INTRODUCTION TO

INVESTMENT ANALYSIS &

PORTFOLIO MANAGEMENT
- Meaning of Investment.
- Investment Process
-

Investment V/S speculation V/S Gambling

-

Criteria for investment

-

Types of investors
Investment avenues

Factors Influencing Selection of Investment Alternatives

Meaning of investment

Concepts of investment
1) General invt commitment of money for some purpose. Eg:
Purchasing a vehicle for personal use, paying fees for education
etc
2) Economic invt increases capital stock of society. Eg: invt by
government in building roads, setting up factories, goods and
services used in the production of other goods and services etc.
3) Financial invt - monetary asset purchased with the idea that
the asset will provide income in the future or appreciate and be
sold at a higher price. Eg: shares, bonds, debentures, mutual
funds etc.

Investment Process

Investment V/S Speculation

1. As an example of investing, consider a
large stable multinational company.
2. The company may pay a consistent
dividend that increases annually, and its
business risk is low.
3. An investor may choose to invest in this
company over the long-term to make a
satisfactory return on his or her capital
while taking on relatively low risk.

1. As an example of a speculative trade,

consider a volatile junior gold mining
company that has an equal chance
over the near term of skyrocketing
from a new gold mine discovery or
going bankrupt.

4. Additionally, the investor may add

several similar companies across
different industries to his or her portfolio
to diversify and further lower their risk.

2. With no news from the company,

investors would tend to shy away
from such a risky trade, but some
speculators may believe that the
junior gold mining company is going
to strike gold and may buy its stock
on a hunch.

5. Investment has a longer time horizon.

3. This would be speculation

4. Speculation is shorter time horizon,
and tends to be impulsive.

Gambling
1. Converse to speculation, gambling involves a game of chance. Generally, the
odds are stacked against gamblers.
2. When gambling, the probability of losing an investment is usually higher than the
probability of winning more than the investment. In comparison to speculation,
gambling has a high risk of losing the investment.
3. Generally gamblingdoesntprovide significant economic outcome.
Whereas,investment and speculation can provide significant economic
outcome.
4. It is risky and not possible to balanceriskvsreturns.

Types of Business Investors

Business owners sometimes need to rely on investors for financing. Whether the
company is introducing a new product, expanding operations or performing a capital
upgrade on equipment to help lower production costs, investor resources can provide
help. There are several types of business investors;
1) Personal Investors-Friends and family members with means can also be considered business investors. It is
important to use an investment contract with friends and family members, just as you
would with any other type of investor. The contract should outline the size of the
investment, the rate of return and any ownership arrangements that may also be part
of the agreement.
2) Banks-A bank loan works in much the same way as other business investments. Banks require
the entrepreneur to describe his business and present a business plan, and then
decides whether it is interested in providing funding in the form of a loan.

3) Peer-To-Peer Lending-Peer-to-peer lending is typically arranged via websites that bring investors and small
business owners together. Entrepreneurs create a profile and post a business plan on
a peer-to-peer lending website, and lenders bid on investing in the business. The
owner and the lender, which is commonly a private individual, negotiate an interest
rate for the investment and the lender then supplies the funds to the entrepreneur.
4) Angel Investors-An angel investor is typically an individual with significant financial resources that
invests in start-up businesses, An angel investor tends to follow his instincts and
invest in businesses that may otherwise have a hard time attracting other kinds of
investors. In some cases an angel investor may only want a percentage of return on
his investment, and in other cases he may ask for partial ownership in the company
and a say in management decisions. Angel investor arrangements typically range
from hundreds of thousands up to deals worth a few million.

5) Venture Capitalists-A venture capitalist is a funding organization that typically gets involved
in companies that have already shown a history of returns. Venture
capitalist organizations are rarely interested in risky start-up companies
that may require a small amount of capital to get started. Venture
capitalist organizations are typically interested in deals worth several
millions. They normally ask to be placed in a position of partial ownership
in the company in which they invest, and also expect to have a say in
management decisions.

Investment objective

1. Short term high priority objectives Funds are committed to achieve

objectives as soon as possible. Eg: purchasing a vehicle.
2. Long term high priority objectives - Funds are committed on high priority
basis but investor has time to accumulate funds for the same. Eg:
purchasing a house, building an asset.
3. Low priority objectives These objectives are low priority and failure to
achieve them does not make a significant difference to an individuals life.
Eg: purchasing luxury items, providing for a vacation etc.
4. Money making objectives The surplus funds left after achieving the above
objectives are directed towards wealth maximization. Eg: investing in
equity shares, bonds, gold etc.

Other objectives:
1. Safety it refers to reasonable assurance about repayment of the
funds invested. Different invts provide different degrees of safety.
Deposits with Post office savings bank is 100% as compared to invt in
shares of any company.
2. Profitability / maximizing returns all invts are made with a motive of
maximizing the returns earned. The % of return, its periodicity,
regularity and taxability differs for different forms of invts.
3. Minimizing risk risk is when the investment yields lesser returns than
the expected returns, or no returns at all. Risk may relate to loss of
interest or dividend, delay or loss in repayment of capital etc.
4. Tax benefits some investments provide tax benefits or complete
exemption from tax. Benefits can either be on initial invt, the returns
earned or on the maturity value.

Elements / attributes of invt.

1. Rate of return: The rate of return on any investment comprises of 2 parts, namely the
annual income and the capital gain or loss.
Rate of return = Annual income + (Ending price - Beginning price) / Beginning price
2. Risk: The risk of an investment refers to the variability of the rate of return. It is the
deviation of the outcome of an investment from its expected value. Could result in loss
of current income or capital loss. A further study can be done with the help of
variance, standard deviation and beta.
3. Time: Period of investment is one major consideration while selecting avenue for
investment. Such period may be short (up to one year), medium (one to three years)
or long (more than three years).
Return/rate of interest is normally more in the case of longer term investment while
it is less in the shorter period investment. The period of investment relates to liquidity. An
investor has to decide when he needs money back and adjust the period accordingly.
LIC policy is an investment for a very long period.
Balance in the savings bank account is a short term investment with highest liquidity but
lowest rate of return.

Investment avenues
- Investment in equity & preference shares
- Debentures and bonds/debt instruments
- Non-marketable financial assets
- Money market instruments
- Mutual funds
- Real estate
- Precious objects

Investment in equity & preference shares

Equity Shares:Equity investments represent ownership in a running
company. By ownership, we mean share in the profits and assets of the
company but generally, there are no fixed returns. It is considered as a
risky investment but at the same time, they are most liquid investments
due to the presence of stock markets. Equity shares of companies can be
classified as follows:
1. Blue chip scrip
2. Growth scrip
3. Income scrip
4. Cyclical scrip
5. Speculative scrip

Blue chip shares

Stock of a large, well-established and financially sound company that has operated for many years. A
blue-chip stock typically has a market capitalization in billions, is generally the market leader or among
the top three companies in its sector.
While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most
blue-chips have a record of paying stable or rising dividends for years, if not decades. The term is
believed to have been derived from poker, where blue chips are the most expensive chips.
While a blue-chip company may have survived several challenges and market cycles over the course
of its life, leading to it being perceived as a safe investment, this may not always be the case. The
bankruptcy of General Motors and Lehman Brothers, as well as a number of leading European banks,
during the global recession of 2008, is proof that even the best companies may sometimes be unable
to survive during periods of extreme stress
As per market capitalization, the leading blue chip companies of India are
Tata Consultancy Services (TCS), Reliance Industries, Oil and Natural Gas Corporation Limited (ONGC),
Imperial Tobacco Company of India Limited (ITC), Housing Development Finance Corporation Limited
(HDFC) Bank, Coal India,
Sun Pharmaceutical Industries Limited, Infosys, State Bank of India (SBI) and Industrial Credit and
Investment Corporation of India Limited (ICICI) Bank.

1) Growth Scrip-Agrowthstock is asharein a company whose earnings are expected to grow at an aboveaverage rate relative to the market.
A growth stock usually does not pay adividend, as the company would prefer to
reinvestretained earningsincapital projects. Most technology companies are growth stocks.
2) Income scrip
Aclass of sharesoffered by adual purpose fundthat has little room forcapital appreciationbut
gives the holder a portion of all income earned in the portfolio. This type of share typically
attracts those investors looking for a steady stream of income rather than capital appreciation.
The holders receive their portion of all income created in the portfolio plus any additional
returns on the stocks'par valueat the time of the fund's dissolution.
3) Cyclical Scrip
Acyclicalstock is an equity security whose price is affected by ups and downs in the overall
economy. Typically, these securities move sharply higher when theeconomyis expanding.
However, they also tend to lose value as economic conditions deteriorate. Although this concept
is true of moststocks, it is particularly evident when it comes tosharesof companies that
operate in highlycyclical industries.
Auto manufacturing and residential construction are examples of cyclical industries. Other
cyclical groups include transportation, oil services and mining.

Speculative Scrip-Aspeculativestock is a stock with a high degree of risk.

Aspeculativestock may offer the possibility of substantial returns to
compensate for its higher risk profile. Speculative stocksare favored by
speculators and investors because of their high-reward, high-risk
characteristics. A necessary condition forinvestingin speculative stocks is
a high tolerance for risk. This means an investor in a speculative stock
should be prepared for the possibility of losing the full amount invested if
the stock price goes down to zero.

Debentures or Bonds
Debentures or bonds are long term investment options with a fixed stream of cash
flows depending on the quoted rate of interest. They are considered relatively less
risky. An amount of risk involved in debentures or bonds is dependent upon who the
issuer is. For example, if the issuer is government, the risk is assumed to be zero.
Following alternatives are available under debentures or bonds:
Government bonds - These kinds of bonds are issued and backed by the
Government of India. In other words, the Indian government offers investors bonds
at a fixed rate. The government also employs an investment banker, whose main
responsibility is to serve as a middleman. However, it is difficult for retail
individuals to invest directly in these bonds as the minimum investment amount is
very high.
Tax-saving bonds - By investing in this type of bond, person receives exemption
from paying taxes on the interest income as long as you hold the bond or until its
period of maturity. Egs: ICICI infrastructure bonds, NABARD bonds, RBI tax relief
bonds etc.

Types of bonds
Corporate bonds - These bonds are offered by corporate houses and are open to everyone.
However, these bonds are not as safe as government bonds as the issuing companies are
subject to market volatility, industry ups and downs, etc.
Zero coupon bonds - Usually, most types of bonds are offered at a fixed interest rate.
However, zero coupon bonds do not come with any specific coupon rate or interest rate.
They are offered at a discount on the face value, and on maturity, investors get the face
value back. The difference between the two is the profit. Also called as deep discount
bonds.
Junk bonds - These bonds are issued by companies that are financially not very stable.
These bonds are considered below the investment grade. Since it is a risky trade for an
investor to put money in such bonds, the issuing company usually offers a high rate of
return.
Capital gains bonds - Capital Gains Bonds are instruments which offer tax exemption for
transferring gains of long term capital assets. The Investment in these Bonds is to be made
within six months from the date of such transfer of capital assets (Land/House Property
etc.) for being exempted from Capital Gains Tax. The investment should be held for three
yrs.
Eg: RECL (Rural Electrification Corporation Ltd)
NHAI (National Highways Authority Of India)

Mutual Funds:
Mutual funds are an easy and tension free way of investment and it
automatically diversifies the investments. A mutual fund is an investment
mix of debts and equity and ratio depending on the scheme. They provide
benefits such as professional approach, benefits of scale and convenience.
In mutual funds also, we can select among the following types of
portfolios:
1. Equity Schemes
2. Debt Schemes
3. Balanced Schemes
4. Sector Specific Schemes etc.

Types of mutual funds

(A) By Structure
Open-Ended Schemes
These do not have a fixed maturity. You deal directly with the Mutual Fund for
your investments and redemptions. The key feature is liquidity. You can
conveniently buy and sell your units at net asset value ("NAV") related prices.

Close-Ended Schemes
Schemes that have a stipulated maturity period (ranging from 2 to 15 years)
are called close-ended schemes. You can invest directly in the scheme at the
time of the initial issue and thereafter you can buy or sell the units of the
scheme on the stock exchanges where they are listed. The market price at the
stock exchange could vary from the scheme's NAV on account of demand and
supply situation, unit holders' expectations and other market factors. One of
the characteristics of the close-ended schemes is that they are generally
traded at a discount to NAV; but closer to maturity, the discount narrows.

Some close-ended schemes give you an additional option of selling your units directly
to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations
ensure that at least one of the two exit routes are provided to the investor.
Interval Schemes
These combine the features of open-ended and close- ended schemes. They may be
traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.
(B) By Investment Objective
Growth Schemes
Aim to provide capital appreciation over the medium to long term. These schemes
normally invest a majority of their funds in equities and are willing to bear short- term
decline in value for possible future appreciation.
These schemes are not for investors seeking regular income or needing their money
back in the short-term.

Ideal for:
*Investors in their prime earning years.
*Investors seeking growth over the long-term
Income Schemes
Aim to provide regular and steady income to investors. These schemes generally invest
in fixed income securities such as bonds and corporate debentures. Capital appreciation in
such schemes may be limited.
Ideal for:
*Retired people and others with a need for capital stability and regular income.
*Investors who need some income to supplement their earnings.
Balanced Schemes
Aim to provide both growth and income by periodically distributing a part of the income
and capital gains they earn. They invest in both shares and fixed income securities in the
proportion indicated in their offer documents. In a rising stock market, the NAV of these
schemes may not normally keep pace, or fall equally when the market falls.
Ideal for:
*Investors looking for a combination of income and moderate growth.

Money Market Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes
generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit,
commercial paper and inter- bank call money.
Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the
market.
Ideal for:
*Corporates and individual investors as a means to park their surplus funds for short periods
or awaiting a more favorable investment alternative.
Other Schemes
Tax Saving Schemes
These schemes offer tax rebates to the investors under tax laws as prescribed from time to
time. This is made possible because the Government offers tax incentives for investment in
specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes.
Recent amendments to the Income Tax Act provide further opportunities to investors to save
capital gains by investing in Mutual Funds. The details of such tax savings are provided in the
relevant offer documents.
Ideal for:
*Investors seeking tax rebates.

Sector Funds
Sector funds are those with the objective to invest only in the equity of
those companies existing in a specific sector, as laid down in the funds
offer document. For example, an FMCG sector fund shall invest in
companies like HUL, Cadburys, Nestle etc., while a technology fund will
invest in software companies like Infosys Technologies, etc. There are also
funds that invest in basic sectors/industries such as Cement, steel and
petrochemicals.
Index Funds
Index Funds try to mirror the performance of a particular index such as the
BSE (Sensitivity Index) Sensex or the NSE 50 (NIFTY). Index funds will
invest in only those scrips that constitute a particular index. Investment in
these scrips is also made in proportion to each stocks weight in the index.

Non-marketable financial assets

Non-marketable FA / securities are those that cannot be sold in the
capital/financial market to raise funds. The following are the types:
Post office savings scheme
Public provident fund
Bank deposits
Company fixed deposits
1)Post office savings scheme - post offices across India help in
mobilizing the funds by encouraging public to deposit money into its
saving schemes. It also offers a decent % of interest. It is a 100% secure
invt as it with the Government. Following are the popular schemes

Scheme

Interest rate

Tenure

Invt
denominatio
ns & limits

Features

PO savings A/c

3.5%per
annum on
individual/
joint accounts.

No fixed time

Min. Rs.50
max Rs.1 lakh
for individual
and Rs.2 lakh
for joint a/c

Cheque facility Interest earned

available if an is Tax Free u/s
account is
10(11)
opened with
INR 500/- and
for this
purpose
minimum
balance of INR
500/-in an
account is to
be maintained.

5 yrs. Can be
renewed for
another 5 yrs.

Minimum INR
10/- per month
or any amount
in multiples of
INR 5/-. No
maximum
limit.

1 withdrawal
up to 50% of
balance is
allowed after 1
yr.
After 6 months
full maturity
value.

5 year PO
7.5% per
recurring deposit annum
a/c
(quarterly
compounded)

Tax benefits

No tax benefit

Scheme

PO

time deposit

Kisan vikas
Patra

Interest rate

Tenure

Invt
Features
denominations
& limits

Tax benefits

Interest
payable
annually but
calculated
quarterly.
Period Rate
1yr.A/c 6.25%
2yr.A/c 6.50%
3yr.A/c 7.25%
5yr.A/c 7.50%

upto 5 yrs

Minimum INR
200/- and in
multiple thereof.
No maximum
limit.

Longterm a/cs
can be closed
after 1 yr for
discounted
interest. A/cs
could be closed
after 6 months
but before a yr
for no interest.

The investment
under 5 Years TD
qualifies for the
benefit of Section
80C of the
Income Tax Act,
1961

Amount
Invested
doubles in 100
months (8
years & 7
months).
8.4% interest
compounded
yearly.

--

No limits. Invt
denominations
available are Rs.
100, 500, 1000,
5000, 10000 in all
post offices and
Rs. 50000 in Head
post office.

Certificate can be
purchased by an
adult for himself
or on behalf of a
minor or by two
adults.

No tax benefit

Scheme

Interest rate

Tenure

Invt
Features
denomination
s & limits

Tax benefits

Senior citizens
savings scheme

9% per annum

5 yrs

Only one deposit

allowed in the
multiples of
Rs.10000. Max is
15 lakhs

An individual of
Tax deductions
the Age of 60
u/s 80 C.
years or or 55
yrs above if
retired under
superannuation.
A/c if closed after
1 yr will suffer a
deduction of 1.55
interest and after
2 yrs will suffer a
deduction of 1%
int. TDS is made
on int if it
exceeds
Rs.10000 p.a.

National savings
certificates (XI
issue)

8% compounded
six monthly but
payable at
maturity.

6 yrs

Minimum INR.
100/- No
maximum limit
available in
denominations of
INR. 100/-, 500/-,
1000/-, 5000/- &
INR. 10,000/-.

A single holder
type certificate
can be
purchased by, an
adult.

Invt as well
interest qualifies
for tax
deductions under
Sec. 80C

Public provident fund

Public Provident Fund (PPF) scheme is a popular long term investment option backed by
Government of India which offers safety with attractive interest rate and returns that are fully
exempted from Tax . It was introduced by the National Savings Institute of the Ministry of
Finance in 1968. The aim of the scheme is to mobilize small savings by offering an investment
with reasonable returns combined with income tax benefits.
Public Provident Fund (PPF) account can be opened by resident Indian Individuals and individuals
on behalf of minors.
PPF Product Features:
Attractive interest rate of 8.1% that is fully exempted from Income Tax under section 80 C
Good long term investments of 15 years
Deposit Amount as low as Rs.500 and maximum Rs.1,50,000 in one financial year
Deposits can be done maximum in 12 transactions
Loan can be availed between 3rd to 6th financial year
Partial withdrawal facility can be availed from 7th financial year onwards
Account can be extended in a block period of 5 years after maturity.

Bank deposits

Portfolio
A collection of investments all owned by
the same individual or organization.
These investments often include stocks,
which are investments in individual
businesses; bonds, which are investments
in debt that are designed to earn interest;
and mutual funds, which are essentially
pools of money from many investors that
are invested by professionals.
By creating portfolios of investments, the
investor curbs down the risk of one
particular investment.

Portfolio management
'Portfolio Management - The art and science of making decisions about
investment mix and policy, matching investments to objectives, asset
allocation for individuals and institutions, and balancing risk against
performance.
PM is about analyzing the strengths, weaknesses, opportunities and threats
in choice of securities in an attempt to maximize returns at minimum risk.
People and companies hire portfolio managers to manage their portfolios
for a certain fee.
He helps in improving return on investors portfolio.
Under portfolio investment, risk of one security can be compensated by
another security.

Objectives / Principles of portfolio management

Steps in portfolio management

Approaches to construction of portfolio.

a) Interior Decorating Approach : Interior decorating approach is tailormade to the
investment objectives and constraints of each investor. In case of exterior
building or
room structure, the furnishing and interior decoration to be carried out
inside the
structure will depend upon the purpose for which it is to be used.
Similarly, the portfolio will consist of securities which will suit the
individuals investment objectives and constraints. An individual investor
has to carefully develop his portfolio over a
period of years to suit his needs and match his investment objectives.
b) Markowitz Approach : Markowitz approach provides a systematic search
for optimal
portfolio. It enables the investors to locate minimum variance portfolios i.e.
portfolios
with the least amount of risk for different levels of expected return.

C) Matrix approach matrix approach considers, risk,

returns as well as liquidity, tax benefit and image of the
investment. The various considerations may be
summarized and overall view may be obtained through a
matrix by allotting 100 marks to each consideration and
then totaling the marks allotted for each invt. The invt with
highest marks is considered.

Approaches to investment
analysis
Investment analysis means a careful study of factors such as; safety,
dividend / interest, scope for capital appreciation, tax benefits etc.
Investor must also study stock market behavior, trends in prices &
interest rates, present and expected earnings of the company before
investing.
Investment analysis is of two types:
1) Fundamental analysis
2) Technical analysis

Fundamental analysis
Fundamental analysis is a technique that attempts to determine a security's
value by focusing on underlying factors that affect a company's actual
business and its future prospects.
On a broader scope, one can perform fundamental analysis on industries or
the economy as a whole. The term simply refers to the analysis of the
economic well-being of a financial entity as opposed to only its price
movements.
Fundamental analysis serves to answer questions, such as:
1. Is the company's revenue growing?
2. Is it actually making a profit?
3. Is it in a strong-enough position to beat out its competitors in the future?
4. Is it able to repay its debts?
5. Is management trying to "cook the books"?

Fundamental analysis is also defined as a method of evaluating

securities by attempting to measure the intrinsic value of a stock.
Fundamental analysts study everything from the overall economy and
industry conditions to the financial condition and management of
companies.
Intrinsic value Real value OR fundamental value without considering
market value.
Eg: Let's say that a company's stock was trading at Rs.20. After doing
extensive homework on the company, you determine that it really is
worth Rs.25. In other words, you determine the intrinsic value of the firm
to be Rs.25.
This is clearly relevant because an investor wants to buy stocks that are
trading at prices significantly below their estimated intrinsic value.

Technical analysis
Technical analysis is the evaluation of securities by means of studying
statistics generated by market activity, such as past prices and
volume.
Technical analysts do not attempt to measure a security's intrinsic
value but instead use stock charts to identify patterns and trends that
may suggest what a stock will do in the future.
Underlying Assumptions of Technical Analysis:
1. Market value of the asset is a reflection of supply and demand of the
asset.
2. Supply and demand are driven by rational factors, such as data and
economic analysis, as well as irrational factors, such as guesses.
3. Markets and individual stocks move together given trends.
4. Shifts in supply and demand will shift the trends in the market and
can be detected in the market.