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Investment Analysis & Portfolio Management An Introduction

Introduction to IAPM

Investments

Investment: Meaning

Investment Sacrifice of current money or other resources for future benefits. The sacrifice takes place now and it is certain, the benefit is expected in future and it is uncertain. Main Attributes of any investment are: - time - risk In some investment avenues like government bonds time element is dominant attribute while some others like equity shares risk factor is crucial.
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Introduction to IAPM

Introduction to IAPM

Investor
Planning Horizon Risk Disposition Return Expectations
Relatively longer, usually atleast one year Moderate risk

Speculator
Very short Planning Very high risk

Returns expectations are based on Expects very high returns against risk-return profile, normally a high risk taken modest rate of return is expected thoughtful caluculations, fundamental analysis Normally owned funds are used with minimal amount of loan relies on hearsay, technical charts and market psychology may leverage substantially

Decisions based on Leverage

Investment: Attributes

Introduction to IAPM

Rate of Return It includes current yield (Annual income / Beginning price) and capital yield (capital gains / Beginning Price) Rate of return = Annual Income + (Ending Price Beginning Price) Beginning Price

Rate of return is calculated for a specific period normally one year.


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Investment: Attributes

Introduction to IAPM

Risk The rate of return in few classes of assets like equity shares, real estates, gold can vary widely. The risk of an investment refers to the variability of its rate of return: How much do individual outcomes deviate from the expected value? Where the possibility of actual returns deviating from expected returns is high risk is high and vice versa.
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Investment: Attributes

Measures of variance used in finance are: Range: difference between highest and lowest values Variance: mean of the squares of deviations of individual returns around their average value Standard Deviation is the square root of variance Beta: volatility of returns in response to market swings.

Introduction to IAPM

Investment: Attributes

Introduction to IAPM

Marketability or Liquidity: An investment is highly marketable or liquid if: It can be transacted quickly The transaction cost is low The price change is two successive transactions is negligible

Investment: Attributes

Introduction to IAPM

Marketability or Liquidity: The liquidity of the market can be measured in: Depth: existence of buyers and sellers around the current market price Breadth: presence of such orders in substantial volumes Resilience: emergence of new orders in response to price changes.
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Investment: Attributes

Tax Shelter: An investment can provide different types of tax benefits: Initial Tax Benefit: tax relief enjoyed at the time of making the investment. E.g. Deposit in PPF tax rebate under Section 88 of the Income Tax Act. Continuing Tax Benefit: tax shield associated with periodic returns. E.g. Dividend income up to a limit. Terminal Tax Benefit: tax relief on realizing or liquidating the investment. E.g. PPF withdrawal
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Introduction to IAPM

Investment: Attributes

Introduction to IAPM

Convenience: Convenience refers to the ease with which the investment can be made and looked after. Summary Evaluation of Various Investment Avenues is shown on next slide.

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Introduction to IAPM

Choices Galore

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Introduction to IAPM

Contents
Non-Marketable Financial Securities -Fixed Income Securities Money Market Instruments Life Insurance Policies Mutual Funds Financial Derivatives Futures and Options

Real Estate
Precious Objects: gold, silver, precious stones, paintings etc. Shares: Preference, Equities

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Type of Security Fixed Income Class Bonds / Debentures


Govt. Bonds

Period Return

Certainty Risk

Long Long Long Long Long

Interest Coupon Interest Coupon Interest Coupon Interest Coupon Dividend

Definite Definite Definite High High Moderate High High High Least Low Moderate High High

No No No Medium Medium Medium Negligible No Negligible High High Average Low Low
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Introduction to IAPM

Local Authority Bonds Public Sector Bonds

Corporate Debentures
Preference Stock Redeemable Non-Redeemable

Perpetual Dividend Mdium Long Long Moderate Fair+ tax benefit Moderate

Others
Bank Deposits Public Provident Fund Life Insurance Policies

Variable Income Class Equity Real Estate Gold or Silver Cash Equivalent Treasury Bills Commercial Paper

Perpetual Dividend and Capital Gains Long Long Short Short High Moderate Discount Discount

Introduction to IAPM

THANK YOU

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