Investments And Portfolios

Investments and portfolios Name Institution/ Affiliation Introduction In the current business world, investment is a subject that has virtually elicited interest to individuals from all sphere. Today, everybody is running for money as it is considered to be the root of happiness. An investor’s life is characterized by earning and spending of money. Rarely does investor’s income balances their consumption. Therefore, Investment encompasses making present sacrifices with the hope of developing future benefits. According to (Fabozzi & Drake 2009),investment is a commitment of a resource for a specified period to derive future compensation for the time the fund is devoted, uncertainty of upcoming payments and the nature of inflation. The theory of investment can be grouped into either economic investment or financial investment. Economic investment entails the addition of capital stock to the society. Capital stock is commodities used in the creation of other goods and services. According to this concept, investment suggests the development of new dynamic capital such as machinery, portfolios and human capital. On the other hand, financial investment assumes the allocation of monetary capitals to resources expected to generate returns at a given period. It includes the exchange of financial claims such as shares and bond, debentures, fixed deposits, and life insurance policies to generate benefits such as rent, dividends, interests, pension benefits, and appreciation of initial capital value (Sachs & Reid 2006). On the other hand, an investment portfolio is the collection of different kind of investments. Ideally, an investment portfolio is developed to work in coherence to help investors achieve their goals and objectives through a certain degree of diversification. Typically the collection is grouped into stocks, bonds and cash. Further, these portfolios lie sub-assets such as international stocks, mid-cap, small cap and large cap stocks. Moreover, bonds include short term, foreign, intermediate and tax-exempt bonds (Fabozzi & Drake 2009). Assessment of investment environment Investment management process involves managing investment money to generate returns. The method of investment consists in setting investment policy, analyzing and evaluation of investment vehicles, the formation of a diversified investment portfolio, portfolio revision, measurement and evaluation of portfolio performance. The investment environment in a country or a region is a critical element that determines the success of the domestic and foreign investment. According to Sachs & Reid (2006), investment climate is the economic and financial conditions of a region that defines whether financial institutions and individuals are willing to advance money or acquire a stake in the business of a country. Social, financial and economic factors such as infrastructure, capital, political stability, government regulations, property rights a, taxes, crime, poverty and government transparency and accountability, affect the environment of a country. For instance, the unfavorable investment climate is one that is characterized by many challenges that derail development as witnessed in underdeveloped nations. In such countries, regulatory reform and non- profit organisation are developed and tasked in neutralizing these barriers while spurring economic growth (Gao, 2011). Understanding and judging the investment environment of a country is a problematic aspect which need active practicing in a variety of ways. The investment environment is classified into, macro and micro; narrow and broad; hard and soft environment. Narrow investment climate comprises the economic situation including a country level of economic development, strategy, financial system, infrastructure, industrial structure, economical price stability and market sophistication while broad includes the social impact, political, and legal investment potential of the external factors(Sachs & Reid 2006). Moreover, the investment environment is the factors that shapes business incentives and opportunities to invest, grow and create jobs in a particular location. These factors include risks, costs and competitive forces. An active investment is not a mere occurrence but happens from initiatives from authorities through articulating and implementing set policies. Further still, investment does not only involve generating outcomes but also the impacts in transforming the people economic issues such as job creation, reduction of prices of goods and services as well as broadening the tax base. Different environment affects different investment in various capacities (Sachs & Reid 2006). Financial instruments. According to financial instruments are any contract that represents an economic asset to one entity and a liability or equity instrument to the other body. Mostly, these financial instruments facilitate efficient flow and transition of capital from one investor to another over the globe. They include cash, contractual rights to deliver or receive money or another type o financial instrument or evidence of one's ownership of an entity. These documents that represent the legal agreement that involves monetary value may exist in real or in the virtual form. While equity-based financial instruments represent ownership of assets, debt-based instruments denote an asset acquired utilizing a loan (Das, 2010). A financial instrument is comprised of two categories; cash instruments and derivative instruments. Cash instruments are short term commitment that involves less than three months whose provision returns are in the form of interest payments. Cash returns are considered to offer minimal earnings as compared to other investment. Moreover, their risk level is usually minimum since they are commonly insured. In other terms, a cash investment may refer to an individual or business direct financial contribution to a venture as opposed to borrowed money. Cash instruments include; savings account, money market account, cash investments and certificates of deposits. Commonly, the values attached to a cash instrument directly attributed to factors in a geographical market. Also, it is worth to note that these instruments are transferrable from one party to another (Fabozzi & Drake 2009). On the other hand, derivative instruments is an agreement between two or more parties whose value is attached to an underlying financial asset such as security or set of assets such as an index. Bonds, interest rates, market indexes stocks and currencies are the common forms of derivative instruments. Moreover, future contracts, options, swaps, warrants and forward contracts are also commonly used kind of derivatives. Generally, derivatives are secondary securities whose value is based solely on the amount of the first security that is attached. For instance, a stock option is a derivative that is based exclusively on an underlying stock; however, on ownership of such derivative does not necessarily guarantee the purchase of the asset. Commonly, the risk factor associated with such instruments are high, and hence they return are also lucrative (Das et al, 2010). Commonly, there are two categories of derivative products namely, Lock and option. While In lock products such as swaps and forwards, the parties involved are bound from the beginning to the end of life of the contract. The option products usually offer the buyer the right but not the obligation to become a party to the agreement under the initial contractual terms. Moreover, the risk-reward equation is based on the thought that derivatives can be used to either mitigate risks or assume risk with the expectation of better reward in the future. For instance, an investor may anticipate a drop in the in an index, as an effort to mitigate the risks, he may decide to sell the related contracts to benefit (Tarasi et al, 2011). Mutual funds A mutual fund is a financial vehicle that allows collection of money from a pool of investors to invest in securities such as stocks, money market, and bonds. Usually, these funds are operated by specialized money managers who are obliged in the allocation of the funds to the assets to yield returns. However, they are structured and maintained to adhere to the primary goal outlined in the prospectus. Mutual funds offer small sized individual investor’s access to professionally managed portfolios. Consequently, the investors have chances ...