What are the scope of Investment Analysis [Fundamentals of Investment] #2

Notes of Fundamentals of Investment

Investment Analysis is the main element of Investment and under-investment analysis evaluation of different investment plans and avenues are made to find best and good investment plans out of all and without these below given five perspectives the proper evaluation of investment is impossible so here is the scope of Investment analysis that helps to evaluate investment avenues.



Risk: Risk in investment means variation or difference in the expected rate of return and the actual rate of return, more difference means more or higher risk on investment and less difference means less or lower risk on investment. So, an investor must find out the less risky and more risky investment to make him easy to invest. For example, Government securities like Govt bonds are considered less risky as a comparison to other securities like Investing in real estate. 

Return: Return or rate of return is money or gains that are going too received on investment in the future and basically are a combination of current yield and capital yield. 

Rate of Return: Current Yield + Capital Yield  

1. Current Yield: It is the ratio of annual income to the initial or beginning price of the security.

Current Yield =    Annual Income
                          Beginning/Initial Price

2. Capital Yield: It’s the ratio of the difference between ending price and beginning price divided by the beginning price of securities.

Capital Yield =    Ending Price - Beginning Price
                                       Beginning Price

*Yield:  Amount of Cash or return received in the form of interest or dividend on securities.

For example: 

Beginning Price of Share: Rs 200
Ending Price of Share: Rs 300
Divided Received/ Income: Rs 50

Current yield:  (Annual Income/Beginning Price of Share) 50/200 = 0.25 or 25%.
Capital yield: (Ending price- Beginning Price/Beginning Price of Share) (300-200)/200 = 0.5 or 5%  So, Rate of Return = 25% + 5% = 30%   

Tax Benefits: Tax benefits that are available or received on Investments like Income tax exemption on Public Provident funds are a good example of tax benefits on investment, tax benefits can be initial, continuous or at the time of terminal of securities.

Liquidity: Liquidity or also called marketability refers to the scope of the quick transaction with low cost on a transaction and negligible price change between two successive transactions and liquidity of securities is important in investment because less marketable/liquidity securities are not easy to modify in changing circumstances and are less flexible.
Expediency: Securities with few formalities, fewer legal hassles, and fewer maintenance efforts make investment easier. For Example, Provident funds are a good example of expedient investment and are easier to invest because it has less legal hassles & formalities. So, Expediency is the scope of investment analysis.

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