CHAPTER- 1: INTRODUCTION

1.1 About the Industry

1.2 About Organization/ Company Profile



CHAPTER 2: Literature Review

2.1 Literature Review


2. 2 About The Topic




















INDUSTRY OVERVIEW
The Financial Market
The financial industry or financial services industry includes a wide range of companies and
institutions involved with money management, lending, investing, insuring and securities
insurance and trading services. The following institutions are a part of the industry:
Banks
Credit card issuers
Investment companies
Investment bankers
Securities traders
Financial planners
Security exchanges
Products of the financial market:

Fig: 1
The major crises that have shaped the modern financial industry are:
The Great Depression(1929)
Black Monday(1987)
Asian Financial Crisis(1990)
Stock Market Downturn(2002)
Sub-prime Crisis(2007)

The Classification of financial market in India


Fig: 2

THE BROKERAGE INDUSTRY
The brokerage industry is currently characterized by a large number of companies (private or
unorganized). In effect it is a fragmented industry with a large number of participants. The
industry thus has monopolistic competition, i.e. a large number of firms selling a slightly
differentiated product.
Indian stock broking industry is the oldest trading industry that has been around even
before the establishment of BSE in 1875. Despite passing through a number of changes in
post liberalization period, the industry has found its way towards sustainable growth. With
the purpose of gaining deeper understanding about the role of Indian stock broking industry,
in the countrys economy, here are some data gleaned from analysis of secondary research.
On the basis of recent research:
On the basis of geographical concentration, Western region has maximum of 52%,
around 24% are located in the North, 13% in South, and 10% in the East.
3% of firms started broking operations before 1950, 65% between 1950-1995, and
32% post 1995.
On the basis of terminals 40% are located in Mumbai, 12% in Delhi, 8% in
Ahmadabad, 7% in Kolkata, 4% in Chennai, and 29% in other cities.
From the study it was found that 36% of firms trade in cash, 27% in derivatives, and
20% in cash, derivatives and commodities.
In the cash market, 34% trade in NSE, 14% in BSE, 45% in both. Whereas in debt
market, 31% trade in NSE, 26% trades in BSE, and 43% in both.
Majority branches are located in North, i.e. 40%, 31% in West, 24% in South, and 5%
in East.
In terms of sub-brokers, around 55% are located in South, 29% in West, 11% in
North, and 4% in East.
Trading, IPOs and Mutual Funds are the top three products offered by 90% of firms
offering trading, 67% IPOs, and 53% offering Mutual Fund transaction.
In terms of various areas of growth, 84% of firms have shown their interest in
expanding their institutional clients, 66% firms intend to increase FIIs, and 34% are
interested in setting up Joint Ventures in India and abroad.
In terms of IT penetration 62% firms provide their website, and 90% have email
facility.
Brokerage terminals in various regions:
Almost 52% of the terminals in the sample are based in the Western region of India, followed
by 25% in the North, 13% in the South and 10% in the East. Mumbai has got the maximum
representation from the West, Chennai from the South, New Delhi from the North and
Kolkata from the East.
Mumbai also has got the maximum representation in having the highest number of terminals.
40% terminals are located in Mumbai while 12% are from Delhi, 8% from Ahmadabad, 7%
from Kolkata, 4% from Chennai and 29% are from other cities in India.

Fig: 3
Branches and sub-brokers in various regions:
The maximum concentration of branches is in the North, with as many as 40% of all branches
located there, followed by the Western region, with 31% branches. Around 24% branches are
located in the South and East constitutes for 5% of the total branches of the total sample.
In case of sub-brokers, almost 55% of them are based in the South. West and North follow,
with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-
brokers.

Fig: 4 Fig: 5


Analysis of brokerage industry based on Michael Porters 5 factor
model


Fig:1.6
Competition
The industry is now in a fairly high growth phase. However the brokerage industry is very
cyclical and is impacted by activity levels in the markets. During the downturns such as
2008-2009 periods, the smaller players were squeezed out of the business. As a result there is
a contrast consolidation happening in the industry.

Competition in the industry
Potential of new entrants
Power of suppliers
Power of customers
Threat of subsitutes
Potential of new entrants
A new entrant in addition to the above also needs a reasonable level of capital to fund the
working requirements of the business (finance to customers, deposits with exchanges, etc).
The scale requirements are increasing constantly and as a result a new entrant will require
higher levels of investments in the future to enter the business. As pointed out, it is likely to
see many entrants in the industry. On the contrary, it is likely that the smaller players will exit
by selling out or closing.
Power of the supplier
Not much relevant in most segments except investment banking, where employees control
client relationships and hence have to be highly compensated.
Power of the buyers/customers
This is important in the institutional brokerage business which involves high volume and low
brokerage charges. The extent of buyer power is very low to non-existent in all kinds of retail
segments.
Threat of substitutes
The products offered by all firms in this industry are more or less differentiated. Investing
rather saving in the bank rather than investing in a brokerage firm can be one option; else this
is not applicable for this industry.

In a summary the industry has a moderate to low level of competitive advantage. There is low
level of customer lock-in and customer will move his or her business if the brokerage rates
are not competitive with rest of the industry. The only competitive advantage for companies
in this sector comes from size and scale which enables them to leverage their size to reduce
average costs and thus make a profit on low brokerage margins.
In addition to high fixed costs, the industry has very low margin cost. As a result the cost of
adding an additional customer is low and per transaction costs are limited. Due to this reason,
we are seeing a constant pressure on the brokerage rates has intensified the competition in the
industry and is resulting in consolidation with the top players.
The basic brokerage business is now sometimes a loss leader to enable the brokerage firm to
acquire customers and sell other products such as wealth management services, or third party
mutual funds. This segment will provide adequate returns in the future for a company with
scale.
DEMAND AND SUPPLY DRIVERS OF THE INDUSTRY

Demands for financial products are driven by risk-reward assessment, which considers:
Potential yield
The expectation of financial incentives or return on investment is a great demand driver
which tempts people to invest or engage into transactions of the financial markets.
Risk Rating
Higher risks assumes higher profits and vice versa. Risk ratings are a vital point when
making a decision to park ones resources into this industry.
Liquidity
To maintain strong and flexible liquidity position people tend to invest in financial
markets, in order to meet their contingencies.
Availability of information
The more disclosure, the more is information symmetry, and so will be visibility and
access to returns and so will be the expectation from this market increase along with
investment.
Access to alternatives
More the disclosure in the market more will be the competition with more profits, so
more will be the choices and access to alternatives to park ones resources.
The major supply drivers are:
Money supply
The supply of money has a big role to play in this industry, the more the supply of money
in this industry; more will be the availability of financial services and products.
Interest rates
Interest rate determines the terms of trade, fluctuations in interest rates can entirely
fluctuate this industry. Higher interest rate= will give higher returns, with great supply no
doubt but borrowing or ascertaining the real market value may become difficult.
Inflation
Value of a currency appreciates and depreciates with the rates of inflation. Inflation thus
serves as a great supply driver in this market. As in high inflation with higher supply of
money there will be higher supply and vice versa.
Economic conditions
Rates of inflation, the upsurge or downturn in the domestic and global economy is
another supply driver which is beyond the control of any business firm.
Government Regulations
The attitude of the government towards the trade policies and various other financial
firms and industry matters a lot. Various restrictions or duties or taxes may restrict the
supply and may hinder the growth of this industry. And will flourish with the ease of
trade.


GLOBAL AND DOMESTIC ECONOMIC ENVIRONMENT OF
The financial industry
According to global 2000 (annual report by Forbes), seven of the top 10 companies
belonged to the financial industry. These included the Citygroup, Bank of America, HSBC
Holdings, and JPMorgan Chase. Their combined revenue in 2007 was worth $647 billion,
down from 2006 high of $785 billion.
According to Fortune 500 rankings, in 2006 financial services generated $257 billion in
profits, a third of total Fortune 500 profits. In 2008, however, they lost a staggering $213
billion, a total swing of $470 billion. Big players on the list, such as Citygroup and Bank of
America, may only be alive today just because of government money.
The financial industry is an industry in itself as well as an ancillary that supports other
industries. Trade and commerce across the world would come to standstill if there was no
means to fund, pay and protect the transactions.

The Brokerage industry
Domestic Economic Environment
In 1991, Manmohan Singh, as Finance Minister in Narasimha Raos government, embarked
on a programme of liberalization prompted by an acute balance-of-payment crisis.

Fig: 1.7 (Indian economy growth factors)
Indian Brokerage Industry-Pre 2000
Post liberalization period.
Business restricted to friends and relatives.
Settlement T+15 days.
Low trade volumes- No derivatives trading allowed.
Lack of investment in technology- No front or back office software.
Indian Brokerage Industry 2000-2008
Venture capital funding for brokerage businesses.
Investment in technology- Front end and back end.
National presence.
Integrated risk management system.
Significant increase in trade volumes- Derivatives trades play a major role.
Margin funding for the retail clients.
Indian Brokerage Industry 2009 onwards
Paradigm shift from transaction oriented to research/ portfolio based advisory.
Focus on franchisee based business model.
Dematerialized accounts access for international trade.
Access to international stock exchange.
Trading on hand held platform (mobile phones etc) allowed.

Current Global Economic Environment

The global economy is slowly recovering from a deep recession, with significant risks
remaining.
Countries are looking for ways to achieve sustainable economic growth and job
creation.
Competitiveness has become more important than ever
-Globalization will continue and strong international competitors are emerging.
-Companies are re-examining everything in terms of how and where they operate.
India has achieved a long-term competitive transformation, but the next stage of
development will be more challenging.
Stable and robust growth in face of global challenges

Fig: 1.8

Critical Success Factors of the Industry

Fig: 1.9
Seeing the overall brokerage as a single unit, the key success factors or the winning strategy
of Indian Brokerage Industry is a mixture of:
People
Process
Technology
There are the three ingredients that together create value for both international and domestic
customers.
By people it indicates to the service providers or the employees of the various firms of this
industry, who day in and day out interact with the customers and provide them services and
satisfy them.
Transparency of the process followed and disclosure method is yet another success factor.
The settlement of transactions is generally done in a process of T+2 days. And the
government support even still plays a very vital role in forming the rules and norms of such
processes.
Technology enables to stay competitive and on edge with the competitors; facilitating the
ease of processes and speed and to maintain and be up to date. This serves as a great success
of the brokerage industry.
All these factors together help create value to the customer.
VARIOUS MEASURES TAKEN BY INDIAN GOVERNMT TO
IMPROVE THE SITUTATION OF INDIAN STOCK MARKET

MEASURES

OBJECTIVES
Allow foreign institutional investors to
invest in equity and debt markets.

Liberalization of stock market to attract foreign investment in
order to boost economic growth.

Expanding the product range offered by
the stock exchanges.

Bring Indian market at par with the international standards and
diversify product portfolio.

Allowing Indian companies to issues
ADRS and GDRS.

Allowing Indian companies to invest
abroad.

Facilitate market integration and give freedom to the
companies.

Access to more funds for investment.

Divestment of government ownership

Facilitate growth through privatization

Strengthening of institutional framework
in primary and secondary markets
Demutualization

To ensure transparency.
Investor protection.
Provide a standard framework for operations.
Deregulation.
Reduces the conflict of interest.

BSE and NSE to set up and maintain
corporate bond reporting platforms

To capture all information relating to trading. Investor
protection

Making PAN compulsory

Strengthening KYC (Know Your Client)
Fig: 1.10

PESTEL ANALYSIS OF BROKERAGE INDUSTRY

PESTEL analysis stands for "Political, Economic, Social, Technological, Environmental
and Legal analysis" and describes a framework of macro-environmental factors used in the
environmental scanning component of strategic management. It is a part of the external
analysis when conducting a strategic analysis or doing market research, and gives an
overview of the different macro environmental factors that the company has to take into
consideration. It is a useful strategic tool for understanding market growth or decline,
business position, potential and direction for operations.

Fig: 1.11

Political factors are how and to what degree a government intervenes in the economy.
Specifically, political factors include areas such as tax policy, labour law,
environmental law, trade restrictions, tariffs, and political stability.
Economic factors include economic growth, interest rates, exchange rates and the
inflation rate. These factors have major impacts on how businesses operate and make
decisions. For example, interest rates affect a firm's cost of capital and therefore to
what extent a business grows and expands.
Social factors include the cultural aspects and include health consciousness,
population growth rate, age distribution, career attitudes and emphasis on safety.
Trends in social factors affect the demand for a company's products and how that
company operates.
Technological factors include technological aspects such as R&D activity,
automation, technology incentives and the rate of technological change. They can
determine barriers to entry, minimum efficient production level and influence
outsourcing decisions. Furthermore, technological shifts can affect costs, quality and
lead to innovation.
Environmental factors include ecological and environmental aspects such as
weather, climate, and climate change, which may especially affect industries such as
tourism, farming, and insurance.
Legal factors include discrimination law, consumer law, antitrust law, employment
law, and health and safety law. These factors can affect how a company operates, its
costs, and the demand for its products.

Fig: 1.12
LEGAL ISSUES WITH A BROKERAGE FIRM
Securities Exchange Act of 1934 (Exchange Act)
In contrast to the Securities Act, the Exchange Act primarily regulates transactions of
securities in the secondary market - that is, sales that take place after a security is initially
offered by a company (the issuer). These transactions often take place between parties other
than the issuer, such as trades that retail investors execute through brokerage firms. The
Exchange Act operates somewhat differently from the Securities Act. To protect investors,
Congress crafted a mandatory disclosure process that is designed to force companies to make
public information that investors would find pertinent to making investment decision. In
addition, the Exchange Act provides for direct regulation of the markets on which securities
are sold (the securities (stock) exchanges) and the participants in those markets (industry
associations, brokers, and issuers).

Monetary and Fiscal Policies
In the securities industry there exist regulators who have established a set of rules and
regulations that administer the entire industry. Financial markets, depositors, clearing houses,
and vendors work together to regulate the investment in the industry.
The 3 major US government agencies that govern the securities industry and frame monetary
and fiscal policy, they are: the Federal Reserve System, the Securities Exchange Commission
(SEC), and the Office of Comptroller of the Currency.
Federal Reserve System
The Federal Reserve System is a government institution created to administer nations credit
and monetary policies and to oversee the banking industry as well as certain aspects of the
broker activity, such as credit.
The Fed is responsible for establishing and enforcing monetary policy and for regulating the
amount of credit outstanding. The fed does this by establishing the bank discount rates and
the rules for credit. The markets response to the Feds determination to control inflation by
raising and lowering the discount rate affects long term interest rates, which have a
significant impact on the securities market.
Securities Exchange Commission
The Securities Exchange Commission (SEC) is the primary regulatory agency that oversees
the securities industry. The SEC is an independent bipartisan, quasi-judicial agency of the
government. The laws administered by SEC deal with securities and finance and seek to
provide protection for investors in their securities transactions.
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currencys (OCC) principal function is supervising the
national banking system. The OCC must approve the establishment of new national banks,
bank mergers involving national banks, and the liquidations of national banks.


COMPANY OVERVIEW

Fig: 1.13
History of Indiabulls
In middle of 1999, when e-commerce was just about starting in India, Sameer Gehlaut and
his close IIT Delhi friend Rajiv Rattan got together and bought a defunct securities company
with a NSE membership and started offering brokerage services. A Few months later, their
friend Saurabh Mittal also joined them. By December 1999, the company embarked on its
journey to build one of the first online platforms in India for offering internet brokerage
services. In January 2000, the 3 founders incorporated Indiabulls Financial Services and
made it as the flagship company.
In mid 2000, Indiabulls Financial Services received venture capital funding from Mr. L.N.
Mittal & Mr. Harish Fabani. In late 2000, Indiabulls Securities, a subsidiary of Indiabulls
Financial Services started offering online brokerage services and simultaneously opened
physical offices across India. By 2003, Indiabulls securities had established a strong pan
India presence and client base through its offices and on the internet.
In September 2004, Indiabulls Financial Services went public with an IPO at Rs 19 a share.
In late 2004, Indiabulls Financial Services started its financing business with consumer loans.
In March 2005, Indiabulls Properties Private Ltd, a subsidiary of Indiabulls Financial
Services, participated in government auction of Jupiter Mills, a defunct 11 acre textile mill
owned by NTC in Lower Parel, Mumbai. Indiabulls Properties private Ltd won the mill in
auction and that purchase started Indiabulls real estate business. A few months later,
Indiabulls Real Estate company Pvt. ltd bought Elphinstone mill in Lower Parel, another
textile mill auctioned by NTC.
With real estate business gaining size, Indiabulls Financial Services demerged the real estate
business under Indiabulls Real Estate and each shareholder of Indiabulls Financial Services
received additional share of Indiabulls Real Estate through the demerger. Subsequently,
Indiabulls Financial Services also demerged Indiabulls Securities and each shareholder of
Indiabulls Financial Services also received a share of Indiabulls Securities.
In year 2007, Indiabulls Real Estate incorporated a 100% subsidiary, Indiabulls Power, to
build power plants and started work on building Nasik & Amravati thermal power plants.
Indiabulls Power went public in September 2009.
Today, Indiabulls Group has a net worth of Rs 16,796 Crores & has a strong presence in
important sectors like financial services, power & real estate through independently listed
companies and Indiabulls Group continues its journey of building businesses with strong cash
flows.



BUSINESS LIFE CYCLE OF INDIABULLS

Fig: 1.14
The business life cycle is a model that enables businessmen to identify the level of
performance at which their business is operating and to determine exactly what needs to be
done to move to the next level.
The various levels of a business life cycle are:
Start up
Rapid Growth
Maturity
Decline
Re-birth/ death
The startup of Indiabulls
Indiabulls was in start up phase in the year 1999. Sameer Gehlaut, Rajiv Rattan and bought a
defunct securities company with NSE membership and started brokerage services. Saurabh
Mittal joined the founders.
-The founders were usually involved in running the business.
-The primary emphasis was on generating and selling offline brokerage services.
-There was less staff with modest pay in the industry, which provided personalized services.
The rapid growth stage
Indiabulls success geared up quite early, within one year of its inception in 2000.
-Indiabulls Financial Services received venture capital funding from Mr. L. N. Mittal and Mr.
Harish Fabani and started online brokerage services.
-It opened many physical offices all across the country thereon and made pan India presence.
- Went public in 2004 (IPO was Rs. 19 per share) and also started providing customer loan in
the same year.
-Became a private ltd. in the year 2005. Participated in government auction and bought
Jupiter mills to start its real estate business, and so on.
-In 2007, started Power Indiabulls.
Indiabulls by this time had a huge customer base, with wide number of physical offices. Its
sales and demand increased and it made its presence greatly visible in the financial and other
markets.
Maturity stage
Indiabulls is still in the process of reaching the maturity stage. Its financial services and
signature account services are in their boom phase and are expected to reach there the
earliest. With its current pace of developments, expanded and loyal customer base, constant
research and development, and other initiatives Indiabulls is sure to reach the maturity stage
as a market leader very soon. And so will increase its profitability and side by side will its
competition in the market.

Decline/Re-birth
With an upsurge in demand for financial services. NBFCs like Indiabulls have a great
opportunity to develop and expand in the market with its current potentials and probably will
never reach this stage unless it gives up to its competitors in the maturity stage.

JOURNEY OF INDIABULLS
Fig: 1.15
INDIABULLS GROUP OF COMPANIES

Fig: 1.16


COMPANY FINANCIALS
Total group net worth: Rs.16,844 Crs
Total group PAT for FY 10-11: Rs 944 Crs
Total group capital expenditure: Rs 6,200 CRs (US $ 1.4 bn) capex in financial year
10-11. Planned capex of 29000 (us $ 6.5 bn) in the FY 2014-2015.
Focus on execution and on the ground results translating into profits.
For its ongoing projects Indiabulls groups customers 385 MTs of steel, 550 MTs of
cement, and 1700 CUM of RMC on daily basis.
Creating value for shareholders: Dividend payout of 232 Crs in FY 10-11.







INDIABULLS IS A LEADING FINANCE COMPANY


Fig: 1.17

ASSET GROWTH

Fig: 1.18
Assets have grown at a quarterly average of Rs. 2000 Crs, over last 9 quarters
with a decrease in non-performing assets.
Long duration mortgage loans have lead to steady asset growth and increase in
Net Asset Income.
Company continues to grow its branch networks and now has 170 branches across
the country.
Company has well trained in house direct sales team, over 1300 people to
promptly attend to prospective customers.

MISSION AND VISION

MISSION:
Rapidly increase the number of client relationships by providing a broad array of products
offering to emerge as a clear market leader.
VISION:
To be the largest and most profitable financial services organization in Indian market and
become one stop shop for all non banking financial products and services for the retail
customers.
STRATEGIES AND FOCUS
CONSOLIDATION
Aim to be among the top 3 players in existing products within next 3 years.
NO NEW PRODUCTS
Focus on gaining size and scale in existing core products.
NO CAPITAL MARKET FUND RAISING
All businesses are well funded to achieve growth and size. Avoiding excessive debt from the
capital market.
GOAL
FY 2013/2014, target of US $ 1.4 bn in cash generation from 3 companies (real estate,
finance and power).
LITERATURE REVIEW
The Securities Brokerage Industry is cyclical and comprised of two distinct types of
businesses. Brokerages, also known as financial services companies, strive to meet the
investing needs of their clients, and exchanges facilitate securities trading. Net profits
correlate to the performance of the broader equity market.
In this market with less differentiated products and many players, there exists an oligopoly
(saying in book terms), characterized by tough competition, entry and exit barriers and many
more.

1. Al Ries and Jack Trout, in his work said differentiate or die, too many less
differentiated products creates a kind of information overload, and in this clutter of
too much information, products which are not properly differentiated or advertised
just end up becoming a me too product. To avoid it every marketer needs to position
his/ her products in a way that makes a specific image in the minds of consumers.

2. Jack Miller, in his work published on June 03, 2010, talked about how investors
make investment decisions. He broke the process of decision making in pulling the
buy or sell trigger. According to him investors made the investment decisions in the
ways like simple screening, then lateral recommendation, followed by piggy bank
investing.

3. According to U.S. Securities and Exchange Commissions, one of the articles:
investors first evaluate their current financial roadmap, and then they evaluate their
comfort zone in taking on risk. Consider an appropriate mix of investments, create
and maintain an emergency fund, consider dollar averaging, consider rebalancing
portfolio occasionally, and in the process also try to avoid the circumstances that can
lead to fraud.
OBJECTIVE OF THE PROJECT
An increasing trend has been observed in demand for the services of Non-Banking Financial
Institutions nowadays. This project is aimed to find out factors affecting investment decisions
in these firms. There has also been emphasis to find out the plus points of Indiabulls or the
differentiating factors that give Indiabulls a competitive edge. In short:
To find out the factors affecting investment decisions in a NBFC.
To find out various competitive advantages that makes Indiabulls of the largest stock
broking companies.

METHODOLOGY
This is a two dimensional project focusing on two aspects, as already mentioned (objectives).
For my project work I have focused on both primary and secondary data as well.
Basically any research work proceeds as:

Fig: 2.1
For this project my challenge was to find out the factors and the competitive
advantages. For which I conducted a descriptive research.
I have collected primary data through questionnaire and survey.
For secondary data, company records, some reviews in economic times, data on
moneycontrol site, some online research works have been referred.
I have taken 11 factors in my survey so my population size is of 66. I have targeted
only investors, who were customers, general investors and company employees.
A factor analysis has been run on the data to find the most influential factor.
For rest my own analytical skill is used.


Fig: 2.2











SCOPE OF THE PROJECT

This project has been a great insight for me as I came to know about stock market, demat
accounts, buying and selling of dematerialized securities, who are brokers, how to make
investment and how to track portfolio of investments.
The project is aimed to cover maximum factors affecting the demand drivers and
competitiveness.
Nowadays even the government is taking up steps to find such factors to give a boost to the
Indian financial system.
FACTORS AFFECTING INVESTMENT DECISIONS
There are a numerous reasons that affect investment decisions here are some of them:
Risk Tolerance
Risk refers to the volatility of portfolios value. The amount of risk the investor is willing to
take on is an extremely important factor. While some people do become more risk averse as
they get older; a conservative investor remains risk averse over his life-cycle. An aggressive
investor generally dares to take risk throughout his life. If an investor is risk averse and he
takes too much risk, he usually panic when confronted with unexpected losses and abandon
their investment plans mid-stream and suffers huge losses.
Return Needs
This refers to whether the investor needs to emphasize growth or income. Younger investors
who are accumulating savings will want returns that tend to emphasize growth and higher
total returns, which primarily are provided by equity shares. Retirees who depend on their
investment portfolio for part of their annual income will want consistent annual payouts, such
as those from bonds and dividend-paying stocks. Of course, many individuals may want a
blending of the two some current income, but also some growth.
Investment Time Horizon
The time horizon starts when the investment portfolio is implemented and ends when the
investor will need to take the money out. The length of time you will be investing is
important because it can directly affect your ability to reduce risk. Longer time horizons
allow you to take on greater risks with a greater total return potential because some of that
risk can be reduced by investing across different market environments. If the time horizon is
short, the investor has greater liquidity needs some attractive opportunities of earning higher
return has to be sacrificed and the result is reduced in return.
Tax Exposure
Investors in higher tax brackets prefer such investments where the return is tax exempt,
others will have no such preference.
Management Outlook
lf the management is progressive and has an aggressively marketing and growth outlook, it
will encourage innovation and favor capital proposals which ensure better productivity on
quality or both. In some industries where the product being manufactured is a simple
standardized one, innovation is difficult and management would be extremely cost conscious.
In contrast, in industries such as chemicals and electronics, a firm cannot survive, if it follows
a policy of 'make-do' with its existing equipment. The management has to be progressive and
innovation must be encouraged in such cases.
Competitors Strategy
Competitors' strategy regarding capital investment exerts significant influence on the
investment decision of a company. If competitors continue to install more equipment and
succeed in turning out better products, the existence of the company not following suit would
be seriously threatened. This reaction to a rival's policy regarding capital investment often
forces decision on a company'.
Opportunity created by technological change
Technological changes create new equipment which may represent a major change in
process, so that there emerges the need for re-evaluation of existing capital equipment in a
company. Some changes may justify new investments. Sometimes the old equipment which
has to be replaced by new equipment as a result of technical innovation may be downgraded
to some other applications, A proper evaluation of this aspect is necessary, but is often not
given due consideration. In this connection, we may note that the cost of new equipment is a
major factor in investment decisions.

Market Forecast
Both short and long run market forecasts are influential factors in capital investment
decisions. In order to participate in long-run forecast for market potential critical decisions on
capital investment have to be taken.
Fiscal Incentives
Tax concessions either on new investment incomes or investment allowance allowed on new
investment decisions, the method for allowing depreciation deduction allowance also
influence new investment decisions.
Cash Flow Budgets
The analysis of cash-flow budget which shows the flow of funds into and out of the company
may affect capital investment decision in two ways. 'First, the analysis may indicate that a
company may acquire necessary cash to purchase the equipment not immediately but after
say, one year, or it may show that the purchase of capital assets now may generate the
demand for major capital additions after two years and such expenditure might clash with
anticipated other expenditures which cannot be postponed. Secondly, the cash flow budget
shows the timing of cash flows for alternative investments and thus helps management in
selecting the desired investment project.
Non-economic Factors
New equipment may make the workshop a pleasant place and permit more socializing on the
job. The effect would be reduced absenteeism and increased productivity. It may be difficult
to evaluate the benefits in monetary terms and as such we call this as non-economic factor.
Let us take one more example. Suppose the installation of a new machine ensures greater
safety in operation. It is difficult to measure the resulting monetary saving through avoidance
of an unknown number of injuries. Even then, these factors give tangible results and do
influence investment decisions.
FACTOR ANALYSIS BASED ON FACTORS AFFECTING
INVESTMENT DECISIONS
Factor analysis is a data reduction/summarization technique. Generally in market research
there are many factors/variables which are correlated which needs to be reduced to
manageable levels.
Generally factor analysis is used where multi co-linearity exists. For factor analysis to run the
null is that the correlation matrix is an identity matrix.
KMO and Bartletts test
Kaiser-Mayer-Olkin (KMO) test is to test the appropriateness of the factor analysis, if the
value is between 0.5 to 1, the test is considered to be significant.
Bartletts Test
Using Bartletts test of sphericity we test the null hypothesis, if the significant value is <0.5,
then the null hypothesis is rejected, i.e. there is multi co-linearity, so we can proceed with
factor analysis.


Fig: 2.3
The factor analysis stands to be appropriate as KMO is 0.891 i.e. more than 0.5.


For Bartletts test:
Null hypothesis: the variable is only correlated to itself, (i.e. r=1) and un-correlated to others
(i.e. r=0).
Alternate hypothesis: all the variables are correlated to each other.
Calculated value: 758.225
Analysis: the null hypothesis is rejected as the significance level is less than 0.5. Hence, the
variables are correlated.
Variables used in the project are:
No.
(sign used)
Variables
V1 Income
V2 Market Situation
V3 Company
V4 Risk Appetite
V5 Management Outlook
V6 Market forecast
V7 Financial Incentives
V8 Cash-flow Budgets
V9 Non-economic Factors
V10 Age Factor
V11 Other Factors

Fig: 2.4



Communalities:

Fig: 31
Extraction Method: Principal Component Analysis
Principal Component Analysis works on the assumption that all the variance is common,
therefore before extraction all communalities are 1. After extraction table shows shared
variance of each variable in all the factors.
Total variance explained

Fig: 2.5
Extraction Method: Principal Component Analysis.
Factor Component: The initial number of factors is the same as the number of variables used
in the factor analysis. However, not all 11 factors will be retained. In this project only 1
st
2
factors will be retained.
Initial Eigen Values: Eigen value is the variance explained by each factor. Because the
analysis is conducted based on a correlation matrix, the variables are standardized, which
means that each variable has a variance of 1, and the total variance is equal to the number of
variables used in the analysis, in this case its 11.
Total: This column contains the Eigen values. The first factor will always account for the
most variance (and hence it has the highest Eigen value), and the next factor will account for
as much of the left over variance as it can, and so on. Hence, each successive factor will
account for less and less variance.
% of Variance: This column contains the percent of total variance accounted for by each
factor.
Cumulative %: This column contains the cumulative percentage of variance accounted for by
the current and all preceding factors.
Component Matrix
In this approach, factors only with Eigen value more than 1 are retained. Factors with
variance less than 1 are no better than a single variable, because due to standardization, each
variable has a variance of 1. If numbers of variables are less than 20 this approach will result
in a conservative number of factors. Here, the number of variables is 11 so to select the
number of factors, Eigen value method is the best method.
Rotated Component Matrix

Fig: 2.6
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
Rotation is converged in 3 iterations.

As a result of the Factor Analysis the 11 variables are condensed to 2 factors. From the
Component Matrix we can identify all variables which come under a particular factor. Heres
a depiction of it:

Factor What it explains

Personal/Internal Factors
Income
Risk appetite
Financial incentives
Non-economic factors
Age factor
Others

External Factors
Market Situation
Market forecast
Management outlook
Company
Cash flow budgets

Fig: 2.7
Thus there are some internal and external factors that affect a persons investment decisions.