Page 122 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 7: Investment Strategies-II

investment portfolio. For example, investing in mutual funds has recently emerged as a very Notes
favourable investment strategy.
An investment strategy is cantered on risk-return trade-offs for a potential investor. High return
investment instruments such as real estate and mutual funds usually have more risks associated
with it than low return-low risk investment opportunities. Return on investment can be calculated
on past or current investment or on the estimated return on future investment.
Symbolically, it can be expressed as:
Vf/Vi – 1

Where,
Vf denotes final investment value and
Vi is the initial investment value. (“F” and “I” should be noted as subscripts)
Return on investment (ROI) is profitable when Vf/Vi-1>0 and the investment is deemed to be
unprofitable when the value of final investment is less than that of the initial investment. ROI is
calculated to be 1 or 100% when the value of the final investment is twice the value of the initial
investment.

7.2 Types of Investment Strategies

1. Active and Passive Investment Strategies: An investment strategy can be either active or
passive. A passive investment strategy attempted to minimize transaction costs. An active
investment strategy guide is used to maximize returns based on moves such as proper
market timing. This usually mean, “Buying in the lows and selling in the highs” or buying
investment instruments when they are cheap and selling them off when their price
appreciates. This strategy, however, is not very beneficial for small time investors.
2. Buy and Hold Investment Strategy: Small time investors can adopt the buy and hold
investment strategy to invest in equities, which although volatile in nature, give favourable
long run returns. Investing in equity markets for small time investors is associated with
the investors holding on for very long periods. In the case of real estate, the holding
period extends the life-span of the mortgage. Notably, in case of this strategy, indexing or
buying a small proportion of all the shares in market index or a mutual fund is a purely
passive variant of the above strategy.
3. Strategy of Value Investing: The strategy of value investing, a classic investment strategy
propagated by Benjamin Graham simply concentrates on the strategy that an investor
buys shares of a company as if he was buying off the whole company without paying any
attention to the stock market scenario or any exterior conditions such as the political
climate. At the end of the day, if he can buy the stock at less than that its actual future worth
to the buyer, the person is said to have discovered a “value investment.”
Investment strategies can also denote the investment strategies a national or central government
should follow to bring about economic growth in a country. This can only be achieved by
domestic investment as well as significant FDI (Foreign Direct Investment) flows to particular
sectors of countries, especially the less developed ones of Asia and Africa.
In case of India, infrastructural problems, excessive government intervention, rigid labour laws
and corruption are stifling the flow of FDI in the critical sectors. Less developed countries such
as those in the Asia- Pacific region and Africa can bring about much needed development in
these economies.

LOVELY PROFESSIONAL UNIVERSITY 117