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Investment constraints for Financial Planning Mcom sem 1 Delhi University


Investment constraints for Financial Planning Mcom sem 1 Delhi University

Investment constraints for Financial Planning Mcom sem 1 Delhi University

The objective of financial Planning is to acquaint the students with essentials of finance so that they have requisite knowledge, skills and confidence to take charge of their financial future. Further, this paper intends to foster critical thinking skills for personal financial planning and handling financial market constraints.

Investment constraints for Financial Planning Mcom sem 1 Delhi University

Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.

The Financial Planning activity involves the following tasks;—-

  • Assess the business environment
  • Confirm the business vision and objectives
  • Identify the types of resources needed to achieve these objectives
  • Quantify the amount of resource (labor, equipment, materials)
  • Calculate the total cost of each type of resource
  • Summarize the costs to create a budget
  • Identify any risks and issues with the budget set

Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set.

The role of financial planning includes three categories:

  1. Strategic role of financial management
  2. Objectives of financial management
  3. The planning cycle

When drafting a financial plan, the company should establish the planning horizon, which is the time period of the plan, whether it be on a short-term (usually 12 months) or long-term (2–5 years) basis. Also, the individual projects and investment proposals of each operational unit within the company should be totaled and treated as one large project. This process is called aggregation.

Investment constraints for Financial Planning Mcom sem 1 Delhi University

Investment

To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future, for example, investment on durable goodsuch as real estate for service industry and factory for manufacturing product development, which are two common types for micro-economic output in modern economy. Investment on Research and Development occurs mainly on the innovation of consumer products.

In financial market, the benefit from investment is called a return. The return may consist of capital gain or investment income, including dividends, interest, rental income etc., or a combination of the two. The projected economic return is the appropriately discounted value of the future returns. The historic return comprises the actual capital gain (or loss) or income (or both) over a period of time.

Investment generally results in acquiring an asset, also called an investment. If the asset is available at a price worth investing, it is normally expected either to generate income, or to appreciate in value, so that it can be sold at a higher price (or both).

Investors generally expect higher returns from riskier investments. Financial assets range from low-risk, low-return investments, such as high-grade government bonds, to those with higher risk and higher expected commensurate reward, such as emerging markets stock investments.

Investors, particularly novices, are often advised to adopt an investment strategy and diversify their portfolio. Diversification has the statistical effect of reducing overall risk.

Investment constraints for Financial Planning MCOM sem 1 Delhi University

Investment environment

What is the investment environment? The investment environment is the international economy and the domestic economy, developments in which have an effect on the values (prices) of the assets of the asset classes. It is well known that the prices of financial assets, particularly shares, can be extremely volatile (see Figure 3), and this introduces the element of risk in financial markets. Investment risk is broadly defined as volatility in asset prices and it is measured in these terms (see later).

Ultimately, gross domestic product (GDP) growth is the major driver of asset prices, and asset price changes (positive and negative) are often exacerbated by the irrational behavior of participants in the investment arena (known as the “herd instinct”). GDP is driven by gross domestic expenditure (GDE) and the trade account balance (TAB). GDE is driven by the consumption expenditure (C) and investment expenditure (I) of the private and government sectors, such that C + I = GDE. This is domestic demand. Foreign demand for local products is reflected in exports (X) while imports (M) reflect domestic demand for foreign goods. So, X – M = TAB = net foreign demand. The “big picture” (the entire economy) is complete:

Investment constraints for Financial Planning MCOM sem 1 Delhi University

GDP is the total of net domestic production in a year, also called aggregate demand.

Investment constraints for Financial Planning MCOM sem 1 Delhi University

The importance of saving and investing

Investment starts only after savings. To invest your money, you need to focus on factors like risk, return, tenure, tax, and liquidity. It is better to start investing at an early stage of life. Once you start investing, the compounding effect starts appreciating your infused capital, gradually growing it day by day. Investment requires great discipline and patience. You can make an investment for short term, medium term and long term and also select the appropriate instrument as per your planning.

While investing, taking care of tax implications. Investment requires periodical reviewing of the portfolio as per the prevailing macroeconomic conditions. You can switch from you preferred investment assets in the future, taking into account alterations in your risk capacity and return requirements. An investor with a higher risk appetite can invest in the stock market whereas moderate risk takers can opt for mutual funds. Low risk taker can invest in instruments like bank deposits, PPF etc. The selection of the investment instrument boils down to one’s risk profile.

Which is more important: saving or investing?

Investment follows acts of saving. Unless you already own a huge amount of money, the only way to accumulate it is through saving. Once you have created a corpus, its value starts eroding due to inflation. Therefore to maintain or grow the value of your corpus, you must invest it in a higher return asset. We can say that without savings, we can’t invest, and without investment, we lose the value of saving. Hence both go hand-in-hand and are equally important.

When to switch from saving to investment

Investments for Financial Planning Mcom Sem 1 Delhi University – You should ascertain the savings required to meet all your expenses and uncertainties. Payments for utilities, loan instalments, credit card, rent etc. should be prioritised, as should be premium for health and life insurance. Once these are done, you get a clear idea of what your surplus is, and you can divert it into investment assets.

Investment constraints for Financial Planning MCOM sem 1 Delhi University

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