Investment is the commitment of funds at present in some course of action with the expectation of some positive rate of return.An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future.A systematic process should be followed while making investment decision.The general steps of investment process are as follows:
- Determining investment objectives:First of all the an investor should clearly spell her/his investment objective before making investment. The investment objective is the motive that guides investor in choosing investment alternatives. Investment objective should be stated in terms of both risk tolerance and return preference. Simply stating investment objective as to make money is not enough. The investor should be clear why s/he needs to make money. It may be for children education or for retirement life or for safety and liquidity. Accordingly, the investor can go for the alternatives that best suit her/his investment objective.While determining investment objective it should be noted that there may be more than one set of investment objective. For example, the investor may invest simultaneously for wealth maximization and liquidity. Similarly, the investment objective once set does not remain static rather it changes over the time as per the change in personal and family circumstances of investors.
- Developing investment plan: After setting investment objective, investor should develop formal investment plan consistent to the investment objective. The investment plan must specify the investor’s return preference, risk tolerance along with the period of investment.
- Evaluating and selecting investment alternatives:After developing proper plan for investment,an investor should analyze the alternatives available. There is wide range of investment alternatives available for investment. Each available alternative must be evaluated in terms of comparative risk-return relationship. The expected return and risk associated with each alternative should be preciously measured and they should be assessed in the light of investment objective. After the assessment of investment alternatives, the investor should select the suitable alternatives that best suit her his investment objective. While selecting among the investment alternatives, investors should gather the information and use the information to select suitable investment vehicles. Along with risk-return preferences, the investors should assess the factors like tax considerations.
- Constructing a portfolio: The investor should form an investment portfolio by including the securities that are qualified in terms of risk-return relationship, tax considerations and other factors. In constructing portfolio, the investor should pay attention to the diversification of risk. The portfolio of investment should maximize return and minimize the risk.
- Evaluating and revising the portfolio:The securities included in the portfolio may not perform as predicted or may not satisfy the investment objective.Therefore, investor should make periodic evaluation of the performance of the portfolio against the investment objective. Some securities in the portfolio which stood attractive may no longer be so attractive. Thus, investors should delete such securities from the portfolio and add new ones that are attractive.Thus evaluating and revising the portfolio is an ongoing process.