STUDY OF FINANCIAL INSTRUMENT IN INDIA

A PROJECT SUBMITTED IN
PART COMPLETION OF
MASTERS OF FINANCIAL MANAGEMENT

TO
TIMSR

SUBMITTED BY
SNEHAL RASIKLAL PANCHAL
Roll Number:- F-17-20-24

UNDER THE GUIDALINES OF

PROF. SARVESH BANSAL

MFM – BATCH – 2017-2020

THAKUR INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

Shyamnarayan Thakur Marg, Thakur Village,
Kandivali (East), Mumbai 400101

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 CERTIFICATE

This is to certify that the study presented by Ms. SNEHAL RASIKLAL PANCHAL to THAKUR
INSTITUTE OF MANAGEMENT STUDIES & RESEARCH in part completion of FINANCIAL
MANAGEMENT under “STUDY OF FINANCIAL INSTRUMENT IN INDIA” has been done under
my guidance in the year 2017-20.

The Project is in the nature of original work that has not so far been submitted for any other course in this
institute or any other institute. Reference of work and relative sources of information have been given at
the end of the project

Signature of the Candidate

MS. SNEHAL PANCHAL

Forwarded through the Research Guide

Signature of the Guide

PROF. SARVESH BANSAL

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 ACKNOWLEDGMENT

I feel immense pleasure to present my project report on “STUDY OF FINANCIAL INSTRUMENT

IN INDIA” It is not only due to my alone efforts instead many hands contribute to its successful
completion. Therefore, I would link to thank all of them.

I place on record and warmly acknowledge the continuous encouragement invaluable supervision timely
suggestions and inspired guidance offered by our guide Prof. SARVESH BANSAL in bringing this
report to a successful completion.

I am highly indebted to Thakur Institute of Management Studies And Research for providing necessary
information and infrastructure regarding the project & also for their support in completing the project.

Lastly my thanks and appreciations also go to all those who directly and indirectly helped in developing
and completion of this project.

Snehal Panchal
Roll No. 24

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 Declaration

I Ms. SNEHAL RASIKLAL PANCHAL student of THAKUR INSTITUTE OF MANAGEMENT

STUDIES & RESEARCH hereby submit my project entitled as “STUDY OF FINANCIAL
INSTRUMENT IN INDIA” in the academic year 2017-2020.

The subject matter contain in this project is the original as was done under the guidance of
PROF. SARVESH BANSAL. However this material has been picked up, has been used to enhance the
clarity of the hypothesis and has been used for academic purpose only.

I further assert that this project or any part of it has never been submitted by any one or else to any
university in the world.

Date:

Place:

(Signature of the Student)

Name: Ms. Snehal Panchal

Roll no: F-17-20-24

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 EXECUTIVE SUMMARY

An investment refers to the commitment of funds at present, in anticipation of some positive rate of
return in future. Today the spectrum of investment is indeed wide. An investment is confronted with
array of investment avenues. Among all investment, investment in equity is in best high proportion.
This is because the history of stock market is booming and bursts overnight millionaires, an instant
pauper. Indian economy is doing indeed well in recent years. The study has been undertaken to analyze
the investment pattern of investment community. The main reasons behind the study are the factors
like income, economy condition, and the risk covering nature of the Indian investors. The percentage
of Indian investors investing in the Indian equity market is very less as compared to foreign investors.

This project contains the investors’ preferences and as well as the different factors that affect investors
decision on the different investment avenues

This study includes response of investor in choosing securities in each classification and analysis has
been for the respective performance based on their returns. The findings relates to the outperforming
products and investors risk taking ability while investing in each different products.

In India, there has been a conscious effort by the Government of India, RBI and SEBI to develop and
integrate various financial market segments. In this assignment/report, the author analysis the
economic dependency on the finance sector i.e. specifically on the financial markets industry

The impact of economic affects the people to the ground level creating a scenario of economic
downfall which not only impacts the nation itself but to the all other nations as well. The 2008 downfall
of USA impacted the world & created depression or crisis for which was shared by the other nation as
well.

India as a developing country have emerged as the most promising investment destination across
global financial hubs for providing stable economy with balanced growth rate. The new government
has been trying to turn the things in favor of India so as to get India under the banner of developed
nation

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Sr Content Page No
No
1 Objectives 7

2 Literature Review 7
3 Research Methodology 9

4 Introduction 11

5 Characteristics of Investment 13

6 Investment Process – Stages in Investment 16

7 Success In Investment 18

8 Three Approaches to Succeed as An Investor 21

9 Investment and Speculation 24

10 Investment Categories: 27

11 Factors Favourable For Investment: 29

12 Fundamental Analysis Of Various Investment Alternatives: 33

13 Technical Analysis 34

14 Types Of Investment & Investors 39

15 Corporate Securities 41

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 16 Return and Risk – The Basis of Investment Decisions 48

17 Sources of Study For Investors 50

18 Questionnaire and Analysis 51

19 Conclusion 60
20 Bibliography 60

Table of Contents

OBJECTIVES

a) Objective of Study:
 Analysis of Financial Instrument.
 Fundamental Analysis in Financial Market.
 Long Term & Short Term benefits.
 Technical Analysis

Literature review

A literature review was conducted in investigation recent research and current research related to
performance measurement, risk assessment, and risk management implementation of the company.
The source the literature review included professional journals, articles and current practices. This
summarises the review, organised by risk management, performance measurement, and
database. The review of risk management literature focused on two primary areas financial
performance specific approaches in risk management and overall performance measurement of the
company.

1.Conceptual Framework

The development of a country‘s financial markets is one of the key priorities for the think tanks of the
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country‘s central bank. The development of financial markets can be broadly classified into three
stages (Rangarajan, 1997):

Bank-oriented stage: Banks and other financial institutions play the most significant role in financial
capital formation.

Early capital stage: Issues of equity and debentures take over banks in capital formation.

Highly capital-oriented stage: The capital market becomes the key source for long-term financing.

In tandem with the changing internal and external environments, the Indian financial markets have
undergone significant transformations over the course of time (discussed in brief later on).

Depending on the inherent nature of an economy, one of the three segments of the debt market—the
government securities market (GSM), the Public Sector Undertaking (PSU) bonds market, or the
corporate debt market—would be predominantly more active than the other segments in the country.
For instance, the corporate debt market would be the most predominant segment in those economies
whose government did not run fiscal deficits or who are not allowed to issue

bonds in the domestic market. However, since both these factors are absent in the case of India, GSM
garners the lion ‘s share in the country‘s debt market (Reddy, 2007). GSM ‘s dominance in the
domestic debt market can also be attributed to the RBI‘s conscious role in its development through a
series of steps that can be categorised as follows:

Instrument development

Institutional development

Strengthening of market transparency and efficiency

2.Motivation for development of domestic financial market segments

In response to the 1997 Asian crisis, the development of the domestic bond market became significant
not only for fund channelization but also for the diversification of the external sector risk in the
financial system (Reddy, 2002). In general, governments are motivated by different factors for
developing the domestic bond market. For instance, the Singaporean government viewed it as a means
of financial intermediation for credit allocation, while the Hungarian government was motivated to
reduce monetisation of the government deficit and increase competitiveness in the banking sector (that
possessed wide spreads between deposits and advances) to encourage foreign investment. Whatever
be the motivation factor, the macro-economic fundamentals of an economy do impact the performance
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of its domestic financial markets to a certain extent.

International financial market integration refers to an increase in capital flows and a tendency for prices
and returns on internationally-traded financial assets to equalise on a common-country basis. The
validity of various international parity conditions—purchasing power parity (PPP), covered interest
parity (CIP), uncovered interest parity (UIP), and real interest parity (RIP)—provides a direct test to
analyse the degree of international market integration. On the other hand, indirect tests include the
measurement of the degree of correlation between national savings and investments (Jain and
Bhanumurthy, 2005). This paper, however, deals only with the analysis of the integration levels of
domestic financial markets.

3.Kabra, Mishra and Dash (2010) studied the factors which affect individual investment decision and
differences in the perception of investors in the decision of investing on the basis of age and gender and
found that investors' age and gender predominantly decides the risk taking capacity of investors.

4.Suman Chakraborty and Sabat Kumar Digal (2011) found from their work that, saving is
significantly influenced by demographic factors such as age, occupation and income level of investors. .
It was found that female investors tend to save more in a disciplined way than the male investors. Paper
attempts to explore whether dichotomy of the popular believes that men are more pro-risk than women.
It was observed that women are risk averse indeed but save more than the male counterparts as the
income level rises.

5.Jaakko and Tikkanen (2011) in their study on “Individuals’ Affect-Based Motivations to Invest in
Stocks: Beyond Expected Financial Returns and Risks” found that most investors had affected based
extra motivation to invest in stock, over and above financial return expectations. The more positive an
individual's attitude towards the company was, the stronger was his extra investment motivation.

RESEARCH METHODOLOGY

To complete any project one need to do is research for this project is done through two methods.

1: Primary data

2: secondary data

1. Primary data

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Primary data is that type of data which is collected for the first time and for the specific purpose of the
research. In simple words this data does not prevail to be collected unless the need is desired for it. This
type of information is the first hand information collected exclusively for the purpose of the research.

The main advantage of using primary data is because it can be easily relied upon as the data is fresh and
without any contamination and adulteration. Secondly primary data is collected as this data is not available
anywhere. However, the main disadvantage of collecting primary data is that it takes lot of time to conduct
the data. Secondly it requires lot of effort and cost in conducting the research. Some of the common tools
of conducting primary data are by way of surveys, interview, focus group discussion, in-depth interview,
observation techniques and other form of discussion forums and panels

2.Secondary data

Secondary data is the form of data which is already present in the market and was collected by some other
person for some different purpose. Any form of data which is collected and used immediately becomes
secondary data for others. For example many researchers carry out research which is primary but for
students and academicians this later becomes secondary which we then refer in journals and magazines.
This type of data has more to do with past rather than the present since it is historical in nature. In simple
words secondary form of data is any form of data which is present in the universe and collected by someone
else for some other purpose

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Introduction

The Indian financial system nurtures the savings among investors and channels them to their optimum
and effective use through financial instruments. These financial instruments are those instruments which
are used for raising funds for corporate entities. Investments in financial assets consists of:

a. Securitized investments like shares, bonds, debentures, govt. securities, mutual funds, etc.

b. Non-securitized investments like bank deposits, post office deposits, insurance, provident funds, etc.

They can also be classified into:

a. Money market instruments like treasury bills, commercial papers, commercial bills etc. which are for
short run and

b. capital market instruments like equity, bonds etc. which are for long run.

They all are available to investors for earning returns and beating the inflation. However, all these
investment avenues have their own pros and cons. So, a rational investor tries to balance these
benefits and shortcomings before investing in them.

The economic development of a country depends upon the savings done by its households, individuals or
corporate houses who channelizes their savings in some productive avenues i.e., in an economy there is a
regular flow of funds from the investors(savers) to the users of the fund which leads to creation of
wealth. This flow of funds is mobilized through financial markets in some financial instruments such as
bonds, mutual funds, public provident fund(PPF), bank deposits etc. Accordingly, a rational investor has
to make a decision regarding the best investment instrument available to him.

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Investment involves making of a sacrifice in the present with the hope of deriving future benefits. Two
most important features of an investment are current sacrifice and future benefit. Investment is the sacrifice
of certain present values for the uncertain future reward. It involves numerous decision such as type, mix,
amount, timing, grade etc, of investment the decision making has to be continues as well as investment
may be defined as an activity that commits funds in any financial/physical form in the present with an
expectation of receiving additional return in the future. The expectation brings with it a probability that
the quantum of return may vary from a minimum to a maximum.
This possibility of variation in the actual return is known as investment risk.
Thus, every investment involves a return and risk. Investment has many meaning and facets. However,
investment can be interpreted broadly from three angles -
- economic,
- layman,
- financial.

Economic investment includes the commitment of the fund for net addition to the capital stock of the
economy. The net additions to the capital stock means an increase in building equipment or inventories
over the amount of equivalent goods that existed, say, one year ago at the same time.

The layman uses of the term investment as any commitment of funds for a future benefit not necessarily
in terms of return. For example, a commitment of money to buy a new car is certainly an investment from
an individual point of view. Financial investment is the commitment of funds for a future return,
thus, investment may be understood as an activity that commits funds in any financial or physical form in
the presence of an expectation of receiving additional return in future. In the present context of portfolio
management, the investment is considered to be financial investment, which imply employment of funds
with the objective of realizing additional income or growth in value of investment at a future date.
Investing encompasses very conservative position as well as speculation the field of investment involves
the study of investment process. Investment is concerned with the management of an investors’ wealth
which is the sum of current income and the present value of all future incomes.
In this text investment refers to financial assets. Financial investments are commitments of funds to derive
income in form of interest, dividend premium, pension benefits or appreciation in the value of initial
investment. Hence the purchase of shares, debentures post office savings certificates and insurance policies
all are financial investments. Such investment generates financial assets.

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These activities are undertaken by anyone who desires a return, and is willing toaccept the risk from the
financial instruments.

INVESTMENT PROCESS
An organized view of the investment process involves analyzing the basic nature of investment decisions
and organizing the activities in the decision process.
Investment process is governed by the two important facets of investment they are risk and return.
Therefore, we first consider these two basic parameters that are of critical importance to all investors and
the trade off that exists between expected return and risk. Given the foundation for making investment
decisions the trade off between expected return and risk- we next consider the decision process in
investments as it is typically practiced today.

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Characteristics of Investment

The characteristics of investment can be understood in terms of as:

Return: All investments are characterized by the expectation of a return. In fact, investments are made
with the primary objective of deriving return. The expectation of a return may be from income (yield) as
well as through capital appreciation. Capital appreciation is the difference between the sale price and the
purchase price. The expectation of return from an investment depends upon the nature of investment,
maturity period, market demand and so on.

Risk: Risk is inherent in any investment. Risk may relate to loss of capital, delay in repayment of capital,
non-payment of return or variability of returns. The risk of an investment is determined by the investments,
maturity period, repayment capacity, nature of return commitment and so on. Risk and expected return of
an investment are related. Theoretically, the higher the risk, higher is the expected returned. The higher
return is a compensation expected by investors for their willingness to bear the higher risk.

Safety: Safety of funds invested is one of the essential ingredients of a good investment programme. Safety
of principal signifies protection against any possible loss under the changing conditions. Safety of principal
can be achieved through a careful review of economic and industrial trends before choosing the type of
investment. It is clear that no one can make a forecast of future economic conditions with utmost precision.
To safeguard against certain errors that may creep in while making an investment decision, extensive
diversification is suggested.
The main objective of diversification is the reduction of risk in the loss of capital and income. A diversified
portfolio is less risky than holding a single portfolio.
Diversification refers to an assorted approach to investment commitments. Diversification may be of two
types, namely,
Vertical diversification; and
Horizontal diversification.
Under vertical diversification, securities of various companies engaged in different stages of production
(from raw material to finished products) are chosen for investment.
On the contrary, horizontal diversification means making investment in those securities of the companies
that are engaged in the same stage of production.

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Apart from the above classification, securities may be classified into bonds and shares which may in turn
be reclassified according to their types. Further, securities can also be classified according to due date of
interest, etc. However, the simplest diversification is holding different types of securities with reasonable
concentration in each.

Liquidity: A liquid investment is one which can be converted into cash immediately without monetary
loss. Liquid investments help investors meet emergencies. Stocks are easily marketable only when they
provide adequate return through dividends and capital appreciation. Portfolio of liquid
investments enables the investors to raise funds through the sale of liquid securities or borrowing by
offering them as collateral security. The investor invests in high grade and readily saleable investments in
order to ensure their liquidity and collateral value.

Stable income : Investors invest their funds in such assets that provide stable income. Regularity of
income is consistent with a good investment programme. The income should not only be stable but also
adequate as well.

Capital growth : One of the important principles of investment is capital appreciation. A company
flourishes when the industry to which it belongs is sound. So, the investors, by recognizing the connection
between industry growth and capital appreciation should invest in growth stocks. In short, right issue in
the right industry should be bought at the right time.

Tax implications : While planning an investment programme, the tax implications related to it must be
seriously considered. In particular, the amount of income an investment provides and the burden of income
tax on that income should be given a serious thought. Investors in small income brackets intend to
maximize the cash returns on their investments and hence they are hesitant to take excessive risks. On the
contrary, investors who are not particular about cash income do not consider tax implications seriously.

Stability of Purchasing Power : Investment is the employment of funds with the objective of earning
income or capital appreciation. In other words, current funds are sacrificed with the aim of receiving larger
amounts of future funds. So, the investor should consider the purchasing power of future funds. In order
to maintain the stability of purchasing power, the investor should analyze the expected price level inflation
and the possibilities of gains and losses in the investment available to them.
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Legality : The investor should invest only in such assets which are approved by law. Illegal securities
will land the investor in trouble. Apart from being satisfied with the legality of investment, the investor
should be free from management of securities. In case of investments in Unit Trust of India and mutual
funds of Life Insurance Corporation, the management of funds is left to the care of a competent body. It
will diversify the pooled funds according to the principles of safety, liquidity and stability.

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INVESTMENT PROCESS – STAGES IN INVESTMENT
The four main steps involved in investment process. Those are Investment Policy, Investment
Analysis, Valuation of Securities, Portfolio Construction.

1. Investment Policy:
The first stage determines and involves personal financial affairs and objectives before making
investments. It may also be called preparation of the investment policy stage.
The investor has to see that he should be able to create an emergency fund, an element of liquidity and
quick convertibility of securities into cash. This stage may, therefore; be considered appropriate for
identifying investment assets and considering the various features of investments.

2. Investment Analysis:
When a individual has arranged a logical order of the types of investments that he requires on his portfolio,
the next step is to analyse the securities available for investment. He must make a comparative analysis of
the type of industry, kind of security and fixed vs. variable securities. The primary concerns at this stage
would be to form beliefs regarding future behaviour or prices and stocks, the expected returns and
associated risk.

3. Valuation of Securities:
The third step is perhaps the most important consideration of the valuation of investments. Investment
value, in general, is taken to be the present worth to the owners of future benefits from investments. The
investor has to bear in mind the value of these investments.
An appropriate set of weights have to be applied with the use of forecasted benefits to estimate the value
of the investment assets. Comparison of the value with the current market price of the asset allows a
determination of the relative attractiveness of the asset. Each asset must be valued on its individual merit.
Finally, the portfolio should be constructed.

4. Portfolio Construction:
Under features of an investment programme, portfolio construction requires a knowledge of the different
aspects of securities. These are briefly recapitulated here, consisting of safety and growth of principal,
liquidity of assets after taking into account the stage involving investment timing, selection of investment,
allocation of savings to different investments and feedback of portfolio as given in Table.

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18
Success in Investment
Success in most things is relative, and not less so in the field of investment. Success in investment means
earning the highest possible return with the constraints imposed by the investor’s personal circumstances-
age, family, needs, liquidity requirements, tax position and acceptability of risk. If possible, performance
should be measured against alternative investments or combinations of investments, available to the
investor within those constraints. Genuine success also means winning the battle against inflation, against
the fall in the real value of savings and capital.

To be a successful investor, one should strive to achieve no less than the rate of return consistent with the
risk assumed. If markets are efficient, abnormal returns are not likely to be achieved, and so the best one
can hope for a return consistent with the level of risk assumed. The trick is to assess the level of risk we
wish to assume and make certain that the collection of assets we buy fulfils our risk expectation. As a
reward for assuming this level of risk, we will receive the returns that are consistent with it. If, however,
we believe that we do better than the level of return warranted by the level of risk assumed, then success
must be measured in these terms. But care must be exercised here. Merely realizing higher returns does
not indicate success in this sense. We are really talking about outperforming the average of the participant
in the market for assets. And if we realize higher return we must be certain that we are not assuming higher
risk consistent with those returns in order to measure our success. Thus we are left with two definitions of
success.
(i) Success is achieving the rate of return warranted by the level of risk assumed. Investors expect
returns proportional to the risk assumed.
(ii) Success is achieving a rate of return in excess of warranted by the level of risk assumed.
Investors expect abnormal returns for the risk assumed.

To be successful under the first definition, an investor must have a rational approach to portfolio
construction and management. Reasonably efficient diversification is the key. To be successful under the
second definition, an investor must have at least one of the following:
(1) Superior Analytical Skill, Superior Forecasting Ability, Inside Information, Dumb Luck
Whether and to what extent anyone is likely to possess these characteristics and consistently be able to
outperform the market by the level of risk assumed is critical issue.

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The investor should be aware of, but not denoted by, the fact that investment markets, the stock market in
particular, are largely dominated by professional investors. As a consequence, grossly under-valued
investments are rarely easy to come by. Moreover, he should beware of books subtitled.
How I made a Million in the Stock Market, Get Rich Quick and statements such as ‘You can have a high
return with no risk1. In reasonably efficient markets risk and return go together like bread and butter; in
the words of Milton Friedman, there is no such thing as a free lunch.
Success involves planning clearly establishing one’s objectives and constraints. In-vestments should be
looked at in terms of what they contribute to the overall portfolio, rather than their merits in isolation.
Institutional investment will probably play some part, and performance tables are available to give some
guidance.
But personal direct investment should not be over looked, particularly in the obvious area of true
ownership, and one’s own knowledge, skills, hobbies and acquaintances can also be put to advantage.
Remember Francis Bacon’s words: If a man looks sharply and attentively, he shall see fortune; for though
she is blind, yet she is not so invisible. More money has been lost in the stock market than one can imagine
simply because of the failure of investors to clearly define their objectives and assess their financial
temperaments.
In analysing the portfolios of individual investors, the most common errors observed are: firstly, portfolio
is over diversified, containing so many issues that the investor can not follow closely the developments in
those companies; secondly, many portfolios suffer from overconcentration in one or two issues; thirdly,
all too often, the quality of these securities is not consistent with the stated investment goal and usually a
portfolio contain too many speculative securities; fourthly, many individual investors are afraid to take
losses, they want to wait for their stock to come back to the price they paid; and fifthly, most investors,
without realising it, do not have a plan.
They are buying and selling on tips and believe in going where the action is instead of sticking to an
investment goal; and finally, most serious of all, some investors consider only profit potential and never
the risk factor.
They try to wait for the bottoms to buy and tops to sell, they don’t learn from their mistakes and sight of
their financial goals or the time frame of the investment objectives, under pressure of hope, fear, or greed.
Should investor play a winner’s game or a loser’s game while buying securities? To answer this question,
probably the best way to explain it is to use a sport as an illustration. Let us take tennis. To professionals
like Wilander or Lendll, tennis is a winner’s game.
To win, they must deliver the ball to a place where the opponent will find it difficult to return or play at a
speed that the opponent cannot keep up with. They win the game by delivering winning shots.
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The above analogy clears the distinction between winners and loser’s game. Probably, the investor can
guess whether buying securities is a winner’s game or a loser’s game recently, buying securities has
become a loser’s game even for professionals engaged in institutional investing. For those who are
determined to win the loser’s game, it is required
(2) Do the things do best? Make ‘fewer’ but ‘better’ investment
(3) Concentrate on your, defenses. Most investors spend too little time on sell-decisions, Sell decisions
are as important as buy-decisions. Investors should spend at least equal time in making sell decision.
The crucial point of the loser’s game is to put the balance sheet and the income statement through a fine
screen. This is the first step in making source to avoid a mistake and will help the investor to keep away
from letting the excitement make him move too quickly. Remember the old saying.’ A fool and his money
are quickly parted’.

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THREE APPROACHES TO SUCCEED AS AN INVESTOR
As Charles Ellis argued, it appears that there are three different ways of earning superior risk‐ adjusted
returns on the stock market. The first one is physically difficult, the second one is intellectually difficult,
and the third one is psychologically difficult.

Physically Difficult Approach : Many investors seem to follow this approach, wittingly or unwittingly.
They look at newspaper and financial to learn about new issues, they visit the offices of brokers to get
advice and applications forms, and they regularly apply in the primary market. They follow the budget
announcements intently, they read CMIE reports to learn about the developments in the economy and
various industrial sectors, they read investment columns written by the so‐called ‘expert’, they follow
developments in companies, they solicit information from company executives, they read the columns in
technical analysis, and they attend seminars and conferences. In a nutshell, they apply themselves
assiduously, diligently , and even doggedly. They operate on the premise that if they can be a step ahead
of others, they will outperform the market.
The physically difficult approach seems to have worked reasonably well for most of the investors in India
since the late 1970s to the early 1990s, for three principal reasons:
1.Typically, issues in the primary market have been priced very attractively.
2.The secondary market, thanks to limited competitions tell almost 1991, was characterized by numerous
inefficiencies that proved rewarding opportunities to the diligent investor.
3.An advancing price‐earning multiple, in general, bailed out even inept investors.
Things, however, have changed from mud‐1995. The opportunities for subscribing to issues in the primary
market have substantially dried up as companies, quite understandably, are placing securities with
institutional investors at prices that are fairly close to the prevailing market prices. Likewise, the
scope for earning superior returns in the secondary market has diminished as the degree of competition
and efficiency is increasing, thanks to the emergence of hundreds of new institutional players (mutual
funds, foreign institutional investors, merchant banking organizations, corporate bodies) and millions of
new individuals’ investors. Finally, the prospects of fluctuating price‐earnings multiple seem to be greater
than the prospects of a rise in the price earnings multiple.

Intellectually Difficult Approach: The intellectually difficult approach to successful investing calls for
developing a prefund understanding of the nature of investments and hammering out a strategy based on
superior insights. This approach has been followed mainly be the highly talented investors who have an
exceptional ability, a rare perceptiveness, an unusual skill, or a touch of clairvoyance. Such a gift has been
22
displayed by investors like Benjamin Graham, John Maynard Keynes, Jhon Templeton, George Soros,
Warren Buffett, Phil Fisher, Peter Lynch, and others.
Benjamin Graham, widely acclaimed as the father of modern security analysis, was an exceptionally gifted
quantitative navigator who relied on hard financial facts and religiously applied the margin of safety’
principle. John Maynard Keynes, arguably the most influential economist of the 20th Century, achieved
considerable investment success on the basis of his sharp insights into market psychology.
John Templeton had an unusual feel for bargain stocks and achieved remarkable success with the help of
bargain stock investing. Warren Buffett, the most successful stock market investor of our times, it the
quintessential long term value investor. George Soros, a phenomenally successful speculator, developed
and applied a special insight which he labels as the ‘reflexivity’ principle. Phil Fisher, a prominent growth
stock advocate, displayed a rate ability with regard to investing in growth stocks . Peter Lynch, perhaps
the most widely read investments guru in recent years, has performed exceptionally well, thanks to a rare
degree of openness and flexibility in his approach.
The intellectually difficult approach calls for a special talent that is diligently honed and nurtured over
time. Obviously, it can be practiced only by a select few and you should have the objectivity to discern
whether you can join this elite club. Remember that many investors unrealistically believe that they have
a rare gift because the stock market provides and exceptionally fertile environment for self deception.
Participants in the stock market can easily live in a world of make believe by accepting confirming
evidence and rejecting contradictory evidence. As David Dreman says:
“Under Conditions of anxiety and uncertainty, with a vast interacting information grid, the market can
become a giant Rorschach test, allowing the investor to see any pattern that he wishes...experts cannot
only analyze information; they can also find relationships that aren’t there‐‐‐a phenomenon called illusory
correlation.”

Psychologically Difficult Approach: The stock market is periodically swayed by two basic human
emotions, viz. greed and fear. When greed a euphoria sweep the market, prices rise to dizzy heights. On
the other hand, when fear and despair envelop the market, prices fall to abysmally low levels. If you can
surmount these emotions which can warp your judgment, create distortions in your thinking, and induce
you to commit follies, you are likey to achieve superior investments results.
The psychologically difficult approach essentially calls for finding ways and means of substantially
overcoming fear and greed. Its operational guidelines are as follows:
Develop an investments policy and adhere to it consistently
Do not try to forecast stock prices
23
Rely more on hard numbers and less on judgment
Maintain a certain distance from the marketplace
Face uncertainly with equanimity

These guidelines look simply, but they are psychologically difficult to follow. Yet, for the bulk of the
investors this appears to be only sensible approach to improve the odds of their investment performance.
You have to assiduously and consciously cultivate certain qualities, discussed in the preceding chapter, to
follow this approach.

24
INVESTMENT AND SPECULATION

There are some important differences between Investment and Speculation, they are as follows.

INVESTMENT SPECULATION

Investors are interested in safety of the Speculators are interested in appreciation of

investment. capital and earnings profits quickly.

INCOME

Investors seek income from interest derived Speculators seek income from profit from sale
from the investment. and purchase of securities.

DURATION

Speculators only hold the securities for a

Investors hold the securities for a longer
shorter term and tries to sell securities
period of time.
quickly.

NATURE

Investors makes payment and takes delivery

Speculators neither delivers nor takes the
of securities on purchasing. Receives
delivery of securities on sale or purchase.
payment and delivers the securities on sales.

RISK BEARING

The risk bearing capacity of investors is low The risk bearing capacity of speculators is
and limited. very high.

CONCENTRATES ON

Investors concentrates on stable income Speculators concentrates on earnings of

from the investment. profits which are highly uncertain.

DEPENDS UPON

25
 INVESTMENT SPECULATION

The profits earned by the speculators

The earnings of investors depends upon the
depends upon the fluctuations or changes in
earnings of the enterprise.
the market price of securities.

the three basis of difference between Investment and Speculation. The basis are: 1. Risk 2. Capital Gain
3. Time.
1. Risk: The word ‘risk’ has a definite financial meaning. It refers to the possibility of incurring a loss in
a financial transaction. In a broad sense, investment is considered to involve limited risk and is confined
to those avenues where the principal is safe.
‘Speculation’ is considered as an involvement of funds of high risk. An example may be cited of the stock
brokers’ lists of securities which labels and recommends securities separately for investment and
speculation purposes.
Risk, however, is a matter of degree and no clear-cut lines of demarcation can be drawn between high risk
and low risk and sometimes these distinctions are purely arbitrary. No investments are completely risk-
free.
Even if safety of principal and interest are considered, there are certain non-manageable risks which
are beyond the scope of personal power. These are:
(a) The purchasing power risk — in other words, it is the fall in the real value of the interest and principal
and
(b) The money rate risk or the fall in market value when interest rate rises.
These risks affect both the speculator and the investor. High risk and low risk are, therefore, general
indicators to help an understanding between the terms investment and speculation.

2. Capital Gain: Another distinction between investment and speculation emphasizes that if the motive
is primarily to achieve profits through price changes, it is speculation.
If purchase of securities is preceded by proper investigation and analysis and review to receive a stable
return over a period of time, it is termed as investment. Thus, buying low and selling high, making a large
capital gain is associated with speculation.

3. Time: The third difference is the consideration of the time period. A longer-term fund allocation is
termed as investment. A short-term holding is associated with trading for the ‘quick turn’ and is called
26
speculation. The distinction between investment and speculation help to identify the role of the investor
and speculator.
The investor constantly evaluates the worth of a security through fundamental analysis, whereas the
speculator is interested in market action and price movement. These distinctions also draw out the fact that
there is a very fine line of division between investment and speculation. There are no established rules and
laws which identify securities which are permanent for investment.
There has to be a constant review of securities to find out whether it is a suitable investment. To conclude,
it will be appropriate to state that some financial experts have called investment a well-grounded and
carefully planned speculation or good investment is a successful speculation.
Therefore, investment and speculation are a planning of existing risks. If artificial and unnecessary risks
are created for increased expected returns, it becomes gambling.

27
Investment categories:
Investment generally involves commitment of funds in two types of assets:
-Real assets
- Financial assets
Real assets: Real assets are tangible material things like building, automobiles, land, gold etc.
Financial assets: Financial assets are piece of paper representing an indirect claim to real assets held by
some one else. These pieces of paper represent debtor equity commitment in the form of IOUs or stock
certificates. Investments in financial assets consist of –
- Securitised (i.e. security forms of) investment
- Non-securities investment
The term ‘securities’ used in the broadest sense, consists of those papers which are quoted and are
transferable. Under section 2 (h) of the Securities Contract (Regulation) Act, 1956 (SCRA) ‘securities’
include:
i) Shares., scrip’s, stocks, bonds, debentures, debenture stock or
other marketable securities of a like nature in or of any incorporated company or
other body corporate.
ii) Government securities.
iii) Such other instruments as may be declared by the central Government as securities, and,
iv) Rights of interests in securities.
Therefore, in the above context, security forms of investments include Equity shares, preference shares,
debentures, government bonds, Units of UTI and other Mutual Funds, and equity shares and bonds of
Public Sector Undertakings (PSUs). Non-security forms of investments include all those investments,
which are not quoted in any stock market and are not freely marketable. viz., bank deposits, corporate
deposits, post office deposits, National Savings and other small savings certificates and schemes, provident
funds, and insurance policies. Another popular investment in physical assets such as Gold, Silver,
Diamonds, Real estate, Antiques etc. Indian investors have always considered the physical assets to be
very attractive investments. There
are a large number of investment avenues for savers in India. Some of them are marketable and liquid,
while others are non marketable, Some of them are highly risky while some others are almost risk less.
The investor has to choose proper avenues from among them, depending on his specific need, risk
preference, and return expectation. Investment avenues can be broadly categorized under the following
heads: -

28
1.Corporate securities
 .Equity shares
 Preference shares
 Debentures/Bonds
 GDRs /ADRs
 Warrants
 Derivatives

2.Deposits in banks and non banking companies

3.Post office deposits and certificates
4.Life insurance policies
5.Provident fund schemes
6.Government and semi government securities
7.Mutual fund schemes
8.Real assets

29
Factors Favourable for Investment:
The investment market should have a favourable environment to be able to function effectively. Business
activities are marked by social, economic and political considerations. It is important that the economic
and political factors are favourable.
Generally, there are four basic considerations which foster growth and bring opportunities for investment.
These are legal safeguards, stable currency and existence of financial institutions to aid savings and forms
of business organization.
Legal Safeguards:A stable government which frames adequate legal safeguards encourages
accumulation of savings and investments. Investors will be willing to invest their funds if they have the
assurance of protection of their contractual and property rights.
In India, the investors have the dual advantage of free enterprise and control. Freedom, efficiency and
growth are ensured from the competitive forces of private enterprises. Statutory control exerts discipline
and curtails some element of freedom. In India, the political climate is conducive to investment since the
new economic reforms in 1991 leading to liberalization and globalization.

A Stable Currency: A well-organized monetary system with definite planning and proper policies is a
necessary prerequisite to an investment market. Most of the investments such as bank deposits, life
insurance and shares are payable in the currency of the country.
A proper monetary policy will give direction to the investment outlets. As far as possible, the monetary
policy should neither promote acute inflationary pressures nor prepare for a deflation model. Neither
condition is satisfactory.
Price inflation destroys the purchasing power of investments. Thrift is also penalized when the net interest
after taxes received by the investor is less than the rise in the price level, leaving the investor with less
total purchasing power than he had at the time of saving.
Inflation occurs generally in unstable conditions like war or floods but in the last decade, it also discernible
in peace conditions especially in developing countries because of huge government deficit in creating
infrastructure.
Deflation is equally disastrous because the nominal values of inventories, plant and machinery and land
and building tend to shrink. An example of the evil effects of deflation can be cited for the period 1929-
1933 in the United States when the shrinkage in nominal values came to a point of producing wholesale
bankruptcy.

30
A reasonable stable price level which is produced by wise monetary and fiscal management contributes
towards proper control, good government, economic well-being and a well-disciplined growth oriented
investment market and protection to the investor.

Existence of Financial Institutions and Services: The presence of financial institutions and financial
services encourage savings, direct them to productive uses and helps the investment market go grow. The
financial institutions in existence in India are mutual funds, development banks, commercial banks, life
insurance companies, investment companies, investment bankers and mortgage bankers.
The financial services include venture capital, factoring and forfaiting, leasing, hire purchase and
consumer finance, housing finance, merchant bankers and portfolio management. Investment bankers are
merchants of securities. They buy bonds and stocks of companies for re-sale to investors.
The investment bankers are distinguished from security brokers who act as agents in buying and selling
already issued securities for commission. Mortgage bankers sometimes act as merchants and sometimes
as agents on mortgage loans generally on residential properties.
They serve as middlemen between investors and borrowers and perform collateral service in connection
with loans. Commercial banks and financial institutions also act as mortgage bankers in giving mortgage
loans and servicing the loans.
In India, there are a large number of financial institutions under Central Government and State
Governments and rural bodies that have encouraged the growth of savings and investment. The Life
Insurance Corporation and Unit Trust of India offer a wide variety of schemes for savings and give tax
benefits also.
Apart from these, there is a well-organized network of development banks such as the Industrial
Development Bank of India (IDBI), Industrial Credit Investment Corporation of India (ICICI) and
Industrial Finance Corporation of India (IFCI).
At the state level, there are State Financial Corporation, for rural areas and agriculture, the National Bank
of Agriculture and Rural Development (NABARD). These financial institutions and development banks
offer a wide variety of policies for encouraging savings and investment. These institutions lend an element
of strength to the capital market and promote discipline while encouraging growth.
Since 1991, there has been a development of the private corporate sector. Many new financial institutions
have emerged in the private sector. Insurance companies, mutual funds and venture capitalists leasing
companies have been opened up to private financing agencies.
Foreign banks have been allowed to do business. Thus, there is the presence of a large number of
institutions and services which channel the funds in productive directions.
31
Form of Business Organization: The form of business organization which is permanent in existence
aides savings and investment. The public limited companies have been said to be the best form of
organization. The three characteristics of the corporation which have been very useful for investors are
limited liability of shareholders, perpetual life and transferability and divisibility of stocks and shares.
The public limited company with the ability to continue its business irrespective of members comprising
it, gives longevity and soundness to its business activity.
In contrast to a public limited company whose shareholders have limited liability, the sole proprietor or a
partner in a partnership firm is liable for all the debts of the firm to the full extent of his personal wealth.
In these conditions, investors are hesitant to risk their savings in these forms of organizations.
Besides unlimited liability, the partnership and proprietor also suffer from short life of the organization.
With the death or retirement of any of the partners, a partnership firm is dissolved. Similarly, a sole
proprietor carries on business only during his lifetime.
In these unstable and unsure conditions, investors would not like to make their investments. Finally, the
public limited company lends an element of liquidity to its shares. In contrast, partnership restricts stability
and transferability freely from person to person. The public limited company, therefore, is a popular form
for investment as the investors benefit from liquidity, convenience and longevity.
In India since 1991, there is the existence of large corporate organizations. There have been many mergers
and amalgamations and consolidation has taken place.
Business has become more permanent in nature. Family businesses have expanded and are now stable and
well organized. Indian business is taking new forms and being recognized in the world. With increased
awareness and stability, the investor has many favourable outlets for making investments.

Choice of Investment: The growth and development of the country leading to greater economic activity
has led to the introduction of a vast array of investment outlets. Apart from putting aside savings in savings
banks where interest is low, investors have the choice of a variety of instruments. The question to reason
out is which is the most suitable channel? Which media will give a balanced growth and stability of return?
The investor in his choice of investment will have to try and achieve a proper mix between high rate of
return and stability of return to reap the benefits of both. Some of the instruments available are equity
shares and bonds, provident fund, life insurance, fixed deposits and mutual funds schemes.

Risk-Less Vs. Risky Investments: Most investors are risk averse but they expect maximum return from
their investment. Every investment must be analysed because there is definitely some risk in it. The Indian

32
investment scene has many schemes to offer to an individual. On an analysis of these schemes, it appears
that the investor has a wide choice.
A vast range of investments is in the government sector. These are mostly risk free but low return yielding.
Several incentives are attached to it. The private sector investments consist of equity and preference shares,
debentures and public deposits with companies. These have the features of high risk. Ultimately, the
investor must make his investment decisions.
The dilemma faced by the Indian investor is the reconciliation of profitability, liquidity and risk of
investments. Government securities are risk free and the investor is secured.
However, to him the return or yield is very important as he has limited resources and would like to plan
an appreciation of the investments for his future requirements. Government securities give low returns,
and do not fulfil his objective of money appreciation.
Private sector securities are attractive though, risky. The success stories of Reliance, Infosys, Wipro give
to the investor the dream of future appreciation of investment by several times.
The multinational and blue chip companies offer very high rates of return and also give bonus shares to
their shareholders. Food Specialties Limited, Cadburys, Colgate Palmolive, Hero-Honda have been known
to raise the hopes of investors by giving high rates of return.
Real Estate and Gold have the advantage of eliminating the impact of inflation, since the price rises
experienced by them have been very high. The Indian investor in this context cannot choose his
investments very easily.
An investor can maximize returns with minimum risk involved if he carefully analyses the information
published in the prospectuses of private companies. Contents as the past performance, name of Promoters
and Board of Directors, the main activities, its business prospects and selling arrangements should be
assessed before the investor decides to invest in the company.
From the point of view of an investor, convertible bonds, may under proper conditions, prove an ideal
combination of high yield, low risk and potential of capital appreciation.
If private companies would offer a wider range of investments to the public, they would be able to mobilize
a larger part of pubic savings and at the same time, the investor would be enabled to make a better choice.
This would solve his dilemma of being at the crossroads.

33
Fundamental analysis of various investment alternatives:
Before investing in various investment alternatives fundamental analysis is very necessary. A fundamental
analysis believes that analysing the economy, strength, management, production, financial status and other
related information will help to choose investment avenues that will outperform the market and provide
consistent gain to the investor. Fundamental analysis is the examination of the underlying forces that affect
the interests of the economy, industrial sectors, and companies. It tries to forecast the future movement of
capital market using signals from the economy, industry, company. Fundamental analysis requires an
examination of the market from broader prospective. It also examines the economic environment,
industrial performance, and company performance before taking an investment decision.

Economic Analysis The economic analysis aims at determining if the economic climate is conductive
and is capable of encouraging the growth of business sector, especially the capital market. When the
economy expands, most industry groups and companies are expected to benefit and grow and when the
economy declines, most sectors and companies usually face survival problems. Hence, to predict scrip
prices, an investor has to spend time exploring the forces operating in the overall economy. Economic
analysis implies the examination of GDP, government financing, government borrowings, consumer
durable goods market, non-durable goods and capital goods market, saving and investment pattern, interest
rates, inflation rates, tax structure, foreign direct investment, and money supply. The most used tools for
performing economic analysis are;
 Gross Domestic Product
 Monetary policy and liquidity
 Inflation
 Interest rate
 International influences
 Consumer behaviors
 Fiscal policy etc 

Industry Analysis:
It is very important to see how the industry to which the company belongs is faring. Specifics like effect
of Government policy, future demand of its products etc. need to be checked. At times prospects of an
industry may change drastically by any alterations in business environment. For instance, devaluation of
rupee may brighten prospects of all export-oriented companies. Investment analysts call this as Industry

34
 Analysis. Companies producing similar products are subset (form a part) of an Industry/Sector. For
example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company
(NTPC) Ltd., Tata Power Company (TPC) Ltd. etc. belong to the Power Sector/Industry of India.
Tools for industry analysis
 Cross study of performance of the industry
 Industry performance over times
 Differences in industry risk
 Prediction about market behaviors
 Competition over the industry life cycle

Company Analysis
Company analysis involved choice of investment opportunities within a specific industry that consists
of several individual companies.
How has the company been faring over the past few years? Seek information on its current operations,
managerial capabilities, growth plans, its past performance vis-à-vis its competitors etc

Financial Analysis:
If performance of an industry as well as of the company seems good, then check, if at the current price,
the share is a good to buy or not. For this, look at the financial performance of the company and certain
key financial parameters like Earnings per Share (EPS), P/E ratio, current size of equity etc. for arriving
at the estimated future price. This is termed as Financial Analysis. For that you need to understand
financial statements of a company i.e. balance Sheet and Profit and Loss Account contained in the
Annual Report of a company.

Technical Analysis
Technical analysis is a trading discipline employed to evaluate investments and identify trading
opportunities by analyzing statistical trends gathered from trading activity, such as price movement and
volume.

Technical analysis can be used on any security with historical trading data. This includes stocks, futures,
commodities, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks
in our examples, but keep in mind that these concepts can be applied to any type of security. In fact,
technical analysis is far more prevalent in commodities and Forex markets where traders focus on short-
term price movements.

35
Japanese Candlestick History
The father of Japanese candlestick is considered to be Munehisa Homma, who was born in 1724 in the
city of Sakata, which was a major port and one of the centres of rice trade. The Homma family owned
vast rice plantations and also engaged in rice trade.

In 1750, after the death of his father, Munehisa, being the youngest son, started managing family capital.
This happened contrary to the tradition according to which the eldest son became the heir of his father’s
business, and could testify to his remarkable commercial abilities. At this time, a rice exchange also
appeared in Sakata. Homma traded on it for several years and then transferred his activities to Osaka and
Edo, where he made a considerable fortune.

The candlestick looks like

It is considered to be one of the first books to study the psychological aspect of the market. Homma
realized that traders’ emotions have a significant influence on rice prices and he noted that recognizing
this can enable one to take a position against the market.

He also described the rotation of Yang (a bull market), and Yin (a bear market) and laid out the principle
of their alternation: “A market that has risen should eventually fall, and a market that has fallen will
eventually rise”.

Basic Candlestick Patterns

 Spinning Top
 Marubozu
 Doji
 Bullish Harami
 Bearish Harami

36
  Bullish Engulfing Candle
 Bearish Engulfing Candle
 Hammer
 Inverted Hammer
 Hanging Man
 Shooting Star
 Three Black Soldiers
 Three White Soldiers
 Morning Star
 Evening Star
 Piecing Line
 Dark Cloud Covering

The Basics of Technical Analysis

Technical analysis as we know it today was first introduced by Charles Dow and the Dow Theory in
the late 1800s. Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson
Gould and John Magee further contributed to Dow Theory concepts helping to form its basis. In
modern day, technical analysis has evolved to included hundreds of patterns and signals developed
through years of research.

Today Technical analysis is based on three main assumption

1. The Market Discounts everything: - Technical analysts believe that everything from a company's
fundamentals to broad market factor to market psychology are already priced into the stock.
2. Price moves in trends: - Technical analysis believe that price move in short, medium- and long-
term trend
3. History trends to repeat itself: - Technical analysis believe that history trends to repeat itself.

37
 How Technical Analysis used?
technical analysis as simply the study of supply and demand forces as reflected in the market price
movements of a security. Technical analysis most commonly applies to price changes, but some
analysts track numbers other than just price, such as trading volume or open interest figures.

Technical analysts look at the following broadly types of indicators

 Price Trends
 Chart Patterns
 Volume &Momentum indicators
 Oscillators
 Moving averages
 Support & Resistance Levels

Trend Analysis

What is Trend Analysis?

Trend analysis is a technique used in technical analysis that attempts to predict the future stock price
movements based on recently observed trend data. Trend analysis is based on the idea that what has
happened in the past gives traders an idea of what will happen in the future. There are three main
types of trends: short-, intermediate- and long-term.

What Does Trend Analysis Tell You?

Trend analysis tries to predict a trend, such as a bull market run, and ride that trend until data
suggests a trend reversal, such as a bull-to-bear market. Trend analysis is helpful because moving
with trends, and not against them, will lead to profit for an investor.
A trend is the general direction the market is taking during a specified period of time. Trends can be
both upward and downward, relating to bullish and bearish markets, respectively. While there is no
specified minimum amount of time required for a direction to be considered a trend, the longer the
direction is maintained, the more notable the trend.

38
Moving Averages: These strategies involve entering into long positions when a short-term moving
average cross over above a long-term moving average, and entering short positions when a short-term
moving average cross below a long-term moving average.
Momentum Indicators: These strategies involve entering into long positions when a security is trending
with strong momentum and exiting long positions when a security loses momentum. Often times, the
relative strength index (RSI) is used in these strategies.
Trendlines & Chart Patterns: These strategies involve entering long positions when a security is
trending higher and placing a stop-loss below key trendline support levels. If the stock starts to reverse,
the position is exited for a profit.
Uptrends occur where prices are making higher highs and higher lows. Up trendlines connect at least
two of the lows and show support levels below price.
Downtrends occur where prices are making lower highs and lower lows. Down trendlines connect at
least two of the highs and indicate resistance levels above the price.

Consolidation, or a sideways market, occurs where price is oscillating between an upper and lower
range, between two parallel and often horizontal trendlines.

39
Types of investment:

(i) Short term Investment- It is an investment made by the investor for very short period of time
i.e. for one to three years. Such as investment in bank, money market, liquid funds etc.
(ii) Long Term Investment – When investor invests money for more than three to five years then
it is called long term investment. Such as investment in bonds, mutual funds, fixed bank
deposits, PPF, insurance etc

Investor:
Investor is a person or an organization that invest money in various investment sources for specific
objective. Attitude of investment is different in each alternative. E.g. financial market have different
attitude towards risk and return. Some investors are risk averse, while some have an affinity of risk. The
risk bearing capacity of investor is a function of personal, economical, environment, and situational factors
such as income, family size, expenditure pattern, and age. A person with higher income is assumed to have
higher risk- bearing capacity. Thus investor can be classified as risk skiers, risk bearer.

Categories of Investors
While there are as many investing styles as there are investors, most people fall more or less into one of
three broad categories: conservative, moderate, aggressive.
Conservative investors
Generally, conservative investors feel that safeguarding what they have is their top priority. These
investors want to avoid risk — particularly the risk of losing any principal (their original investment) —
even if that means they’ll have to settle for very modest returns. Conservative investors allocate most of
their portfolios to bonds, such as Treasury notes or high- rated municipal bonds, and cash equivalents,
such as CDs and money market accounts. They’re generally reluctant to invest in stocks, which may lose
value, especially over the short term. When conservative investors do venture into stocks they‘re often
inclined to choose blue chips or other large-cap stocks with well-known brands because they tend to
change value more slowly than other types of stock and often pay dividend income.

Moderate investors
Moderate investors want to increase the value of their portfolios while protecting their assets from the
risk of major losses. For example, a moderate investor might use an allocation model that has 60% in
stock, 30% in bonds, and 10% in cash equivalents. While they will tend to favor blue chip and other
large-cap stocks, they may be willing to invest a modest portion of their principal in higher risk

40
securities — such as international stock, small-caps, and volatile sector funds — in order to increase
their potential for higher returns.

Aggressive investors
Aggressive investors concentrate on investments that have the potential for significant growth. They are
willing to take the risk of losing some of their principal, with the expectation that they will realize
greater returns. Aggressive investors might allocate from 75 to 95% of their portfolios to individual
stocks and stock mutual funds. While large- and small-cap stocks and funds may make up the core of
their portfolios, many aggressive investors will have significant holdings in more speculative stocks and
funds, such as emerging market and sector mutual funds. Since aggressive investors focus on growth,
they are usually less inclined to hold income producing securities, such as bonds. An aggressive
investing style is definitely not for the faint of heart. It’s best suited for investors with a long-term
investing horizon of 15 years or more, who are willing to make a long-term commitment to the stocks
they buy. But history has shown that an aggressive investing approach, combined with a well-diversified
portfolio, and the patience to stick to a long-term buy-and-hold investing strategy through inevitable
market downturns, can be the most profitable in the long run.

Before making any investment, one must ensure to:

 Obtain written documents explaining the investment
 Read and understand such documents
 Verify the legitimacy of the investment
 Find out the costs and benefits associated with the investment
 Assess the risk-return profile of the investment
 Know the liquidity and safety aspects of the investment
 Ascertain if it is appropriate for your specific goals
 Compare these details with other investment opportunities available
 Examine if it fits in with other investments you are considering or you have already made
 Deal only through an authorized intermediary
 Seek all clarifications about the intermediary and the investment
 Explore the options available to you if something were to go wrong, and then, if satisfied, make
the investment.

41
CORPORATE SECURITIES
Joint stock companies in the private sector issue corporate securities. These include equity shares,
preference shares, and debentures. Equity shares have variable dividend and hence belong to the high
risk high return category; preference shares and debentures have fixed returns with lower risk. The
classification of corporate securities that can be chosen as investment avenues can be depicted as shown
below.

Equity Shares-: By investing in shares, investors basically buy the ownership right to that company.
When the company makes profits, shareholders receive their share of the profits in the form of
dividends. In addition, when a company performs well and the future expectation from the company is
very high, the price of the company’s shares goes up in the market. This allows shareholders to sell
shares at profit, leading to capital gains. Investors can invest in shares either through primary market
offerings or in the secondary market. Equity shares can be classified in different ways but we will be
using the terminology of Investors. It should be noted that the line of demarcation between the classes
are not clear and such classification are not mutually exclusive.
Equity is the term commonly used to describe the ordinary share capital of a business. Ordinary shares in
the equity capital of a business entitle the holders to all distributed profits after the holders of debentures
and preference shares have been paid. Ordinary shares are issued to the owners of a company. The
ordinary shares of Indian companies typically have a nominal or 'face' value between rupees 10 to 100.
However, it is important to understand that the market value of a company's shares has little relationship
to their nominal or face value. The market value of a company's shares is determined by the price
another investor is prepared to pay for them. In case of publicly quoted companies, this is reflected in the
market value of the ordinary shares traded on the stock exchange. In case of privately owned companies,
where there is unlikely to be much trading in shares, market value is often determined when the business
is sold or when a minority shareholding is valued for taxation purposes

Blue Chips (also called Stalwarts) : These are stocks of high quality, financially strong companies
which are usually the leaders in their industry. They are stable and matured companies. They pay good
dividends regularly and the market price of the shares does not fluctuate widely. Examples are stocks of
Colgate, Pond’s Hindustan Lever, TELCO, Mafatlal Industries etc.

Growth Stocks: Growth stocks are companies whose earnings per share is grows faster than the
economy and at a rate higher than that of an average firm in the same industry. Often, the earnings are
42
ploughed back with a view to use them for financing growth. They invest in research and development
and diversify with an aggressive marketing policy. They are evidenced by high and strong EPS.
Examples are ITC, Dr. Reddy’s Bajaj Auto, Sathyam Computers and Infosys Technologies ect.. The
high growth stocks are often called “ GLAMOUR STOCK’ or HIGH FLYERS’.

Income Stocks: A company that pays a large dividend relative to the market price is called an income
stock. They are also called defensive stocks. Drug, food and public utility industry shares are regarded as
income stocks. Prices of income stocks are not as volatile as growth stocks.

Cyclical Stocks: Cyclical stocks are companies whose earnings fluctuate with the business cycle.
Cyclical stocks generally belong to infrastructure or capital goods industries such as general engineering,
auto, cement, paper, construction etc. Their share prices also rise and fall in tandem with the trade
cycles.

Discount Stocks: Discount stocks are those that are quoted or valued below their face values. These are
the shares of sick units.
Under Valued Stock: Under valued shares are those, which have all the potential to become growth
stocks, have very good fundamentals and good future, but somehow the market is yet to price the shares
correctly.

Turn Around Stocks: Turn around stocks are those that are not really doing well in the sense that the
market price is well below the intrinsic value mainly because the company is going through a bad patch
but is on the way to recovery with signs of turning around the corner in the neat future. Examples- EID –
Parry in 80’s, Tata Tea (Tata Finlay), SPIC, Mukand Iron and steel etc.

Preference Shares: Preference shares refer to a form of shares that lie in between pure equity and debt.
They have the characteristic of ownership rights while retaining the privilege of a consistent return on
investment. The claims of these holders carry higher priority than that of ordinary shareholders but lower
than that of debt holders. These are issued to the general public only after a public issue of ordinary

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Debentures and Bonds: These are essentially long-term debt instruments. Many types of debentures
and bonds have been structured to suit investors with different time needs. Though having a higher risk
as compared to bank fixed deposits, bonds, and debentures do offer higher returns. Debenture
investment requires scanning the market and choosing specific securities that will cater to the
investment objectives of the investors.

Depository Receipts (GDRs/ADRs): Global Depositary Receipts are instruments in the form of a
depositary receipt or certificate created by the overseas depositary bank outside India and issued to
non-resident investors against ordinary shares or Foreign Currency Convertible Bonds (FCCBs) of an
issuing company. A GDR issued in America is an American Depositary Receipt (ADR). Among the
Indian companies, Reliance Industries Limited was the first company to raise funds through a GDR
issue. Besides GDRs, ADRs are also popular in the capital market. As investors seek to diversify their
equity holdings, the option of ADRs and GDRs are very lucrative. While investing in such securities,
investors have to identify the capitalization and risk characteristics of the instrument and the
company’s performance in its home country (underlying asset).

Warrants: A warrant is a certificate giving its holder the right to purchase securities at a stipulated
price within a specified time limit or perpetually. Sometimes a warrant is offered with debt securities as
an inducement to buy the shares at a latter date. The warrant acts as a value addition because the holder
of the warrant has the right but not the obligation of investing in the equity at the indicated rate. It can
be defined as a long-term call option issued by a company on its shares.

A warrant holder is not entitled to any dividends; neither does he have a voting right. But the exercise
price of a warrant gets adjusted for the stock dividends or stock splits. On the expiry date, the holder
exercises an option to buy the shares at the predetermined price. This enables the investor to decide
whether or not to buy the shares or liquidate the debt from the company. If the market price is higher
than the exercise price, it will be profitable for the investor to exercise the warrant. On the other hand,
if the market price falls below the exercise price, the warrant holder would prefer to liquidate the debt
of the firm.

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Derivatives: The introduction of derivative products has been one of the most significant
developments in the Indian capital market. Derivatives are helpful risk-management tools that an
investor has to look at for reducing the risk inherent in as investment portfolio. The first derivative
product that has been offered in the Indian market is the index future. Besides index futures, other
derivative instruments such as index options, stock options, have been introduced in the market. Stock
futures are traded in the market regularly and in terms of turnover, have exceeded that of other
derivative instruments. The liquidity in the futures market is concentrated in very few shares.
Theoretically the difference between the futures and spot price should reflect the cost of carrying the
position to the future of essentially the interest. Therefore, when futures are trading at a premium, it is
and indication that participants are bullish of the underlying security and vice versa. Derivative trading
is a speculative activity. However, investors have to utilize the derivative market since the opportunity
of reducing the risk in price movements is possible through investments in derivative products.

DEPOSITS: Among non-corporate investments, the most popular are deposits with banks such as
savings accounts and fixed deposits. Savings deposits carry low interest rates whereas fixed deposits
carry higher interest rates, varying with the period of maturity, Interest is payable quarterly or half-
yearly or annually. Fixed deposits may also be recurring deposits wherein savings are deposited at
regular intervals. Some banks have reinvestment plans whereby savings are re- deposited at regular
intervals or reinvested as the interest gets accrued. The principal and accumulated interests in such
investment plans are paid on maturity.

Savings Bank Account with Commercial Banks: A safe, liquid, and convenient investment option,
a savings bank account is an ideal investment avenue for setting aside funds for emergencies or
unexpected expenses. Investors may prefer to keep an average balance equal to three months of their
living expenses. A bank fixed deposit is recommended for those looking for preservation of capital
along with current income in the short term. However, over the long-term the returns may not keep
pace with inflation.

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 Company Fixed Deposits: Many companies have come up with fixed deposit schemes to mobilize
money for their needs. The company fixed deposit market is a risky market and ought to be looked at
with caution. RBI has issued various regulations to monitor the company fixed deposit market.
However, credit rating services are available to rate the risk of company fixed deposit schemes.The
maturity period varies from three to five years. Fixed deposits in companies have a high risk since
they are unsecured, but they promise higher returns than bank deposits. Fixed deposit in non-banking
financial companies (NBFCs) is another investment avenue open to savers. NBFCs include leasing
companies, hire purchase companies, investment companies, chit funds, and so on. Deposits in
NBFCs carry higher returns with higher risk compared to bank deposits.

Post Office Deposits and Certificates: The investment avenues provided by post offices are non-
marketable. However, most of the savings schemes in post offices enjoy tax concessions. Post offices
accept savings deposits as well as fixed deposits from the public. There is also a recurring deposit
scheme that is an instrument of regular monthly savings.

National Savings Certificates (NSC): is also marketed by post office to investors. The interest on the
amount invested is compounded half-yearly and is payable along with the principal at the time of
maturity, which is six years from the date of issue.There are a variety of post office savings certificates
that cater to specific savings and investment requirements of investors and is a risk free, high yielding
investment opportunity. Interest on these instruments is exempt from income tax. Some of these
deposits are also exempt from wealth tax.

Life Insurance Policies: Insurance companies offer many investment schemes to investors. These
schemes promote savings and additionally provide insurance cover. LIC is the largest life insurance
company in India. Some of its schemes include life policies, convertible whole life assurance policies,
endowment assurance policies, Jeevan Saathi, Money Back Plan, Jeevan Dhara, and Marriage
Endowment Plan. Insurance policies, while catering to the risk compensation to be faced in the future
by investors, also have the advantage of earning a reasonable interest on their investment insurance
premiums. Life insurance policies are also eligible for exemption from income tax.

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Provident Fund Scheme: Provident fund schemes are deposit schemes, applicable to employees in
the public and private sectors. There are three kinds of provident funds applicable to different sectors
of employment, namely, Statutory Provident Fund, Recognised Provident Fund, and Unrecognised
Provident Fund. In addition to these, there is a voluntary provident fund scheme that is open to any
investor, employed or not. This is known as the Public Provident Fund (PPF). Any member of the
public can join the PPF, which is operated by the State Bank of India

Equity Linked Savings Schemes (ELSSs): Investing in ELSSs gets investors a tax rebate of the
amount invested. ELSSs are basically growth mutual funds with a lock-in period of three years.
ELSSs have a risk higher than PPF and NSCs, but have the potential of giving higher returns.

Pension Plan: Certain notified retirement/pension funds entitle investors to a tax rebate. UTI, LIC,
and ICICI are some financial institutions that offer retirement plans to investors.

Government and Semi-Government Securities: Government and semi-government bodies such as

the public sector undertakings borrow money from the public through the issue of government
securities and public sector bonds. These are less risky avenues of investment because of the
credibility of the government and government undertakings. The government issues securities in the
money market and in the capital market
Money market instruments are traded in the Wholesale Debt Market (WDM) trades and retail
segments. Instruments traded in the money market are short- term instruments such as treasury bills
and repos. The government also introduced the pricatisation programme in many corporate
enterprises and these securities are traded in the secondary market. These are the semi-government
securities. PSU stocks have performed well during the years 2003-04 in the capital market.

Mutual Fund Schemes: The Unit Trust of India is the first mutual fund in the country. A number of
commercial banks and financial institutions have also set up mutual funds. Mutual funds have been
set up in the private sector also. These mutual funds offer various investment schemes to investors.
The number of mutual funds that have cropped up in recent years is quite large and though, on an
average, the mutual fund industry has not been showing good returns, select funds have performed
consistently, assuring the investor better returns and lower risk options.

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REAL ASSETS
Investments in real assets are also made when the expected returns are very attractive. Real estate,
gold, silver, currency, and other investments such as art are also treated as investments since the
expectation from holding of such assets is associated with higher returns.

Real Estate: Buying property is an equally strenuous investment decision. Real estate investment is
often linked with the future development plans of the location. It is important to check the value
while deciding to purchase a movable/immovable property other than buildings. Besides making a
personal assessment from the market, the assistance of government-approved valuers may also be
sought. A valuation report indication the value of the each of the major assets and also the basis and
manner of valuation can be obtained from an approved valuer against the payment of a fee. In case of
a plantation, a valuation report may also be obtained from recognized private valuers.

Bullion Investment: The bullion market offers investment opportunity in the form of gold, silver,
and other metals. Specific categories of metals are traded in the metals exchange. The bullion market
presents an opportunity for an investor by offering returns and end value in future. It has been
observed that on several occasions, when the stock market failed, the gold market provided a return
on investments. The changing pattern of prices in the bullion market also makes this market risky for
investors. Gold and Silver prices are not consistent and keep changing according to the changing
local/global demands in the market. The fluctuation prices, however, have been compensated by real
returns for many investors who have followed a buy and hold strategy in the bullion market.

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Return and Risk – The Basis of Investment Decisions

An organized view of the investment process involves analyzing the basic nature of investment
decisions and organizing the activities in the decision process. Common stocks have produced, on
average, significantly larger returns over the years than savings accounts or bonds. Should not all
investors invest in common stocks and realize these larger returns? The answer to this question is
to pursue higher returns investors must assume larger risks. Underlying all investment decisions
is the trade off between expected return and risk. Therefore, we first consider these two basic
parameters that are of critical importance to all investors and the trade- off that exists between
expected return and risk.
Given the foundation for making investment decisions the trade off between expected return and
risk – we next consider the decision process in investments as it is typically practiced today.
Although numerous separate decisions must be made, for organizational purposes, this decision
process has traditionally been divided into a two step process: security analysis and portfolio
management. Security analysis involves the valuation of securities, whereas portfolio
management involves the management of an investor’s investment selections as a portfolio
(package of assets), with its own unique characteristics.

Return: Why invest? Stated in simplest terms, investors wish to earn a return on their money.
Cash has an opportunity cost: By holding cash, you forego the opportunity to earn a return on that
cash. Furthermore, in an inflationary environment, the purchasing power of cash diminishes, with
high rates of inflation bringing a relatively rapid decline in purchasing power. In investments it is
critical to distinguish between an expected return (the anticipated return for some future period)
and a realized return (the actual return over some past period). Investors invest for the future for the
returns they expect to earn but when the investing period is over, they are left with their realized
returns. What investors actually earn from their holdings may turn out to be more or less than what
they expected to earn when they initiated the investment. This point is the essence of the
investments process; Investors must always consider the risk involved in investing.

Risk: Risk is explained theoretically as the fluctuation in returns from a security. A security that
yields consistent returns over a period of time is termed as “ risk less security “ or “ risk free
security “. Risk is inherent in all walks of life. An investor cannot foresee the future definitely;
hence, risk will always exist for an investor. Risk is in fact the watchword for all investors who
enter capital markets. Investment risk can be an extraordinary stress for many investors. When the
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secondary market does not respond to rational expectations, the risk component of such markets are
relatively high and most investors fail to recognize the real risk involved in the investment process.
Risk aversion is the criteria commonly associated with many small investors in the secondary
market. Many small investors look upon the market for a definite return and when their
expectations are not met, the effect on the small investors’ morale is negative. Hence these
investors prefer to lock up their funds in securities that would rather give them back their
investment with small returns than those securities that yield high returns on an average but are
subject to wild fluctuations.
There are different types and therefore different definition of risk. Risk is defined as the uncertainty
about the actual return that will earn on an investment. When one invest, expects some particular
return, but there is a risk that he ends up with a different return when he terminates the investment.
The more the difference between the expected and the actual the more is the risk. It is not sensible
to talk about the investment returns with out talking about the risk, because the investment decision
involves a trade-off between the two, return and risk.

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Sources of study for investors:
A look out for new investment opportunities helps investors to beat the market. There are many
sources from which investors can gather the required information. Such as;
Financial institutions
Corporate house, government bodies and mutual funds are the main source of investment
information. Many of these enterprises have their own website and post investment related
information on their websites.

Financial market
Stock exchange and regulated bodies also provide useful information to investor to
make their investment decisions. With respect to secondary market, the Securities and
Exchange Board of India uses various modes to promote investors education and
takes great effort to achieve an investor friendly secondary market in India. The Reserve Bank
of India also provide useful information relating to the prevent interest
rates and non-banking financial intermediaries that mobiles money through deposit schemes.

Financial service intermediaries

These are intermediaries who promote securities among the public. Many of these
intermediaries are the agencies of specific instruments especially tax saving instruments. These
intermediaries offer to share their commission from there concerned organization with the
individual investor thus investor get additional advantages while investing through
intermediaries

Media Press
sources such as financial newspapers, financial magazine, business news channel, websites etc.
provide information related to investment to the public. Besides information on securities, these
sources also provide analysis of information and in certain instance suggest suitable investment
decisions to be made by investor. The foregoing discriminations about stock market and
investment having under stood its important and its unique optimization in the money market

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 Questionnaire and Analysis
Investment in financial instrument Survey:-
1.NAME *

2.AGE *

o Less than 20

o 20-30

o 31-40

o 41-60

o above 60

3.ANNUAL INCOME *

o Less than

o 1 lakh 1 lakh -2 lakh

o 2 lakh-3 lakh

o 3 lakh - 5 lakh

o above 5 Lakh

4.OCCUPATION

o Salaried
o Self- employed
o Retired
o Others

5.ANNUAL INVESTMENT

o Less than 25000

o 25000-50000
o 50000-100000

6. WHAT IS FREQUENCY OF INVESTMENT?

o Weekly
o Monthly
o Quarterly
o Half-Yearly
o Yearly
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 7. DO YOU INVEST IN ANY TYPE OF FINANCIAL INSTRUMENTS ?
o Yes
o No

8.REASONS FOR NOT INVESTING IN ANY OF THE INVESTMENT OPTIONS?

o Lack of awareness
o Lack of time
o Income Factor
o Fear Factor
o Never Thought of it

9. IN WHICH OF FINANCIAL INSTRUMENT DO YOU INVEST?

o Equity
o Mutual Fund
o Life Insurance Premium
o Reccuring Deposit
o Fixed Deposit
o NSC/KVP
o Bond
o Derivatives
o Provident Fund
o Government Securities
o Commodity
o others

10. WHAT ARE INVESTMENT OBJECTIVES ?

o Short term profit Seeking

o Growth & Income
o Long term profit seeking

11. WHAT PATTERN OF INVESTMENT DO YOU PREFER ?

o Low Risk & Return
o Moderate Risk & Return
o High Risk & Return

12.WHAT IS THE SOURCE OF YOUR INVESTMENT ?

o Savings
o Inherited amount

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 o Money extracted from business
o Personal Borrowings
o Margin Financing

13.DO YOU THINK STILL NEW FINANCIAL INSTRUMENTS ARE REQUIRED ? *

o Yes
o No
o Maybe

Analysis: - Respondent is classmates and relatives age group from 18 to 30

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Analysis: - Respondent from different annual income

Analysis:-Majority of respondent are salaried person (87.5%) and 5% belongs to self

employed.

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Analysis:- Annual investment of Respondent. Majority are making less than Rs.25000
annually and 37.5% makes investment between Rs.25000 to Rs.50000.

Analysis:-frequency of investment 34.4% makes monthly investment , 31.3% makes half-

yearly investment, 12.5% makes yearly & quarterly investment, 9.4% makes weekly
investment.

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 Analysis: - Respondents are investing in financial instruments.

Analysis: - Reason for not investing majorly are lack of awareness (27.3%) & income factor
(22.7%) and others due to to time and fear .

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Analysis: - Respondents are majorly investing in LIP (62.5%) , in Equity and fixed deposit
(40.60%), in Mutual funds (37.50%) , and in Recurring deposit (31.3%) , in provident fund
(28.10%) ,in current scenario investment in NSC / KVP are not preferred.

Analysis: - Respondents are mostly invest with objective to earn return to meet short term
objective and growth with income. Only 37.50% prefers long term profit.

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Analysis: - Respondents are generally ready to take moderate risk so that they can earn moderate
return. Hardly investors prefer to take high risk. Investors are ready to take low risk for low
return but they avoid high risk.

Analysis :- Major source of respondent are savings they invest from the amount they saved in
order to get return on such savings (93.8%).

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Analysis: - 62.5 % Respondents are responding for still new financial instruments are required to
get more good benefits and meet their objectives so that more people can start investing.

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Conclusion
As per the study conducted identified the people do invest in financial instruments
but they majority invest in instruments that consist low risk or moderate risk and
return. Investors considering risk and return ratio while investing. There still the
people not prefer to invest because of lack of awareness and income level. Majority
of the people uses their savings for the purpose of investment therefore they prefer
not to take high risk. There are various of financial instruments but people are still
investing in Life insurance policies than investing in equity. They prefer to invest in
safe securities which provides guaranteed return.

Bibliography

www.NSEindia.com

www.BSEindia.com

www.investopedia.com

www.advisorymandi.com

www.sapling.com

www.yourlibrary.com

www.hebalance.com

www.learningmarkets.com

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