Page 123 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes An investment strategy in mutual funds is probably the best bet for a profitable investment.
Mutual funds is defined as a pool of money supplied by different investors and in turn used by
the mutual fund company to invest in various assets such as stocks and bonds. However, a
detailed research has to be conducted for choosing the mutual fund companies and only those
should be considered which have a professional investment manager. This will ensure that the
funds get channelled towards the right investments. This also applies for investing in stock
markets where a decision to invest should follow a thorough research about the past and current
trends of the stock prices and their Net Asset Values (NAV). Analyses from market researchers
about the predicted future trends should also be considered otherwise gains from capital
appreciation; capital gain distribution (in case of mutual funds) and dividends might not be
realized.
Lastly, investment strategies leading to green investments or investments in renewable sources
of energy will be the next big thing in the investment spectrum.

7.3 Investment Strategy Considerations

As you create your investment portfolio of bonds, there are various techniques you and your
investment advisor can use to help you match your investment goals with your risk tolerance.

Active vs. Passive

One important consideration is how a portfolio is managed day to day. A portfolio can be
actively managed, which means the composition of the portfolio and how often it is traded
depend, largely, on the investment decisions made by you or your investment manager. A
passively managed portfolio tends to invest in a basket of stocks or bonds (usually mimicking
an index) and, generally, employs a buy and hold strategy, where purchases are made for the
long term.

Diversification

Diversification is the allocation of assets to several categories in order to spread, and therefore
possibly mitigate, risk. Regardless of your investment objectives, diversification is an important
consideration in building any portfolio. Diversification can be achieved in any number of ways,
including by:
a. Bond Type: Diversification by bond type may provide some protection for a portfolio, so
if one sector or asset class experiences a downturn, the performance of other parts of the
portfolio may help offset the negative impact. For example, a bond portfolio might consist
of a variety of high-yield and investment-grade bonds in order to balance risk and return.
b. Laddering: Another diversification strategy is to purchase securities of various maturities
in a technique called laddering. When you buy bonds with a range of maturities, a technique
called laddering, you are reducing your portfolio’s sensitivity to interest rate risk. If, for
example, you invested only in short-term bonds, which are the least sensitive to changing
interest rates, you would have a high degree of stability but low returns. Conversely,
investing only in long-term bonds may result in greater returns, but prices will be more
volatile, exposing you to potential losses. Assuming a normal yield curve, laddering
allows returns that would be higher than if you bought only short-term issues, but with
less risk than if you bought only long-term issues. In addition, you would be better
protected against interest rate changes than with bonds of one maturity.

118 LOVELY PROFESSIONAL UNIVERSITY