What is “Investment Environment”?

When investors take a decision to invest in either stocks or bonds or

attempt to make an investment in a portfolio of assets in any market or
across markets (i.e. international investing), they make such decisions in
an investment environment where higher (lower) returns are associated
with higher (lower) risk.

The term “Investment Environment” essentially includes all types of

investment opportunities (i.e. varied financial and real assets), investment
vehicles or alternatives in the market that are available to an investor,
financial markets, investment process, market structure that enables
purchasing and selling of investments, regulatory set up that fosters an
enabling environment to invest, and market intermediaries.

Investment environment relates to developments in the domestic and

international economy, which have an impact (positive or negative) on
asset (financial and real) prices or values of asset classes and related risk.

Elements (7) of Investment Environment

There are seven elements of the investment environment that one should
be aware of:

Assets and investment vehicles: an investor usually has a plethora of

existing types of assets to choose from – which include stocks, corporate
bonds, government bonds (for example, US Treasury Bills – usually very
safe in terms of default risk), municipal bonds, money market instruments
(which are short-term, highly marketable and usually very low risk)
derivatives, currencies, real estate and commodities. Further, an investor
can choose among varied investment vehicles – mutual funds, hedge
funds and Exchange Traded Funds (ETF’s) among others.

Financial markets: it is a market where buyers and sellers of assets (such

as stocks, bonds, currencies and derivatives) trade with each other. A
notable feature of such markets is that it is market forces that determine the
prices of asset classes. Typically, financial markets are characterized by
transparent pricing and certain regulations with reference to trading, costs
and fees, and represent a vast array of financial products. Financial
markets include stock markets (primary and secondary markets), bond
markets, money markets, cash or spot markets, derivatives markets
(options, futures, swap agreements etc.), foreign exchange and interbank
markets, and over-the-counter (OTC) markets.

Market structure: the same refers to the structure of the financial markets,
which include the equity, debt, foreign exchange, mortgage and the
derivatives markets. The most widely followed market in the US is the stock
market and from the point of view of economic activity, the debt market is
very important as investors and borrowers in this market play a pivotal role
in determining interest rates.

Market intermediaries: the same include insurance and pensions

companies, investment banks, commercial banks (banks participate in the
money and capital markets), primary dealers, brokers, financial advisors
and stock exchanges among others.

Investment process: the same essentially outlines the steps required in

creating an investment portfolio based on determining an investor’s
investment objectives and risk profile, asset allocation policy i.e. how an
investor’s investments are diversified among varied asset classes, which
has a major influence on the overall performance of a portfolio,
implementing an investment strategy and rebalancing of portfolio (that is
consistent with an investor’s chosen or desired asset allocation strategy).

Regulation: of securities markets is a very important element of the

investment environment. Across countries such as the US, the UK and
others, trading in the financial markets is regulated through a plethora of
laws, to ensure that investors and traders have adequate information to
take well-informed investment-related decisions and to prevent fraudulent
activities. For example, in the US, there are two government bodies for
general regulatory oversight of financial markets – Securities and
Exchange Commission (SEC) and the Commodity Futures Trading
Commission. In addition, exchanges have their own regulatory groups.
Regulation of stock and corporate bond markets are the most prominent
examples of financial market regulation.

Economy: developments in the domestic economy and the global

economy relating to GDP, inflation, interest rates, fiscal deficit and
monetary policy have a major impact on the prices of assets and related
volatility (prices of financial assets, particularly stock prices are often very
volatile). Further, asset allocation is the most important decision in the
realm of asset management and contributes significantly to the
performance of portfolios. Moreover, asset allocation and related
investment decisions are critically based on analyzing both the global and
domestic economy, and constructing various forward looking
macroeconomic scenarios.

Consequently, for asset allocation, macroeconomic analysis, incorporating

both domestic and international economy assessment, is critical.

Capital Allocation – Risky and Risk-Free

Portfolios (A Key Aspect of the Investment
Environment)
As already mentioned, asset allocation is the most important decision in the
realm of asset management. Consequently, capital allocation decisions
among broad investment classes by investors is deemed the most
fundamental decision vis-a-vis investing. With each asset allocation choice,
an investor faces a risk-return trade-off. An investor who wants higher
(lower) returns have to contend with higher (lower) risk.

Given below is a workout (example) of capital allocation across risky and

risk-free assets. Assume that the total market value of an investor’s initial
portfolio is US$ 500,000. Out of this, 70% is invested in risky assets
(composition of stocks and corporate bonds), and 30% is invested in risk-
free assets (such as money market funds or treasury bonds). The weights
of each risky type of asset (i.e. stocks and bonds) have been calculated by
dividing the amount (US$) of money invested in stocks and in bonds
respectively by the total amount (US$) invested in risky assets.

Such an investor is seeking higher returns and is prepared to tolerate a

higher level of risk. If, for example, the investor wants to reduce the
portfolio risk by lowering the allocation to risky assets (for example, from
70% to 50%) and enhancing allocation to risk-free assets (for example,
from 30% to 50%) i.e. lower risk by asset reallocation, then he or she
should also be willing to tolerate a lower rate of return on the total asset
portfolio.
 What is Investment Decision?
Investment decision refers to financial resource allocation.
Investors opt for the most suitable assets or investment
opportunities based on risk profiles, investment objectives,
and return expectations.

Firms have limited financial resources; therefore, the top-

level management undertakes capital budgeting and fund
allocation into long-term assets. Managers overseeing
business operations opt for short-term investments to
ensure liquidity and working capital. Investment decisions
are also influenced by the frequency of returns, associated
risks, maturity periods, tax benefits, volatility, and inflation
rates.

 An investment decision is a well-planned action that

allocates financial resources to obtain the highest possible
return. The decision is made based on investment
objectives, risk appetites, and the nature of the investor,
i.e., whether they are an individual or a firm.
 Investments are primarily classified into short-term and
long-term. Further, they are categorized into a strategic
investment, capital expenditure, inventory, modernization,
expansion, replacement, or new venture investments.
 The investment process involves the following steps:
formulating investment objectives, ascertaining the risk
profile, allocating assets, and monitoring performance.

Investment decisions are made to reap maximum returns

by allocating the right financial resource to the right
opportunity. These decisions are taken considering two
important financial management parameters—risks and
returns.

Investors and managers dedicate a lot of time to

investment planning—these decisions involve massive
funds and can be irreversible—impact on the investors and
business is long-term.
 Also, individuals and corporate investors have to decide
between various options—assets,
securities, bonds, debentures, gold, real estate, etc. For
businesses, investments could be in the form of new
ventures, projects, mergers, or acquisitions as well.
Investment decisions are further classified into short-term
and long-term. For example, the final decision may involve
a capital expenditure on assets that pay off in the long
run or an investment in inventory that converts into sales
within a short period. A company might attempt expansion
by taking up new projects; a business might increase the
capacity of an existing facility. Capital investment is
required for replacing an obsolete asset as well. In
business, decision-making is everywhere.

Process
Investing in an asset, security, or project requires a lot of
patience; ideally, the decision-making process should be
analytical. Following is a five-step process decision-making
process that guides investors:

1. Analyze Financial Position: For financial management,

one has to understand the company or individual’s current
financial condition.
2. Define Investment Objective: Then, investors must set
up an investment objective—whether to invest short-term
or long-term. They should also be aware of their risk
appetite (level of risk they desire to take).
3. Asset Allocation: Based on the objective, investors
must allocate assets into stocks, debentures, bonds, real
estate, options, and commodities.
4. Select Investment Products: After narrowing down on a
particular asset class, investors must further select a
particular asset or security. Alternatively, this could be a
basket of assets that fit the requirements.
5. Monitor and Due Diligence: Portfolio managers keep
an eye on the performance of each investment and monitor
 the returns. In case of poor performance, they must take
prompt action.

Factors Affecting Investment

Decision
An investment is a planned decision, and some of the
factors that are responsible for these decisions are as
follows:

 Investment Objective: The purpose behind an

investment determines the short-term or long-term fund
allocation. It is the starting point of the decision-making
process.
 Return on Investment: Managers prioritize positive
returns—they try to employ limited funds in a profitable
asset or security.
 Return Frequency: The number of periodic returns an
investment offer is crucial. Financial management is based
on financial needs; investors choose between investments
that yield monthly, quarterly, semi-annual, or annual
returns.
 Risk Involved: An investment may possess high, medium,
or low risk, and the risk appetite of every investor and
company is different. Therefore, every investment requires
a risk analysis.
 Maturity Period or Investment
Tenure: Investments pay off when funds are blocked for
a certain period. Thus, investor decisions are influenced by
the maturity period and payback period.
 Tax Benefit: Tax liability associated with a particular
asset or security is another crucial deciding factor.
Investors tend to avoid investment opportunities that are
taxed heavily.
 Safety: An asset or security offered by a company that
adheres to regulatory frameworks and has a transparent
financial disclosure is considered safe. Government-backed
assets are considered the most secure.
 Volatility: Market fluctuations significantly affect
investment returns and, therefore, cannot be overlooked.
 Liquidity: Investors are often worried about
their emergency funds—the provision to withdraw money
before maturity. Hence, investors look at the degree of
liquidity offered by a particular asset or security; they
specifically consider withdrawal restrictions and penalties.
 Inflation Rate: In financial management, investors look
for investment opportunities where returns surpass the
nation’s inflation rate.

What is an Investment Plan?

As the name suggests, investment plans are financial instruments, which help you
create sustainable wealth for your future needs. There are various investment
plans available nowadays that enable you to invest your savings systematically into
different money-market products and help achieve your financial goals. These
investment plans provide the much-desirable advantage of creating wealth
through disciplined, long-term investments. Some of the most popular investment
options today are –

 Unit Linked Insurance Plans (ULIPs)

 Public Provident Funds (PPF)
 Monthly Income Plans
 Mutual funds
 Sukanya Samriddhi Account (SSY)
 Senior Citizen Savings Scheme (SCSS)
 Tax saving Fixed Deposits
What are the Different Types of Investments?
Each investment instrument carries a distinctive risk profile and potential for return
generation. For each of these plans, their associated risk of investment can be
described as the probability of the plan performing either below expectations or
experiencing an irreparable loss of value.
 Based on the risk associated, we can broadly classify different investment plans
into three categories –

 Low-risk investments
 High-risk investments
 Medium-risk investments
Let us look at these categories in more detail –

1. Low-Risk Investments
Low-risk investment plans, essentially are those in which there are approximately
zero risks involved. These low-risk investment plans usually provide consistent and
reliable growth of value, with minimal losses. Such types of investment include –

 Public Provident Fund (PPF)

 Post Office Monthly Income Schemes
 Senior Citizen Savings Scheme (SCSS)
 Employee Provident Fund (EPF)
 Sukanya Samriddhi Yojana
 Tax Saving FDs
 Sovereign Gold Bonds
 Life Insurance
 Bonds
2. High-Risk Investments
Investment plans categorized as high-risk are suitable for investors who wish to
sustain long-term capital growth. While most of these high-risk investment plans
are likely to incur fluctuations throughout the investment tenure, they provide
ample opportunities to create substantial returns. These high-risk investment plans
usually include –

 Direct equities
 Unit Linked Insurance Plans
 Mutual Funds
 3. Medium Risk Investments
Investments plans classified as medium or moderate risk options not only provide
opportunities t avail of diversified and balanced investment returns but also help
you accept a certain level of market volatility. These medium-risk investment
options, thus help diversify your investment portfolio by including a mix of equity
and debt instruments, which then generates stable returns with minimal risks.
Examples of these medium risk investment plans include –

 Hybrid debt-oriented funds

 Arbitrage funds
 Monthly Income Plans
At Canara HSBC Oriental Bank of Commerce Life Insurance, we offer various life
insurance and investment plans that can be easily customized to suit your financial
requirements and future needs. You can choose from a wide variety of life
insurance, unit-linked insurance plans, retirement plans, child insurance plans, and
health covers to secure yourself and your loved ones.

Ans:
It refers to the realised or actual investment in an economy during a year.

Investment Process
When we speak of investment, I am sure most of you would think of investing in some fixed deposit or a
property or some of you would even buy gold. But there is much more to investing. An investment is the
purchase of an asset with an expectation to receive return or some other income on that asset in future. The
process of investment involves careful study and analysis of the various classes of assets and the risk-return
ratio attached to it.

An investment process is a set of guidelines that govern the behaviour of investors in a way which allows
them to remain faithful to the tenets of their investment strategy, that is the key principles which they
hope to facilitate out-performance.
There are 5 investment process steps that help you in selecting and investing in the best asset
class according to your needs and preferences. Read here is details every notes on investing
process.
Step 1- Understanding the client
The first and the foremost step of investment process is to understand the client or the investor his/her needs,
his risk taking capacity and his tax status. After getting an insight of the goals and restraints of the client, it is
important to set a benchmark for the client’s portfolio management process which will help in evaluating the
performance and check whether the client’s objectives are achieved.

Step 2- Asset allocation decision

This step involves decision on how to allocate the investment across different asset classes, i.e. fixed income
securities, equity, real estate etc. It also involves decision of whether to invest in domestic assets or in foreign
assets. The investor will make this decision after considering the macroeconomic conditions and overall
market status.

Step 3- Portfolio strategy selection

Third step in the investment process is to select the proper strategy of portfolio creation. Choosing the right
strategy for portfolio creation is very important as it forms the basis of selecting the assets that will be added
in the portfolio management process. The strategy that conforms to the investment policies and investment
objectives should be selected.

There are two types of portfolio strategy.

1. Active Management
2. Passive Management

Active portfolio management process refers to a strategy where the objective of investing is to
outperform the market return compared to a specific benchmark by either buying securities that are
undervalued or by short selling securities that are overvalued. In this strategy, risk and return both are high.
This strategy is a proactive strategy it requires close attention by the investor or the fund manager.

Passive portfolio management process refers to the strategy where the purpose is to generate returns
equal to that of the market. It is a reactive strategy as the fund manager or the investor reacts after the market
has responded.

Step 4- Asset selection decision

The investor needs to select the assets to be placed in the portfolio management process in the fourth step.
Within each asset class, there are different sub asset-classes. For example, in equity, which stocks should be
chosen? Within the fixed income securities class, which bonds should be chosen?

Also, the investment objectives should conform to the investment policies because otherwise the main
purpose of investment management process would become meaningless.

Step 5- Evaluating portfolio performance

This is the final step in the investment process which evaluates the portfolio management
performance. This is an important step as it measures the performance of the investment with respect to a
benchmark, in both absolute and relative terms. The investor would determine whether his objectives are
being achieved or not.
What is an Investment Plan?
As the name suggests, investment plans are financial instruments, which help you create
sustainable wealth for your future needs. There are various investment plans available
nowadays that enable you to invest your savings systematically into different money-market
products and help achieve your financial goals. These investment plans provide the much-
desirable advantage of creating wealth through disciplined, long-term investments. Some of
the most popular investment options today are –

Unit Linked Insurance Plans (ULIPs)

Public Provident Funds (PPF)
Monthly Income Plans
Mutual funds
Sukanya Samriddhi Account (SSY)
Senior Citizen Savings Scheme (SCSS)
Tax saving Fixed Deposits
What are the Different Types of Investments?
Each investment instrument carries a distinctive risk profile and potential for return
generation. For each of these plans, their associated risk of investment can be described as
the probability of the plan performing either below expectations or experiencing an
irreparable loss of value.

Based on the risk associated, we can broadly classify different investment plans into three
categories –

Low-risk investments
High-risk investments
Medium-risk investments
Let us look at these categories in more detail –

1. Low-Risk Investments
Low-risk investment plans, essentially are those in which there are approximately zero risks
involved. These low-risk investment plans usually provide consistent and reliable growth of
value, with minimal losses. Such types of investment include –

Public Provident Fund (PPF)

Post Office Monthly Income Schemes
Senior Citizen Savings Scheme (SCSS)
Employee Provident Fund (EPF)
Sukanya Samriddhi Yojana
Tax Saving FDs
Sovereign Gold Bonds
Life Insurance
Bonds
2. High-Risk Investments
Investment plans categorized as high-risk are suitable for investors who wish to sustain long-
term capital growth. While most of these high-risk investment plans are likely to incur
fluctuations throughout the investment tenure, they provide ample opportunities to create
substantial returns. These high-risk investment plans usually include –

Direct equities
Unit Linked Insurance Plans
Mutual Funds
3. Medium Risk Investments
Investments plans classified as medium or moderate risk options not only provide
opportunities t avail of diversified and balanced investment returns but also help you accept a
certain level of market volatility. These medium-risk investment options, thus help diversify
your investment portfolio by including a mix of equity and debt instruments, which then
generates stable returns with minimal risks. Examples of these medium risk investment plans
include –

Hybrid debt-oriented funds

Arbitrage funds
Monthly Income Plans
At Canara HSBC Oriental Bank of Commerce Life Insurance, we offer various life insurance
and investment plans that can be easily customized to suit your financial requirements and
future needs. You can choose from a wide variety of life insurance, unit-linked insurance
plans, retirement plans, child insurance plans, and health covers to secure yourself and your
loved ones.

Investing in commodities
There are several ways to consider investing in commodities. One is to
purchase varying amounts of physical raw commodities, such as precious
metal bullion. Investors can also invest through the use of futures
contracts or exchange-traded products (ETPs) that directly track a specific
commodity index. These are highly volatile and complex investments that
are generally recommended for sophisticated investors only.
Another way to gain exposure to commodities is through mutual funds
that invest in commodity-related businesses. For instance, an oil and gas
fund would own stocks issued by companies involved in energy
exploration, refining, storage, and distribution.
Commodity stocks vs. commodities
Do commodity stocks and commodities always deliver the same returns?
Not necessarily. There are times when one investment outperforms the
other so maintaining an allocation to each group might help contribute to
a portfolio's overall long-term performance.
Advantages of commodity investing
Diversification
Over time, commodities and commodity stocks tend to provide returns
that differ from other stocks and bonds. A portfolio with assets that don't
move in lockstep can help you better manage market volatility. However,
diversification does not ensure a profit or guarantee against loss.
Potential returns
Individual commodity prices can fluctuate due to factors such as supply
and demand, exchange rates, inflation, and the overall health of the
economy. In recent years, increased demand due to massive global
infrastructure projects has greatly influenced commodity prices. In
general, a rise in commodity prices has had a positive impact on the
stocks of companies in related industries.
Potential hedge against inflation
Inflation—which can erode the value of stocks and bonds—can often mean
higher prices for commodities. While commodities have shown strong
performance in periods of high inflation, investors should note that
commodities can be much more volatile than other types of investments.
Risks of commodity investing
Principal risk
Commodity prices can be extremely volatile and the commodities industry
can be significantly affected by world events, import controls, worldwide
competition, government regulations, and economic conditions, all of
which can have an impact on commodity prices. There's a chance your
investment could lose value.
Volatility
Mutual funds or exchange-traded products (ETPs) that track a single sector
or commodity can exhibit higher than average volatility. Also, commodity
funds or ETPs that use futures, options, or other derivative instruments
can further increase volatility.
Foreign and emerging market exposure
Apart from the risks associated with commodity investing, these funds also
carry the risks that go along with investing in foreign and emerging
markets, including volatility caused by political, economic, and currency
instability.
Asset concentration
While commodity funds can play a role in a diversification strategy, the
funds themselves are considered non-diversified as they invest a
significant portion of their assets in fewer individual securities that are
generally concentrated in 1 or 2 industries. As a result, changes in the
market value of a single investment could cause greater fluctuations in
share price than would occur in a more diversified fund.
Other risks
Commodity focused stock funds may use futures contracts to track an
underlying commodity or commodity index. Trading in these types of
securities is speculative and can be extremely volatile, potentially causing
the performance of a fund to significantly differ from the performance of
the underlying commodity. That difference can be positive or negative,
depending on market conditions and the fund's investment strategy.

What Is Investment Real Estate?

Investment real estate is real estate that generates income or is otherwise intended for
investment purposes rather than as a primary residence. It is common for investors to
own multiple pieces of real estate, one of which serves as a primary residence while the
others are used to generate rental income and profits through price appreciation. The
tax implications for investment real estate are often different than those for residential
real estate.

 Investment real estate can provide opportunities for investors to build wealth,
increase income, and diversify an investment portfolio.
 Residential investments typically involve homes, townhouses, and condominiums.
 An investment in commercial real estate might involve the ownership of retail
stores, office buildings, or storage facilities and warehouses.
 Investment real estate can create capital gains for investors due to increases in
property value as well as provide rental income.
Understanding Investment Real Estate
Investment real estate can provide opportunities for financial gains to investors.
Owning investment properties can help build wealth, increase income, and help diversify
an investment portfolio. Although there are many types of properties in the real estate
market, primarily, most properties can be broken down into two classifications.

Residential
Investment real estate can include residential land and properties. Residential
investments typically involve homes, townhouses, and condominiums. Residential
properties can be multi-family or single-family units.

Commercial
An investment in commercial real estate might involve the ownership of retail stores,
office buildings, or storage facilities and warehouses. Investment in commercial real
estate is typically more involved and costly than residential investments. Commercial
property leases can be longer than a residential rental agreement. Both the costs and
profitability are usually measured on a per-square-foot basis.

Benefits to Investment Real Estate

The benefits of investing in real estate are numerous and can vary depending on the
goal of the investor. How much money to invest in a real estate property can depend on
the investor's risk tolerance. Also, an investor's time horizon is important to consider
when making such a large purchase or investment.

FINANCIAL ASSETS

The financial assets can be defined as an investment asset whose

value is derived from a contractual claim of what they represent.

These are liquid assets as the economic resources or ownership

can be converted into something of value, such as cash. These

are also referred to as financial instruments or securities. They

are widely used to finance real estate and ownership of tangible

assets.

These are legal claims, and these legal contracts are subject to

future cash at a predefined maturity value and predetermined time

frame.

Certificate of Deposit (CD)

This financial asset is an agreement between an investor (here,

company) and a bank institution in which the customer

(Company) keep a set amount of money deposited in the bank for

the agreed term in exchange for a guaranteed rate of interest.

#2 – Bonds
This financial asset is usually a debt instrument sold by

companies or the government to raise funds for short-term

projects. A bond is a legal document that states money the

investor has lent the borrower and the amount when it needs to

be paid back (plus interest) and the bond’s maturity date.

#3 – Stocks
Stocks do not have any maturity date. Investing in stocks of a

company means participating in the ownership of the company

and sharing its profits and losses. Stocks belong

to shareholders until and unless they sell them.

Cash or Cash Equivalent

This type of financial asset is the cash or equivalent reserved with

the organization.

#5 – Bank Deposits
These are the cash reserve of the organization with Banks in

saving and checking accounts.

#6 – Loans & Receivables

Loans and Receivables are those assets with fixed or

determinable payments. For banks, loans are such assets as they

sell them to other parties as their business.

#7 – Derivatives
Derivatives are financial assets whose value is derived from other

underlying assets. These are basically contracts.

All the above assets are liquid assets as they can be converted

into their respective values as per the contractual claims of what

they represent. They do not necessarily have inherent physical

worth like land, property, commodities, etc.