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
Return
Risk
Liquidity
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
INVESTOR SPECULATOR
Time horizon Longer. Holding period
from 1 yr to few years
Very short period. Few
days to months. Trades
frequently
Risk Moderate risk Willing to take high
risk.
Return Moderate rate of return
with limited risk.
Like to have high
return for assuming
high risk.
Decision Considers fundamental
factors and evaluate the
performance of the
company.
Considers insider
information, market
behaviour.
Funds Used 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
INVESTMENT GAMBLING
Long term Shorter 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.
TYPES OF INVESTMENT
Direct
Fixed principal
investments
Fixed
Deposits

Savings
account

Savings
certificates

Governmen
t bonds

Corporate
bonds
Prefer
ence
shares
Variable principal
securities
Equity
shares
Non-security
investments
Indirect
Mutua
l
Funds
Pensio
n fund
Provid
ent
und
Insura
nce
UTI
Real estate
Gold and
Silver
Commodities
Art
Antiques
Investment Process
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 Account Minimum limit Maximum 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 1917.
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
RI SK
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.



TYPES OF RI SK
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.
TYPES OF RI SK
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



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