX) — predominantly

non-agricultural products like gold, silver, aluminium, copper,
nickel, lead, zinc and energy products like crude oil and natural gas
are traded on this exchange.

• National Commodity and Derivative Exchange (NCDEX) —

predominantly agricultural products like pulses, cereals, sugar, etc.
are traded on this exchange
 Real Estate
• Real estate investing involves the purchase,
management and sale or rental of real estate for
profit. Improvement of realty property as part of a
real estate investment strategy is generally
considered to be a sub-specialty of real estate
investing called real estate development.
Someone who actively or passively invests in real
estate is called a real estate entrepreneur or
a real estate investor.
 Types of real estate investment
1. Rental Properties
Owning rental properties can be a great opportunity for
individuals who have do-it-yourself (DIY) renovation skills and the
patience to manage tenants. However, this strategy does require
substantial capital to finance upfront maintenance costs and to
cover vacant months.
2. Real Estate Investment Groups (REIGs)
• Real estate investment groups (REIGs) are ideal for people who
want to own rental real estate without the hassles of running it.
Investing in REIGs requires a capital cushion and access to
financing.
• REIGs are like small mutual funds that invest in rental
properties. In a typical real estate investment group, a company
buys or builds a set of apartment blocks or condos, then allows
investors to purchase them through the company, thereby joining
the group.
3. Real Estate Investment Trusts (REITs)
• A real estate investment trust (REIT) is best for investors who want
portfolio exposure to real estate without a traditional real estate
transaction.
• A REIT is created when a corporation (or trust) uses investors’
money to purchase and operate income properties. REITs are
bought and sold on the major exchanges, like any other stock.

4. Online Real Estate Platforms

• Real estate investing platforms are for those who want to join
others in investing in a bigger commercial or residential deal. The
investment is made via online real estate platforms, which are also
known as real estate crowdfunding. This still requires investing
capital, although less than what's required to purchase properties
outright.