SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

UNIT - 1 INVESTMENT  Financial and Economic Meaning  Characteristics and Objectives  Types  Alternatives  Choice and evaluation  Risk and return concepts

Meaning: It is the employment of funds on assets with the aim of earning income or capital appreciation.

Economic Meaning: Economist: Investment is the net addition made to the nation's capital stock that consists of goods and services that are used in the production process.

Financial Meaning: Financial investment is the allocation of money to assets that are expected to yield some gain over a period of time. The financial and economic meanings are related to each other because the savings of the individual flow into the capital market as financial investments, to be used in economic investment.

CHARACTERISTICS Return: primary objective of investment is to derive a return. – capital appreciation, yield. Expected return depends on  Nature of investment  Maturity period  Market demand Risk: is inherent with every investment.  Loss of capital  Nonpayment of interest  Variability of returns. Equity – high risk Debenture or bond – low risk Banks - low risk,low return.

CHARACTERISTICS Safety: is identified with the certainty of return of capital without loss of money or time. A highly reputed and successful corporate entity assures the investors of their capita. Eg. Investment in securities issued by the government/Bank. Liquidity: An investment should be easily saleable or marketable without loss of money and time. An investor tends to prefer maximization of expected return, minimization of risk, safety of funds and liquidity of investments.

Objectives Main objective: Increasing rate of return and reducing the risk. Other objective:  Safety  Liquidity  Hedge against inflation  Utilization of tax incentives schemes offered by the government.

Investment Objectives ReturnRiskLiquidity Hedge against inflation Security Safety (Register under government regulations) Tax Minimization

TYPES On the basis of risk as Risk Averse investors Investors affinity for risk. – higher income On the basis of groups as Individual investors – large in number, value of investment is comparatively smaller

TYPES Institutional investors –  Few in number,  Value of investment & resources are high.  Institutional investors have fund managers to carry out extensive analysis. Eg. Mutual fund industries, Insurance companies, banking companies.

 Conservative investors/Genuine investors.  CI buy the securities with a view to invest their savings in profitable income earning securities.  Hold the security for long time.  They will sell their holding only when they are assured of a profit.  Speculative investors  Buy securities with a hope to sell them in a future at a profit.  They are not interested in holding the securities.  Interested in price differentials only.

 Enterprising investors They assume risks very boldly as well as willingly. Aim at earning incomes as well as capital appreciation.

Analysis i s - Market - Industry - Company Investment Process Investment Policy Valuation Portfolio Evaluation Portfolio Construction - Investible Funds - Objectives - Knowledge - Intrinsic Value - Future Value - Appraisal - Revision Diversification - Selection & Allocation

Speculation may be defined as “the purchase or sale in the present followed by a sale or purchase in the future in the expectation of making a profit from a price change in the meantime. Speculator prefers to take risks for higher returns. Motive to achieve profits through price changes i.e. capital gains Thus associated with buying low and selling high. SPECULATION

Investment & Speculation INVESTORSPECULATOR Time horizonLonger. Holding period from 1 yr to few years Very short period. Few days to months. Trades frequently RiskModerate riskWilling to take high risk. ReturnModerate rate of return with limited risk. Like to have high return for assuming high risk. DecisionConsiders fundamental factors and evaluate the performance of the company. Considers insider information, market behaviour. FundsUsed his own funds, avoids borrowed funds. Use borrowed funds

Gambling involves taking high risk not only for high returns but also for thrill and excitement. Eg. Horse race, card games, lotteries etc. GAMBLING INVESTMENTGAMBLING Long termShorter than speculation To earning income is the primary factor. Motive is to entertain themselves. Earning income is the secondary factor. Analysis of risk and return. Positive returns are expected by the investors. No risk and return trade off. Negative outcomes are expected.

Numerous avenues of investment are available today, such as,  Non marketable financial assets  Bonds  Mutual fund schemes  Real assets  Equity shares  Life insurance policies  Financial derivatives and  Precious objects

TYPES OF INVESTMENTDirect Fixed principal investments Fixed Deposits Savings account Savings certificates Government bonds Corporate bonds Preferen ce shares Variable principal securities Equity shares Non-security investments Real estate Gold and Silver Commod ities ArtAntiquesIndirect Mutual Funds Pension fund Providen t und Insuranc e UTI

Various Short-term financial options available for investment

Savings Bank Account offers low interest (4%-5% p.a.), making them only marginally better than fixed deposits. Money Market or Liquid Funds : are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Fixed Deposits with Banks are also referred to as term deposits  minimum investment period for bank FDs is 30 days.  low risk, 6-12 months investment period  interest on less than 6 months bank FDs is likely to be lower than money market fund returns.

Various Long -term financial options available for investment

Post Office Savings: Post Office Monthly Income Scheme is a low  risk saving instrument  Provides an interest rate of 8% per annum,  Minimum amount, which can be invested, is Rs. 1,000/- and  Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year.  It has a maturity period of 6 years.

Type of AccountMinimum limitMaximum limit Single INR 1500/- INR 4.5 lakhs Joint INR 1500/- INR 9 lakhs Monthly Income Scheme (MIS) Safe & sure way to get a regular monthly income. Specially suited for retired employees/ Senior Citizens or any one with high sum for investment. Rate of interest 8%. Maturity Period - Six Years. 5% Bonus on Maturity. Auto credit facility to SB Account.

Public Provident Fund:  A long term savings instrument with a maturity of 15 years  and interest payable at 8% per annum compounded annually.  Tax benefits can be availed for the amount invested and interest accrued is tax-free.

Company Fixed Deposits:  These are short-term (six months) to medium- term(three to five years)  borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually.  The rate of interest varies between 6-9% per annum  The interest received is after deduction of taxes.

Bonds:  It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital.  The central or state government, corporations and similar institutions sell bonds.

TREASURY BILLS Treasury Bills are the instruments of short term borrowing by the Central/State govt. They are promissory notes issued at discount and for a fixed period. These were first issued in India in Objectives These are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors. Investors Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. Denomination Minimum amount of face value Rs.1 lac and in multiples there of. There is no specific amount/limit on the extent to which these can be issued or purchased. Maturity : 91 days and 364 days.

Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV), which is determined at the end of each trading session. NAV = Value of all the Shares – Expenses / no. of units issued

Principle of Investment  Feeling of safety  Existence of liquidity  Permanent purchasing power  Capital appreciation  Tax benefits  Legality

INVESTMENT PROCESS Investment process Investment Policy -Investible funds -Objective -Knowledge Portfolio Evaluation Appraisal Revision Analysis - Market - Industry - Company Valuation -Intrinsic value -Future value Portfolio Construction -Diversification -Selection & allocation

RISK Risk: In general, the term risk refers to possibility of incurring a loss in a financial transaction. Risk is define as Variability of returns. Variation between expectations and realizations regarding investment.

T YPES OF RISK Systematic risk Systematic risk is caused by factors external to the particular company.  It is uncontrollable  Non – diversifiable  Associated with securities market.  Put pressure on all securities in such a way the prices of all stocks will move in the same direction.  Example: boom period- Prices rise

Unsystematic risk Unsystematic risk is caused by internal factors to the particular company.  It is controllable  Diversifiable  Peculiar to particular firm  Does not affect the average investor Unsystematic risk arise due to the factors like Labour strike, irregular and dis-organized management policies.

T YPES OF RISK Systematic risk  Market risk  Interest rate risk  Inflation risk Unsystematic risk  Business risk  Financial risk

Internal Business risk  Fluctuations in the sales  Research and development  Personnel management  Fixed cost  Single product External Business risk  Social and regulatory factors  Political risk  Business cycle

 International affairs  National affairs  Industry information  Company information  Stock market information

Alpha relates to factors affecting the performance of an individual stock or the fund manager’s skill in selecting the stocks while beta relates to market risks.