BALBHARATI COLLEGE OF COMMERCE

Investment Analysis & Portfolio Management

By: Mr. Binu Nair

(B.ed, M.Com, MBA (Fin), M.Phil (Acc).

 SYLLABUS
CHAPTER I: INTRODUCTION TO INVESTMENT ENVIRONMENT

CHAPTER II: CAPITAL MARKET IN INDIA

CHAPTER III: RISK – RETURN RELATIONSHIP

CHAPTER IV: PORTFOLIO MANAGEMENT

CHAPTER V: SECURITY ANALYSIS

CHAPTER VI : THEORIES OF TECHNICAL ANALYSIS

CHAPTER VII: CAPITAL ASSET PRICING MODEL

CHAPTER VIII: PORTFOLIO PERFORMANCE MEASUREMENT

 UNIT 1 – INTRODUCTION TO INVESTMENT AND PORTFOLIO
MANAGEMENT
Meaning of Investment:

- The current commitment of funds for a period of time in order to derive a future flow of funds that will
compensate investor for the time the funds are committed, for the expected rate of inflation and also for
uncertainty involved in the future flow of funds.

Three concepts of investment:

- General investment ( used by a common people)
The commitment of money for some purpose E.g – Education, purchase of flat, purchase of vehicle,
Marriage etc.

- Economic investment (Economist’s definition)

This means net increase in capital stock of society –
E.g addition to building, machinery, construction of roads, bridge etc.

- Financial Investment ( used in financial terms by an investor)

This is allocation of funds to assets that are expected to yield some return. Financial investment are
made with the hope of getting some benefits which will accrue in the form of interest, dividend , premium,
appreciation in the value etc.
Every financial investment is eventually converted into a economic investment.
Characteristics of Investment:

1. Rate of Return : -
Investment is done for earning return from the same.
Return are of two type : - a) Current income ( dividends, interest)
b) Future income ( appreciation in the value of investment, capital gain)
2. Risk:
Risk is a chance of loss due to variability in expected returns. Every investment carried certain risk.
Risk and reward goes hand in hand. Risk can be measured and quantified with certain statistical
tools such as range, variance, standard deviation etc.
3. Time/ Liquidity:
Time duration of an investment is important as it explain the risk factor associated with the
investment. Return are dynamic in nature and keep on varying with changing time and scenario. Time also
plays and important role in selecting an investment, short term or long term.
4. Tax benefit: There are certain investment with tax benefit and some are without tax benefit.
• initial tax benefit: under 80C
• Continuing Tax Benefit: Tax benefit on periodic return. Eg. Dividend, interest on PPF A/c
• Terminal benefit: Tax benefit on the matured amount.
5. Convenience: Convenience refers to the ease with which the investment can be made.
TYPES OF INVESTOR:

I. Types of investor on the basis of OWNERSHIP:

Retail Investors or Individual Investor:
- who purchases securities for his own personal account.
- trade in small amounts.
- trade less frequently
Institutional investor: large corporate like bank, insurance company, mutual fund houses etc.
- Trade in large volume at a time
- Effects the price of the security being bought or sold
- have advance resources and technology.
- institutional investors are the trend makers.
II. Types of investor on the basis of Behaviour:
Active Investors:
- those who have achieved significant wealth, or earned well during their lifetime.
- high risk takers
- indepth knowledge and regular investors.
Passive investors:
- Considers securities rather than risk
- Non professional in relation to stock market. Eg. Doctors, engineer etc
- usually invest through brokers or financial advisor.
- prefers diversification of investment to reduce the risk.
 Objectives of Investment:
Objectives are classified on the basis of goals and priority:
i. Short term high priority objectives:- these are the objectives to which funds are committed on high
priority basis and desire to achieve the goal in a short span of time.
Eg. Purchase of house or a living space is a high priority goal for a young couple which they wishes to
achieve as soon as possible.
An individual would like to invest major part of available funds in such assets and then invest left over
funds in other types of assets.
ii. Long term high priority objectives: These are the objective to which funds are allotted on high priority
But the investor has time to accumulate the funds. The investor usually invest in safer securities to attain
the funds in long term. E.g- Education of children, Marriage purpose, vehicle etc.
iii. Low priority objectives: After high priority is achieved funds are allotted to low priority objectives. Failure
To achieve these objective will not effect the life of an investor. Eg. Vacation funds, purchase of home
appliances etc.
iii. Low priority objectives: After high priority is achieved funds are allotted to low priority objectives. Failure
To achieve these objective will not effect the life of an investor. Eg. Vacation funds, purchase of home
appliances etc.

iv. Money making objectives: Any surplus funds available after achieving all the above objectives are
invested to achieve this objective. The main motive behind this objective is wealth creation.
E.g. Shares, gold, real estate etc.
 INVESTMENT VS SPECULATION VS GAMBLING
Investment:
Is a well planned activity of committing funds with the aim of achieving returns with some risk involved.
But it is calculated risk taken after careful study of the investment avenue.

Speculation:
is an activity in which a person assumes high risk, often without regard for safety of invested amount, to
achieve large capital gains in short duration.

Gambling:
involves taking high risk without demanding high compensation in the form of increased return,
gambling is indulged into not for returns but for mere reason of fun and adventure and taking risk. Therefore
it is unplanned, non-scientific and without knowledge of the nature of risk
 Different types of Investment Avenue
1. Direct Equity: Investing in stocks might not be everyone's cup of tea as it's a volatile asset class and there is
no guarantee of returns. Further, not only is it difficult to pick the right stock, timing your entry and exit is
also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than
inflation-adjusted returns compared to all other asset classes.

2. Equity Mutual Fund: Equity mutual fund schemes predominantly invest in equity stocks. As per current the
Securities and Exchange Board of India (Sebi) Mutual Fund Regulations, an equity mutual fund scheme
must invest at least 65 percent of its assets in equity and equity-related instruments. An equity fund can
be actively managed or passively managed.

3. Debt Mutual Fund: Debt mutual fund schemes are suitable for investors who want steady returns. They are
less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily
invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills,
commercial paper and other money market instruments.

4. National Pension System: The National Pension System (NPS) is a long term retirement - focused investment
product managed by the Pension Fund Regulatory and Development Authority (PFRDA).

5. Public Provident Fund: Since PPF has a long tenure of 15 years, the impact of compounding of tax-free
interest is huge, especially in the later years. Further, since the interest earned and the principal invested is
backed by sovereign guarantee, it makes it a safe investment.
 Different types of Investment Avenue
6. Bank Fixed Deposit: A bank fixed deposit is considered a comparatively safer (than equity or mutual funds)
choice for investing in India.

7. Senior Citizen Saving Scheme: Probably the first choice of most retirees, the Senior Citizens' Saving Scheme is a
must-have in their investment portfolios. As the name suggests, only senior citizens or early retirees can
invest in this scheme. SCSS can be availed from a post office or a bank by anyone above 60. SCSS has a
five-year tenure, which can be further extended by three years once the scheme matures.

8. Pradhan Mantri Vaya Vandana Yojana (PMVVY): PMVVY is for senior citizens aged 60 years and above to
provide them an assured return of 7.4 per cent per annum. The scheme offers pension income payable
monthly, quarterly, half-yearly or yearly as opted. The minimum pension amount is Rs 1,000 per month and
maximum Rs 9,250 per month. The maximum amount that can be invested in the scheme Rs 15 lakh. The
tenure of the scheme is 10 years.

9. Real Estate: Investments in real estate deliver returns in two ways - capital appreciation and rentals.
However, unlike other asset classes, real estate is highly illiquid. The house that you live in is for
self-consumption and should never be considered as an investment. If you do not intend to live in it, the
second property you buy can be your investment.
The location of the property is the single most important factor that will determine the value of your
property and also the rental that it can earn.
10. Gold: possessing gold in the form of jewelry has its own concerns such as safety and high cost.
 Factors Influencing selection of Investment Alternative
1. Investment Objective – A wide choice of investments is available today, but these
can be categorised broadly according to three fundamental characteristics i.e Safety,
income and growth.
2. Time Horizon – One of the most important factors is how long their money will remain
invested.
3. Risk Tolerance – Refers to how comfortable an investor would be if the value of his
investment declines significantly.
4. Income and Net Worth – Purchasing equity investment such as stock often requires
higher capital, while an investor can purchase mutual funds with a lesser capital.
5. Life Cycle Stages – Age of an investor and the financial planning is co-related. A
younger investor would prefer to invest in high risk return investment and opposite
with a elder person.
6. Market Sentiments: - The investors are influenced by market sentiments.
7. Past Experience – Investors personality play an important role in investment choices.
8. Investment Knowledge – Understanding the risks involved and potential investment
outcomes helps them to decide whether equity shares, bonds or other investments
suits their portfolio.
 CAPITAL MARKET
Capital market is a market for long term debt and equity shares. In this market , the capital funds
comprising of equity and debt are issued and traded. Capital market is an important constituent of the
financial system.

Capital market can be classified as PRIMARY MARKETS and SECONDARY MARKET.

PRIMARY MARKET:
The primary market is where new securities are issued and sold for the first time. Companies,
governments, or other entities raise capital by selling new stocks, bonds, or other financial instruments
directly to investors
Purpose: It provides a platform for issuers to raise funds for various purposes, such as expanding
operations, funding projects, or paying off debt.

SECONDARY MARKET:
The secondary market is where previously issued securities are bought and sold among investors. This
market provides liquidity and the ability to buy and sell securities after the initial issuance.

Purpose: It allows investors to trade securities, providing them with liquidity and the opportunity to adjust
their investment portfolios.
 INVESTMENT BANKING

Meaning: Investment banking is a segment of the banking industry that focuses on helping
organizations, companies, governments, and other entities raise capital, manage financial assets, and
engage in financial transactions. Investment banks perform a variety of services that are essential for the
efficient functioning of capital markets.

ROLE AND FUNCTION

1. Underwriting and Issuance: -
Investment banks assist companies in issuing new securities, such as stocks and bonds, by underwriting them.
This means they help assess the financial needs of the issuer, determine the appropriate type and amount of
securities to issue, and sell these securities to investors.

They may purchase the entire issue of securities from the issuer and sell them to the public, assuming the risk
of selling all the shares.

2. Mergers and Acquisitions (M&A):

Investment banks advise companies on mergers, acquisitions, and divestitures. They help clients identify
potential acquisition targets, value these targets, and negotiate and structure the transactions.

They provide strategic advice and facilitate deal-making processes.

3. Advisory Services:
• Investment banks offer advice on a wide range of financial matters, including corporate
restructuring, asset management, and financial planning.
• They may assist companies in determining the best strategies for capital structure, market entry, or asset
sales.
4. Sales and Trading:
• Investment banks have trading desks that buy and sell securities, such as stocks, bonds, commodities, and
derivatives, on behalf of their clients and for their own accounts.
• They help clients execute large orders efficiently and provide liquidity to the markets.

5. Research:
Investment banks conduct research on various financial instruments, industries, and economies. They
produce reports and analyses that help investors make informed decisions.
Research divisions often provide insights into market trends, company performance, and economic
outlooks.

6. Asset Management
Portfolio Management: Manage investment portfolios for institutional and individual clients.
Investment Products: Offer mutual funds, hedge funds, and other investment avenues.
Performance Monitoring: Track and report on the performance of investments, ensuring alignment with
clients' goals.
7. Financial Engineering and Structured Finance
• Derivative Products: Create complex financial products like options, futures, and swaps to manage
risk.
• Securitization: Bundle financial assets like loans or mortgages into securities and sell them to
investors.
• Custom Solutions: Develop tailored financial products to meet specific client needs, such as structured
notes or credit derivatives.

8. Wealth Management:
• Personal Financial Planning: Offer tailored advice on investment strategies, estate planning, and
retirement planning for high-net-worth individuals.
• Investment Advisory: Provide guidance on asset allocation, portfolio diversification, and selection of
investment products.
• Tax and Legal Advice: Assist clients with tax-efficient investment strategies and legal considerations
related to wealth management.
 DEPOSITORY SYSTEM
A depository system is an electronic facility that holds and manages securities (like stocks, bonds, and
other financial assets) in a dematerialized form, meaning they are not represented by physical certificates
but instead exist only as electronic records. This system is essential in modern financial markets as it
streamlines the process of securities trading, settlement, and custody.
The main two depositories in India are:
1.National Securities Depository Limited (NSDL): NSDL was established in 1996 as the first electronic
securities depository in India. It plays a crucial role in the dematerialization of securities and offers a wide
range of services, including account maintenance, transaction settlement, and management of corporate
actions. NSDL is a significant player in the Indian capital market and provides infrastructure for the
holding and transfer of securities.

2.Central Depository Services (India) Limited (CDSL): CDSL was established in 1999 and is the second
central securities depository in India. Like NSDL, CDSL provides services related to the dematerialization of
securities, safekeeping, and settlement. It also offers services for the management of corporate actions and
other related activities. CDSL has been a key institution in promoting the electronic trading and settlement
of securities in India.
 BENEFIT OF DEPOSITORY SYSTEM
1. Enhanced Security
•Elimination of Physical Certificates: The depository system eliminates the need for physical share
certificates, reducing the risk of loss, theft, or damage.
•Electronic Record-Keeping: Securities are held electronically, ensuring accurate and tamper-proof
records.
2. Faster Settlement
•Quick Transfer of Securities: Electronic transfers through depositories are immediate, enabling faster
settlement of trades.
•Reduced Settlement Cycle: The depository system has shortened the settlement cycle, enhancing
liquidity and efficiency in the market.
3. Lower Costs
•Reduced Handling and Storage Costs: Without the need for physical certificates, costs related to
printing, handling, and storing physical documents are minimized.
•Lower Transaction Fees: Electronic transactions generally incur lower fees compared to manual
processing of physical securities.
4. Increased Liquidity
•Easy Transferability: The electronic system allows for easy and quick transfer of securities, boosting
liquidity.
•Real-Time Updates: Investors can see real-time updates on their holdings, aiding better decision-making
and enhancing market activity.
5. Improved Transparency
•Accurate Records: Electronic record-keeping ensures that all transactions are accurately documented
and easily traceable.
•Enhanced Regulatory Oversight: Regulators can more effectively monitor the market, ensuring
compliance and reducing the possibility of fraud.
6. Convenience and Accessibility
•Online Access: Investors can access their accounts and manage their holdings online, providing
greater convenience.
•Simplified Processes: Processes such as transferring ownership, pledging securities, and corporate
actions are simplified and can be done electronically.
7. Reduced Paperwork
•Electronic Documentation: Most transactions and communications are handled electronically,
significantly reducing paperwork.
•Simplified Corporate Actions: Actions such as dividend payments, stock splits, and rights issues are
managed electronically, making them more efficient and less prone to error.
8. Enhanced Investor Confidence
•Trust in the System: The reliability, security, and efficiency of the depository system enhance overall
investor confidence in the market.
•Ease of Portfolio Management: Investors can easily track and manage their portfolios, leading to
increased participation and trust in the financial markets.
Systematic Risk Unsystematic Risk
Affects the entire market or Specific to a particular
economy industry, sector, or
company
Cannot be eliminated Can be reduced or
through diversification eliminated through
diversification
Arises from external factors Arises from internal factors
beyond an investor's control specific to a company or
sector
Examples include inflation, Examples include
recession, or interest rate management issues or
risk product recalls
Cannot be eliminated Can be mitigated through
through prudent investment careful analysis and
decisions research
Often referred to as market Also known as idiosyncratic
risk risk
Diversification does not Diversification helps reduce
lower its impact its impact
Measured by beta coefficient Measured by alpha
coefficient
Impacts the entire portfolio Impacts only specific
investments within a
portfolio
Can lead to losses in both Mostly affects investments
bull and bear markets during unfavorable
conditions