Investment Analysis & Portfolio Management – An Introduction

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Investments

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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.

Investment: Meaning

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Investor SpeculatorPlanning Horizon

Risk Disposition Moderate risk Very high riskReturn Expectations

Decisions based on thoughtful caluculations, fundamental analysis

relies on hearsay, technical charts and market psychology

Leverage Normally owned funds are used with minimal amount of loan

may leverage substantially

Returns expectations are based on risk-return profile, normally a modest rate of return is expected

Expects very high returns against high risk taken

Relatively longer, usually atleast one year

Very short Planning

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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.

Investment: Attributes

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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.

Investment: Attributes

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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.

Investment: Attributes

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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

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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.

Investment: Attributes

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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

Investment: Attributes

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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.

Investment: Attributes

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Choices Galore

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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 Period Return Certainty RiskFixed Income Class

Bonds / DebenturesGovt. Bonds Long Interest Coupon Definite No

Local Authority Bonds Long Interest Coupon Definite No

Public Sector Bonds Long Interest Coupon Definite No

Corporate Debentures Long Interest Coupon High Medium

Preference StockRedeemable Long Dividend High Medium

Non-Redeemable Perpetual Dividend Moderate Medium

OthersBank Deposits Mdium Moderate High Negligible

Public Provident Fund Long Fair+ tax benefit High No

Life Insurance Policies Long Moderate High Negligible

Variable Income ClassEquity Perpetual Dividend and

Capital GainsLeast High

Real Estate Long High Low High

Gold or Silver Long Moderate Moderate Average

Cash EquivalentTreasury Bills Short Discount High Low

Commercial Paper Short Discount High Low

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