BA5012- Security Analysis and Portfolio Management

16 Marks Question with Answers

Unit 1

1. Characteristics and Objectives of Investment:

Characteristics of investment:

i) Ensuring safety of principal- through

 Diversification of assets and

 Selecting investment options by deciding to invest in the right type of industry and the right type of
investment.

ii) Liquidity-investor buying assets which can be sold for a higher value in the future

iii) Income stability- regularity of income at consistent rates has to be obtained by the investor for his investments.

iv)Capital appreciation and consistency-investors to judge the price levels and inflation and explore the
possibilities of gain and loss based on value of capital appreciation.

v) Legality -investments to be bound by legal regulations and procedures.

vi) Tangibility- any investment which retains it’s value over a long time period.

Objectives of investment:

 The main investment objectives are:

a)Increasing the rate of return and

b) Reducing the risks

Other subsidiary objectives:

Apart from maximizing return and minimizing risks in investments, the following are the other subsidiary
objectives:

i) Investor’s protection against inflation

For example, Bharathi Axa’s ‘Future Champs’ plan in which the future child expenses are met for a period of 20
years from the commencement of the plan where 105 % of the original sum assured is provided for maximum and
100% of the total premiums is paid on maturity.

ii) Ensuring overall safety of investments

For example, investments subject to a AAA credit rating given by credit rating agency CRISIL in India for HDFC
bank for term deposits and a Corporate Governance Rating provided by CRISIL for creating value of services to
all the stakeholders of the bank.

iii) Longer life expectancy and the requirement of savings for longer time periods.
For example, wealth accumulation benefits offered for investors by banks like the Union bank of India where stock
trading for customers is done through their respective demat accounts in addition to deposits and other investments.

iv) Protecting against taxes.

For example, tax benefits offered by companies like Barclays India Home Loans where a deduction of up to Rs.
1,50,000 is offered for the investor.

v) Ensuring that there are high interest rates so that the return earned is equal to the risk taken by the investor.

For example, the global strategy adopted by Morgan Stanley of making U.S. investors having risking investments to
invest in Chinese stock markets.

vi) Ensuring proper investment channels- achieving a proper balance between a high rate of return and a stable
return.

For example, selecting the right market intermediaries for stock market investments like a stock broker with sound
knowledge, etc.

2. Types of Investments:

i) Negotiable Securities:

a) Variable Income securities:

 Equity shares:

Terms and concepts relating to equity shares:

i) Equity share or stock:

 A stock or any other security representing an ownership interest is known as equity stock or share.
On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders)
plus the retained earnings (or losses). Also referred to as ‘shareholders equity’.

 An instrument that signifies an ownership position (called equity) in a corporation, and represents a
claim on its proportional share in the corporation's assets and profits.

Companies generally issue equity shares for the first time only through IPO method.

Terms and concepts relating to equity shares:

ii) Equity dividend- A taxable payment declared by a company’s board of directors and given to it’s equity
shareholders out of the company’s current earnings.

ii) Maturity Period- The maximum time period for which the equity shares are held by investors before they are
sold or transferred to any other individual. The maturity period for equity shares is for an indefinite time period.

iii) Holding Period- The time period for which the equity shareholder decides to hold the shares in which he has
invested before deciding to sell the shares. The Holding Period of an equity share is generally for an indefinite
period.
For example, equity dividend being raised by Readymade Steel India Ltd through a public issue of equity shares of
face value of 10 Rs. for a cash of Rs. 3474.53 lakhs.

iv) Equity shares issued at par or face value- It refers to the original price of equity shares which is decided to be
issued by the issuing company on a promise to the public investors.

For example, the IPO equity issue of Nagarjuna Constructions Ltd during June 27 th to June 29th to the public at Rs.
10 face value per share.

v) Equity shares issued at a premium- refers to shares issued at a value higher than the face value .

For example, during July 2004, TCS had announced to make a public issue of Re. 1 per share.

vi) Equity shares issued at a discount- refers to shares issued at a value which is below the face value.

For example, the equity issue of Shipping Corporation of India (SCI) made during December 2010 at a discount of
Rs. 5 per share on the face value.

vii) Book value- refers to the value of shares as displayed in the balance sheet of the company.

viii) Intrinsic value- Intrinsic value refers to the real worth of the equity shares which helps investors in taking
buying, holding or selling decisions.

ix) Market Price- The price at which the equity shares are regularly traded in the market.

x) Voting right- The right available to an equity shareholder to vote or represent their decision on aspects such as
declaration of dividends, etc.

xi) Pre- emptive right - The right available to an equity shareholder in which a company issues further equity
shares to the existing shareholders through a Follow on Public Offer (FPO) which can be done by the company
either 1 year after making an IPO or 2 years from incorporation, whichever is earlier.

Specific rights available to equity shareholders

i) Right to control the management of the company.

ii) Right to share the profits of the company.

Types of equity shares:

i) Sweat Equity shares- refers to a type of equity shares which is issued by the company out of the already existing
shares, shares which are issued at a higher discount to employees and directors, shares issued for consideration other
than cash (for eg: for intellectual property rights such as know- how or property rights).

ii) Non- voting shares- Non- voting equity shares carry no voting rights and carry additional dividends instead of
voting rights for the equity shareholders.

iii) Right shares- Shares which are offered to the already existing equity shareholders.

iv) Bonus shares- refers to distribution of additional shares to the existing shareholders without payment of share
price in a specific ratio.

On the basis of stock market performance, equity shares are classified into the following categories:
a) Growth shares- shares which have a higher rate of dividend growth than the industrial or the market growth in
terms of profitability .

For example companies like BPL which witnessed an increase of 5.53 % from Rs. 25.30 to Rs. 26.70 on 18/07/2011.

b) Income shares- stocks which belong to companies which have comparatively stable operations and limited
growth opportunities.

For example, companies like Ranbaxy, whose opening share price on 18/07/2011 was Rs. 545.

c) Defensive shares- equity shares which are unaffected by market movements and which provide a moderate yield
or return over a time period.

d) Cyclical shares- Equity shares which are influenced by the upward and downward movement of the business
cycle of a company which provides low to moderate yields for the investor and high capital gains.

For example, on January 24th, 2010, the share price of Wipro which came down to Rs. 893 from Rs. 965 on the
previous day.

e) Speculative shares- During the bull and bear phases of the stock market, these type of shares have a great
demand from investors where buying and selling takes place in equal volumes in the stock market.

For example, during June 20th, 2011, the equity shares of IDBI were bought and sold in the same quantity because of
the equal demand for the equity shares for buying and selling on that day.

 Fixed Income Securities:

i) Preference shares:

A preference share is a type of share in which a special right is given to the shareholders through which they receive
a fixed dividend from the company, have limited claims on the company’s income and in case of liquidation or
winding up of the company, the claim of the shareholders on the company’s assets are also limited and fixed.

Features or characteristics of a preference share:

i) It is hybrid in nature where the benefits resemble both bond and equity shares.

ii) The dividend received on the preference share is on par with the equity dividend.

iii) Preference shares don’t enjoy voting rights except in cases when there is a resolution of the company affecting
their rights.

Types of preference shares:

i) Cumulative preference shares- type of preference shares in which dividend is paid to the
shareholders at a later date when the company is not able to pay dividend in the current year or during
the time when the dividend is due to the shareholders
For example, Uttam Sugars Ltd issued cumulative preference shares for dividend arrears of 10 % on
it’s preference shares for a total issue of Rs. 16 lakhs during 2010.
ii) Non- cumulative preference shares- preference shares for which the unpaid dividends on the
shares do not accrue on a future date.
 iii) Convertible preference shares- preference shares which can be converted into equity shares at the
end of a specific period after receiving the preference shares from the company. It is a special privilege
available to the investors to increase their equity value of investments.
iv) Cumulative convertible preference shares- preference shares which provide a regular return of
10 % to investors during the conversion period of the shares, which is normally between (3 to 5 years)
and than convert it into equity as per the terms and conditions of issue of the company.
v) Redeemable preference shares- shares which carry the automatic right for the investor to sell
them on the date of maturity. The fund for redemption of preference shares is created from the
company’s profits and the premium on redeemable preference shares should be paid out of profits or
out of the share premium of the company.
vi) Irredeemable preference shares- Irredeemable preference shares are preference shares which do
not have an automatic right for the investor to sell the shares. They provide the right to sell shares only
on specific occasions like the winding up of the company, etc.
 Debenture:
A debenture is a financial instrument generally issued by private companies as a long- term
promissory note for raising loan capital where the company promises to pay interest and principal to
the investor as stipulated or agreed upon.
Features or characteristics of a debenture:
i) Form- refers to the form of certificate given by the issuing company specifying the date of
redemption and the interest rate to the debenture holder.
ii) Interest or the coupon rate of interest- the rate of interest fixed at the time of issue which is
mutually agreed between the issuing company and the investor.
iii) Redemption- the right available to the debenture holder to sell the debentures on the date of
maturity.
iv) Debenture trustee- a financial institution or a custodian who takes the responsibility of protecting
the interest of debenture holders by protecting investors from default of the company.
v) Indenture- a trust or a written agreement between the company issuing debentures and the
debenture trustee who represents the debenture holders.

Types of debentures:

a) Secured and unsecured debentures- In a secured debenture, the trustee can take hold of the
specific assets on behalf of the debenture holders.
Unsecured debentures don’t have the protection of default from the issuing company.
b) Fully convertible debentures- Debentures which can be converted into equity shares after the
completion of 6 months from the issue of debentures.
c) Partly convertible debentures- Here, the investor has the option of both converting a part of his
investments into equity shares and retains the remaining part of his investments as debentures.
d) Non- convertible debentures:
Debentures which do not carry the option for the investor to convert it into equity shares.
 Bonds:
A bond is a long- term debt instrument that promises to pay a fixed annual sum as interest for a
specific period of time.
Types of bonds:
i) Secured and unsecured bonds- A secured bond is secured by the bonds are secured through
protection by real assets. An unsecured bond there is no protection available to the investors.
ii) Perpetual and redeemable bonds- Perpetual or irredeemable bonds refer to the bonds which do
not carry a fixed maturity period.
Redeemable bonds refer to bonds which carry the right to be redeemed after a specific time period.
 iii) Fixed interest rate and floating interest rate bonds- In the case of fixed interest rate bonds, the
rate of interest on the bonds remain constant till the maturity period. In the case of floating interest rate
bonds, the rate of interest paid on the bonds vary
according to the profitability of the company.
iv) Zero coupon bonds- refer to the type of bonds which sell at a high discount and are redeemed at
par and do not carry interest for the bond holders.
v) Deep discount bonds- refer to the type of bonds which sell at a high discounted value and are
redeemed at par and high interest is paid on these bonds.
vi) Capital indexed bonds- bonds whose issue price is fixed based on the Wholesale Price
Index( WPI) and the principal amount of the bonds vary according to the index.

Foreign Currency Convertible Bonds (FCCB’s)- refers to the type of bonds in which the investor
looks to benefit through different currencies by investing in bonds in one currency and selling it in a
different currency for achieving currency appreciation on the bonds
 IVP’s and KVP’s:
These are savings certificates issued by the post office with the names Indira Vikas Patra and Kissan
Vikas Patra for providing investments in small denominations such as 500’s and 1000’s.
 Government securities:
Securities issued by the Government which ensure both the income and the capital gain for investors.
 Money market securities:
Money market securities are short- term instruments with a maturity period of less than 1 year. Some
of the common money market securities are:
a) Treasury Bills- Short term instruments issued by the Government for a duration of 14 days to 1
year.
b) Commercial Paper- Commercial paper is a short- term negotiable instrument issued by private
companies either directly or through banks or merchant banks.
c) Certificate of Deposit- It is a marketable receipt of funds deposited in a bank for a fixed period at a
specified rate of interest.

ii) NON NEGOTIABLE SECURITIES

Securities whose ownership is not transferable from one individual to another either on maturity or
before maturity.
Types of non- negotiable securities:
a) Bank deposits
b) Post office deposits
c) NBFC deposits- deposits provided by Non- Banking Finance companies which offer additional
return to investors after the maturity period.
d) Tax Sheltered saving schemes such as Public Provident Fund Schemes (PPF’s), National Savings
Scheme (NSS) and National Savings Certificate (NSC’s)
e) Life Insurance- schemes such as endowment policies, children plans, convertible term assurance
plans, etc.
f) Mutual funds- refers to the pooling of investments by companies through various financial
instruments such as
Concepts relating to mutual funds:

i) Net Asset Value (NAV)- refers to the market value which determines the daily traded value of the
mutual funds.
ii) Asset Management Company (AMC)- responsible for managing funds and investments of the
mutual fund schemes of the investor.
iii) Mutual Fund Trustee or a custodian- A financial institution or a bank which protects the mutual
fund investors from default of the company.
iv) Sponsor- A financial institution which monitors the performance of the Asset Management
Company on a regular basis.

Types of mutual funds:

a) Open- ended schemes- schemes which allow investors to make investments any time after the
issue is made by the company.
b) Closed- ended schemes- schemes in which investors can invest and exit from the funds where it
remains open only for a period of 45 days from the date of issue.
c) Exchange- traded funds- mutual funds which are traded on a daily basis on their Net Asset Value.

Other types:

a) Growth scheme
b) Income scheme
c) Balanced scheme
d) Money market scheme
e) Tax savings scheme
f) Index scheme
v) Real Assets- such as commodities like gold, silver, etc
vi) Real Estate- investments which benefit the investors primarily through land appreciation and other
tax benefits.
vii) Art- investments such as valuable paintings
 viii) Antiques- valuable sculptures, coins, etc

3. Investment Process:

Investment Process:

 An investment process involves a series of activities leading to the purchase of securities or other
investment alternatives. It comprises of the following steps:
a) Deciding the investment policy- It involves various decisions of the company such as:
 Deciding on the investible funds
 Establishing investment objectives
 Acquiring knowledge on investment alternatives and options
b) Analysis of securities- which includes market analysis, industry analysis and company analysis for
evaluating the benefit of investments.
c) Valuation of investments such as determining the intrinsic value and future value of investments.
d) Portfolio Construction which includes diversification of funds and investment alternatives, selection
of investment options and also allocation of funds.
e) Portfolio evaluation- which includes appraisal and revision of the portfolio.

SHAREWARRANT:
A share warrant is a bearer document of title to buy specified number of equity shares at a specified price.
Warrants are detachable. An investor can sell the warrants separately and they are traded in the market. It enables a
bond holder to exercise the option of an equity simultaneously with bond after a specific time period.

Differences between share warrants and share certificate:

a) A share warrant needs provisions in the Articles of Association for the issue of warrants whereas a share
certificate does not need a prior approval of the Articles of Association for issue of equity shares.

b) Share warrants are issued only to fully paid up shares whereas a share certificate are issued even for partly- paid
up shares.

c) A share certificate is considered to be a negotiable instrument whereas a share certificate is not considered to be a
negotiable instrument.

Sources of Investment information:

i) Journals and Magazines of IMF, reviews of Fortune magazine.

ii) The RBI bulletins, journals such as Economic Times, etc,

iii) Industry information from the journals of Bombay Stock Exchange, CMIE (Centre for Monitoring Indian
Economy)

iv) Company information from BSE and NSE websites.

v) Stock market information from SEBI newsletters, etc.

4. Risk and Return Concepts:

 What Is Risk ?
 The chance that an investment's actual return will be different than expected. This includes the possibility
of losing some or all of the original investment. Risk is usually measured by calculating the standard
deviation of the historical returns or average returns of a specific investment.
 Many companies now allocate large amounts of money and time in developing risk management strategies
to help manage risks associated with their business and investment dealings. A key component of the risk
mangement process is risk assessment, which involves the determination of the risks surrounding a
business or investment.

What Is Systematic Risk ?

 The risk inherent to the entire market or entire market segment. Also known as "un-diversifiable risk" or
"market risk." Interest rates, recession and wars all represent sources of systematic risk because they affect
the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad
range of securities, unsystematic risk affects a very specific group of securities or an individual security.
Systematic risk can be mitigated only by being hedged. Even a portfolio of well-diversified assets cannot
escape all risk.

 What Is Unsystematic Risk ?

Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can
be reduced through appropriate diversification. I it also called as "specific risk", "diversifiable risk" or
"residual risk". For example, news that is specific to a small number of stocks, such as a sudden strike by
the employees of a company you have shares in, is considered to be unsystematic risk.

 What Is Return ?
The gain or loss of a security in a particular period. The return consists of the income and the capital gains
relative on an investment. It is usually quoted as a percentage. The general rule is that the more risk you
take, the greater the potential for higher return - and loss.
 What Is Risk-Return Tradeoff ?
The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are
associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with
high potential returns. According to the risk-return tradeoff, invested money can render higher profits only
if it is subject to the possibility of being lost. Because of the risk-return tradeoff, you must be aware of
your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price
of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to
find an appropriate balance - one that generates some profit, but still allows you to sleep at night.
 Risk-Reward Concept
This is a general concept underlying anything by which a return can be expected. Anytime you
invest money into something there is a risk, whether large or small, that you might not get your money
back. In turn, you expect a return, which compensates you for bearing this risk. In theory the higher the
risk, the more you should receive for holding the investment, and the lower the risk, the less you should
receive.

For investment securities, we can create a chart with the different types of securities and their associated
risk/reward profile.

 Determining Your Risk Preference

With so many different types of investments to choose from, how does an investor determine how much
risk he or she can handle? Every individual is different, and it's hard to create a steadfast model applicable
to everyone, but here are two important things you should consider when deciding how much risk to take:

 Time Horizon
Before you make any investment, you should always determine the amount of time you have to keep your
money invested. If you have $20,000 to invest today but need it in one year for a down payment on a new
house, investing the money in higher-risk stocks is not the best strategy. The riskier an investment is, the
greater its volatility or price fluctuations, so if your time horizon is relatively short, you may be forced to
sell your securities at a significant a loss. With a longer time horizon, investors have more time to recoup
any possible losses and are therefore theoretically be more tolerant of higher risks. For example, if that
$20,000 is meant for a lakeside cottage that you are planning to buy in ten years, you can invest the money
into higher-risk stocks because there is be more time available to recover any losses and less likelihood of
being forced to sell out of the position too early.

 Investment Risk Pyramid

After deciding on how much risk is acceptable in your portfolio by acknowledging your time horizon and
bankroll, you can use the risk pyramid approach for balancing your assets.
 This pyramid can be thought of as an asset allocation tool that investors can use to diversify their portfolio
investments according to the risk profile of each security. The pyramid, representing the investor's
portfolio, has three distinct tiers:

 Base of the Pyramid– The foundation of the pyramid represents the strongest portion, which supports
everything above it. This area should be comprised of investments that are low in risk and have foreseeable
returns. It is the largest area and composes the bulk of your assets.
 Middle Portion– This area should be made up of medium-risk investments that offer a stable return while
still allowing for capital appreciation. Although more risky than the assets creating the base, these
investments should still be relatively safe.
 Summit– Reserved specifically for high-risk investments, this is the smallest area of the pyramid
(portfolio) and should be made up of money you can lose without any serious repercussions. Furthermore,
money in the summit should be fairly disposable so that you don't have to sell prematurely in instances
where there are capital losses.

Steps taken by the company in minimizing risk exposure:

a) Protecting market risk

b) Protection against interest rate risk
c) Protection against inflation
d) Protection against business and financial risk

Methods of risk measurement:

a) Standard Deviation and

b) Variance
 Unit 2

1. Functions and Organisation structure of SEBI:

Objectives of SEBI:
SEBI has a primary twin objective of:
i) Ensuring the protection of interest of investors in securities.
For example, SEBI requires stock broking companies to appoint a ‘Compliance Officer’ for the
purpose of conducting an audit of intermediaries in the securities market and SEBI has issued a
circular saying that an Annual Information Report(AIR) from the compliance officer and the
Disclosure of Investor Protection (DIP) guidelines established by SEBI for investor protection.
ii) Promoting the development of securities market.
For example, the Securities Appellate Tribunal (SAT) established by SEBI to reduce investor
grievances and also investigating any individual to furnish necessary documents
if required for promoting the development of securities market.
iii) Regulating the securities market.
For example, Investor Protection cells (IPC’s) established by the Cochin Stock Exchange to assess the
merits and demerits of various legal services provided by Cochin Stock Exchange and also to create
awareness to the members and investing public about different rules and regulations of SEBI followed
by the stock brokers and the sub- brokers.
Another example is the recent announcement of SEBI regarding documentary proof to be provided by
investors to stock broking companies when dealing with the broking companies.

Functions of SEBI:
The main functions entrusted with SEBI are:
i) Regulating various business activities in stock exchanges and other securities market.
ii) Registering and regulating the working of stock brokers, sub- brokers, share transfer- agents,
bankers to the issue, portfolio managers, etc.
iii) Registering and regulating the working of collective investment schemes including mutual funds.
iv) Prohibiting fraudulent and unfair trade practices in the securities market.
v) Promoting investor’s education and training of various market intermediaries in the securities
market.
vi) Prohibiting insider trading in securities (refers to the disclosure of information of stock issues of
companies such as an IPO to an investor before he is supposed to be informed).
For example, insider trading problems faced by HDFC recently.
vii) Regulating substantial acquisition of shares and takeover of companies.
 viii) Calling for information, undertaking inspection, conducting enquiries and audit of the stock
exchanges, intermediaries and other organizations in the securities market.
Organization of SEBI:
For the purpose of convenient administration, the organization of SEBI is divided into the following
departments:
i) Primary Department- It deals with policy matters relating to primary market, intermediaries and
redressal of investor’s grievances and guidance.
ii) Issue Management and Intermediaries Department- Registration, regulation and monitoring of
intermediaries and checking of related documents.
iii) Secondary Market Department- Policies relating to stock exchanges, price monitoring and
market surveillance, etc.
iv) Institutional Investment- Activities relating to mutual funds, FII’s, activities of mergers and
acquisitions, etc.

2. Types of Securities Market:

Types of securities market:

i) The new issue or the primary market

ii) The secondary market

New Issue or the Primary Market:

 Stocks of companies available for the first time are offered through the new issue market.

In the primary market, the issuing houses, investment bankers and brokers act as the channel of distribution for the
new issues.

Relationship between primary and secondary market:

The new issue market cannot function without the secondary market due to the following reasons:

i) The secondary market provides liquidity for the issued securities.

ii) The issued securities are traded in the secondary market offering liquidity to the stocks at a fair price.

iii) When companies are listed in the stock exchanges, the stock exchanges, through their listing requirements,
exercise control over the primary market.

iv) Therefore, the company seeking for listing on the respective stock exchange has to comply with all the rules and
regulations prescribed by the stock exchange.

v) The primary market provides a direct link between the prospective investors and the company.

vi) The capital appreciation and the benefits provided to investors in the stock market are some of the major factors
which that attract the investing public towards the stock market.

Functions of the primary market:

i) Originating
ii) Underwriting and

iii) Distribution

Parties involved in the primary issue:

i) Managers to the issue- Firms which are responsible for scrutinizing the details mentioned in the prospectus filed
by an issuing company at the time of making a public issue. They are also known as book running lead managers.

ii) Registrar to the issue- Individuals who are responsible for receiving the applications from companies interested in
public issues or IPO’s and enabling transfer of funds through demat accounts of investors.

iii) Underwriters-Firms which find buyers for public issue of securities when they are not subcribed during the time
of public issue.

iv) Bankers to the issue- firms which are responsible for receiving the subscribed money from investors and also for
refunding excess money, if any received from investors.

v) Advertising agents- various credit rating agencies which take care of advertising and creating publicity for public
issues of companies.

vi) Financial Institutions- various banks and other financial institutions who are involved in new issues of
companies.

3. New Issue Market procedures :

PLACEMENT OF THE ISSUE:

Any new issue is floated in the market is floated in any of the following ways:

i) Through prospectus or an offer through prospectus:

 A prospectus is a document which contains details regarding the company and invites offers for
subscription or purchase of any shares or debentures from the public.

 A draft prospectus has to be sent to the regional stock exchange and also other stock exchanges where the
shares of the company are to be listed.

 An abridged prospectus contains all the salient features of a prospectus which accompanies the
application form of public issues made by companies to the stock exchanges.

 Red Herring Prospectus is a prospectus, which does not have details of either price or number of
shares being offered, or the amount of issue. This means that in case price is not disclosed, the number of
shares and the upper and lower price bands are disclosed.

For example, the recent red herring prospectus filed by SKS Microfinance during their public issue made.

ii) Bought- out deal or offer for sale:

 In the case of a bought- out deal, the promoter of the company places his shares with an investment banker
who offers it to the public at a later date. In many public issues, along with the main investment banker,
there are other smaller companies participating in the syndicate. It is issued for a period of 70 days to more
than 1 year.
For example, the online portal services offered for IPO issues like the portal services of Reliance Money where
initially a free 7 day trial version and a fee based usage of 3 months or 6 months is provided for investors.

iii) Private Placement:

 In this method, the issue is placed with a small number of financial institutions, corporate bodies and high
net worth individuals.

Date at a suitable price.

 The stock is placed with the issue house client with the mode of placing a letter and other documents which
together constitute a prospectus and the financial institution itself acts as the underwriter if required.

Some of the advantages of a private placement are being cost effective, being time effective, provides discounts to
the financial intermediaries, serves as a source of raising capital funds for the companies.

iv) Rights issue-if the issuing company wants to increase it’s subscribed capital by allotment of shares further after 2
years from the date of it’s formation or one year from the date of the first allotment, whichever is earlier

should offer shares at first to the existing shareholders in proportion to the shares held by them at the time of offer
and the shareholders can even or transfer the offer in the name of any other person.

v) Book building:

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the
period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the
floor price. The offer price is determined after the bid closing date.

For example, the recent book building process done by Muthoot Finance corporation where South Indian bank acted
as the underwriter.

Pricing of new issues:

 In the case of new issues, issuers and merchant bankers also influence in fixing the offer prices.

 Companies are permitted to make new issues at

a) Premium or

b) At par value

Allotment of shares:

The portion of a new securities issue which is assigned to each member of a syndicate comprising of various Market
intermediaries such as the stock brokers, investment bankers responsible for underwriting and distribution.

The following are the various steps involved in allotment of Shares made in an IPO:

i) The applications received for a public issue by the company is categorized on the basis of number of shares
applied for .
  Then allocation is done on a proportionate basis.

 For example, if the allocation of shares to an applicant works out to be more than 150,would be rounded off
to 200 and if the number is lower than 150, it would be rounded off to 100.

For example, the share allotment done by Manganese Ore India Ltd during December 2010 by alloting shares to
investment bankers through lot sizes of 17 shares.

Allotment of shares- can be done on a pro- rata basis where the allotment of shares is done on the basis of specific
factors like the dividend offered to investors for the stocks, the overall stock market situation, etc.

Factors to be considered by investors for making a public issue:

i) Promoter’s credibility:

a) Promoter’s past performance with regard to the companies promoted by them earlier.

b) Their knowledge and experience in the related field.

ii) Efficiency of the management:

a) The composition of the Board of Directors is to be studied to find out whether professionals are included in the
Board.

iii) Project details:

a) The credibility of the appraising institutions and agencies approving the projects of the companies.

iv) Products:

a) Reliability of the demand and supply projections of the product.

b) Competition faced by the company in the market and the marketing strategies of the company.

v) Financial Data:

a) Accounting policy

b) Analysis of data related to capital, reserves, turnover, profit, dividend record and profitability ratio.

vi) Litigation:

a) Pending litigation and their effect on the profitability of the company such as default in payment of dues to banks
and financial institutions.

For example, during 2007, the litigation which was filed and penalty imposed upon the directors of Mahindra
Holidays and Resorts India Ltd for approving the acquisition of the land for their resorts stating that it could not be
used for commercial purposes. During 2008, when MHIL went for a public issue, their shares did not get subscribed
due to this pending litigation against their directors.

vii) Risk factors:

a) An assessment of various general and specific risk factors need to be done by the investors.
viii) Statutory clearances:

Investors should find out whether all required statutory clearances from regulatory authorities have been obtained by
the company.

ix) Investor services:

a) Promptness of the company with regard to enquiries of allocation of shares, refund of excess application money,
payment of dividends and share transfer should be assessed by investors.

For example, Karvy Investor Services Ltd which provides regular updates and feedback to their clients about the
allotment of shares done, any pending allotment of shares which provide for online registration of enquiries for
investors and a separate database for investors of their customers like IDBI, Reliance.

4. Types of capital markets in India:

RECENT REGULATIONS PROVIDED BY STOCK EXCHANGES FOR LISTING:

i) The BSE has said that the companies should have necessarily recorded profits for the last 3 years, minimum of 5
trades and 500 Shares should be traded on any given day .

ii) Stocks which have not been having good corporate governance, not providing best returns have been categorized
as ‘Z’category stocks under BSE.

BSE, NSE, ISE, OTCEI AND NSDL

Origin and Objectives of BSE:

The major objectives of SEBI are:

 To safeguard the interest of investing public having dealings on the exchange.

 To promote, develop and maintain well- regulated market for dealing in securities.

1) The Trading system in BSE:

 In 1995, BSE introduced it’s screen based trading called BOLT(BSE online trading).

 Trade work stations are connected with the main computer at Mumbai through WAN.

2) Securities traded:

 The securities traded are classified into ‘A’ group or specified shares and ‘B1’, ‘B’, groups which are called
as non- specified securities.

 Carry forward transactions are permitted only for Group ‘A’ shares for a period of 90 days.

3) Surveillance System:

 The surveillance department in the stock exchange aims at providing free and fair market , preventing
unsystemmatic risk from entering the trading system and managing risks.

Methods of surveillance system:

a) Price surveillance:

 The surveillance department keeps a close watch over the price movements of the stocks and it is carried
out through circuit filters and margins.

Circuit filters-The circuit filters decide the range within which the traded prices of a stock varies on a day when
compared to it’s previous closing day price.

Margins- Trading is done on the basis of margins and their limits exercised by the stock exchange.

Types of margins exercised by the surveillance department:

i) Special margin- It is levied on the total net purchase price of a particular stock and it is fixed from from 25% to
100%.

For example, the special margin exercised for ONGC during 26/08/2011 to 30/08/2011 due to a fall in the stock
price by 4.09% due to excessive buying during this period.

ii) Concentration margin- If the member’s trade is focussed specifically on one to three stocks in a day,
concentrated margin is imposed on these stocks for 50%, 65% and 80 %.

iii) Additional volatility margin- A margin which is imposed on stocks which trade above the price of 40 Rs and
which increases above 16% within one settlement.

iv) Ad- hoc margin- To avoid excessive price fluctuations on a specific stock, an ad- hoc margin is imposed above
the previous day’s margin.

Check on the BOLT TERMINALS

 The surveillance department of the stocks exchange applies a check or stops the trading activities for a
temporary period if it is not satisfied with the following aspects:

i) Position monitoring- The stock exchange keeps a close watch of the member’s trade position and the outstanding
position of the members and if it is not within the admissible limits, then a halt on trading is exercised by the stock
exchange.

ii) Outstanding market position- The stock exchange checks whether the current margins exercised by the stock
broker would be sufficient to cover the investor’s profits or losses for the outstanding trades which will be done by
him in the future.

iii) Concentrated purchase or sales- To check whether excess buying or selling of stocks is done by a single
company or a group of companies which negatively influences the prices other stocks in the market.

iv) Delayed carry forward transaction- A carry forward transaction where settlement is delayed unnecessarily and
not done within the required time.

BSE’s steps taken for protecting against trading default:

i) Customer Protection Fund- stock exchange covering trading losses for specific periods with insurance investment
schemes.
ii) Trade Guarantee Fund- Ensuring financial protection to investors if timely completion of transactions is not done.

iii) Broker’s contingency fund- A fund created for compensating stock brokers for unexpected losses. The fund is
created by receiving an initial deposit of Rs.1,000 from the stock brokers.

iv) Insurance cover- Investor’s future losses is covered through comprehensive investment schemes for 3 or 5 years.

v) Investor’s Grievance cell- created for the purpose of receiving regular investor grievances.

NATIONAL STOCK EXCHANGE

1) Origin and Objectives of NSE:

The NSE was started in Mumbai during November 1994 in Mumbai.

 Some of the major promoters of NSE are IDBI, ICICI, IFCI, LIC, etc.

 Some of the major objectives of NSE are:

a) To establish a nation wide trading facility for equities, debt instruments.

b) To ensure equal access to all investors across the country through appropriate communication network.

c) To meet current international standards of the securities market.

2) Membership:

 It is based on various factors such as capital adequacy, corporate structure, track record, education, etc.

3) Types of orders:

The following are the various types of orders which are placed by members of the exchange under NSE:

Time based orders:

a) Time based orders- If the order placed does not match with the NSE terminal, it automatically stands cancelled
at the end of the day.

b) A good till day order or good till cancel order-Here, the trader specifies a certain number of days for which an
order should be in the system if it does not match with the details in the NSE terminal.

c) Immediate or cancel order- In case of this order, if the matching of details does not take place, the order gets
cancelled immediately.

Price based orders:

a) Stop loss order-Here, the order gets executed only if the price crosses a specific limit.

Orders based on volume conditions:

a) Disclosed value order- Here, the trader can disclose only a part of the order value to the market and then place
the remaining orders in smaller lots with the market.
b) Minimum fill order- The trader specifies the minimum volume of shares that can be entered at a single time and
also the maximum number of shares which can be entered at a single time.

c) All or none order – Here, the trader enters the order only if all the conditions specified in the terminal matches
with the order placed.

4) Clearing and settlement- It is done in NSE through NSCCL (National Securities Clearing Corporation Ltd).

Advantages of NSE:

a) Wider accessibility

b) Screen based trading

c) Transparent transactions

d) SGL (Subsidiary General Ledger) Facility in the debt market which keeps a complete record of all the transfer of
funds transactions which takes place for all types of transactions such as the debt market transactions, equity
transactions, derivatives, etc.

INTER CONNECTED STOCK EXCHANGES

 A system established under the stock market system in India where the regional stock exchanges are linked
between each other through centrally connected terminal.

The basic objectives of ISE are:

a) Ensuring liquidity for regional stock exchanges and

b) Minimizing the cost of regional stock exchanges

The various aspects of ISE are:

a) Participants

b) Mode of functioning- Every regional stock exchange is connected to each other through the ISE established
Central system.

c) Risk management and surveillance

OVER THE COUNTER EXCHANGE OF INDIA LTD (OTCEI)

 OTCEI- refers to a system of trading which is done completely in a physical way without the help of
electronic fund transfers and electronic transactions in the stock market. Here, the trading takes place across
counters in stock exchanges which is considered as trading floor.

1) Players in the OTCEI market:

i) Stock Brokers

ii) Market Makers who assist companies in buying and selling of securities.

2) Settlement System- A standard settlement system of 5 days is followed for OTCEI market.
NATIONAL SECURITIES DEPOSITORY LIMITED:

 It is promoted by IDBI and UTI and the NSE

 It is a business subsidiary of the NSE

 Regulates activities relating to the electronic transfer of funds takes place through the demat accounts held
by investors.

1) Individuals associated with NSDL:

a) Depository- Companies which are responsible for trading

Of securities through demat accounts of investors and ensuring that the settlement of securities takes place on time
for investors.

For example, companies such as HDFC securities, etc.

Depository Participant- An intermediary who does the activities of fund transfer, etc on behalf of the depository.

Any custodian, bank, financial institution can be a DP. For example companies in India such as Agarwal Stock
Brokers, AK Stock Brokers, etc.

CENTRAL DEPOSITORY SERVICES LIMITED

 The CDSL is a business subsidiary promoted by the BSE and banks such as Bank of Baroda, Kotak
Mahindra.

DEMATERIALIZATION AND REMATERIALIZATION OF SECURITIES

Dematerialization- refers to the process of converting the physical share certificates of investors into electronic form
through NSDL and DP.

Rematerialization- refers to the process of converting the electronic holding of investors of various companies into
the physical form.

STOCK MARKET INDICES

 Index maintained by the stock exchanges in India for various companies in different industries which
provides the level of risk and return of these stocks as determined by these indices. Some of the common
stock market indices in India are:

i) BSE IT index

ii) BSE realty index

iii) NSE IT index

FOREIGN EXCHANGE MARKET OF FOREX

a) Spot exchange rate- The immediate value of foreign currency exercised by an investor for buying or selling in a
foreign market.
b) Forward exchange rate- The rate of exchange exercised for buying or selling of stocks for carrying out
transactions in the immediate future.

c) Direct Quote- when the buying or selling value of a domestic currency is quoted against the foreign
currency is called as a direct quote.For example, 1 Re= 0.33/0.36 US $.

d) Indirect quote- when the buying or selling value of a foreign currency is quoted against the domestic
currency, it is called as an indirect quote.

For example, a quote such as 1 US $= 45.56/45.58 Re

Unit 3

1. Write notes on Fundamental Analysis:

 Generally, the intrinsic value of shares of a company depends on a number of factors such as the earnings
of the company, the growth rate and the risk exposure of the company in the market which have an
influence on the share price of the company.

 A fundamental analysis is done through the following three steps:

a) Economic Analysis

b) Industry Analysis and

c) Company Analysis

Economic Analysis and factors influencing economic analysis of companies:

i) Gross Domestic Product (GDP)

ii) Savings and investment

iii) Interest rates

iv) Budget

v) Tax structure

vi) The Balance of Payment of companies

vii) Infrastructure facilities

viii) Demographic factors

Economic Forecasting:

 To estimate the stock price changes, an analyst has to analyze the macroeconomic environment and the
factors peculiar to the industry he is concerned with.

 Various economic activities affect the corporate profits, investor’s attitude and share prices.
Common methods for economic forecasting:

a) Economic indicators- factors such as capital investment, money supply, interest rate, unemployment, etc.

Types of economic indicators:

Leading indicators- indicators of what is going to happen in the future, which consists of fiscal policy, monetary
policy, stock market, etc.

For example, stocks of Pantaloon Retail Ltd which went up by 5 % during the period between April 2006 to
September 2010 due to the increase of foreign inflows during this period and the fall in prices of the stock during
Sep 2011. Coincidental indicators- Factors such as the current index, industrial productions, etc.

For example, the influence of the recently changed IIP norms on stocks of listed companies like Castrol India Ltd
where aggressive buying is taking place in these stocks.

Lagging indicators- Frequent changes in the leading and coincidental indicators are indicated in lagging indicators.
Factors such as unemployment rate, etc are examples of lagging indicators.

For example, the recent fall in stocks in the European countries due to the debt crisis where companies are
increasingly making job cuts.

b) Diffusion index- A global index constructed by the National Bureau of Economic Research (NBER) for checking
various irregularities in the indices.

For example, various global indices adopted across the world like the MSCI index, the S& P index, etc.

Econometric Model building:

 In an econometric model building, several economic variables are taken into consideration and the
relationship between dependent and independent variables are given mathematically using simultaneous
equations, regression equations, etc.

2. Write notes on Industry Analysis:

An industry analysis- refers to an analysis of a group of companies in an industry that have similar technological
structure of production and produce similar products.

1) Classification of industries based on the business cycle:

a) Growth industry-Industries which are dependent on technology and volume of production and always
have a minimum growth.

For example, the share price of companies like Coal India Ltd which is Rs.385.40 in NSE as on 7/09/2011 with an
increase of 1.65 %

b) Cyclical industry- The growth and profitability of industries move along with the business cycle. Stocks of
companies which are influenced by economic recession and growth.

For example, the fall in the stock prices of Bharati Airtel up to 8 Rs during March 2009 when there was a downward
trend in the stock prices of telecom companies during March 2009.
c) Defensive industry- Industries which always provide higher safety for investors due to basic necessities such as
the small and medium scale industries.

For example, the stock prices of companies of BSE listed small scale companies such as PTC India Financial
Services Ltd which is Rs. 16.40 in NSE, with an increase of 1.23%.

d) Growth Cyclical industries- Industries which simultaneously grow and are subject to cyclical changes are called
as growth cyclical industries. For example, companies involved in distribution of natural gas, building infrastructure
which is a time consuming activity.

For example, stock prices of companies like Gujarat State Petronet Limited which is Rs.106.70 as on 7/09/2011,
with an increase of 2%, whereas the stock price as on 26/08/2011 had fallen to Rs. 93.25 from 97.05.

2) Different stages of an industrial life cycle:

a) Pioneering stage- Companies which are there in the pioneering stage have high demand for products and the stock
prices of companies are also showing an increasing trend.

b) Rapid growth stage- Companies which are able to withstand even during tough competition and the stock prices
of such companies are stable. For example, stocks of Maruti Suzuki India Ltd which remains stable even during
times of tough competition.

c) Maturity or stabilization stage- The growth of the company takes place simultaneously with industrial changes.

d) Declining stage- The demand for the products of the company is lost completely and it results in continuous fall
in stock prices of the company.

3) Factors to be considered by an investor availing stocks of various companies:

 Apart from an industry life cycle analysis, an investor has to analyze some other factors also which are as
follows:

a) Growth of the industry- The historical performance of the industry in terms of growth and profitability.

For example, stock prices of companies such as Aegis Logistics Ltd under NSE where the stock price of the
company has increased from 198.60 as on 8/08/2011 to Rs. 199.00 as on 17/08/2011.

b) Cost structure and profitability- The cost structure, that is, the fixed and variable costs, affects the cost
of production and the profitability of the firm. Higher, the fixed cost component, greater sales volume is required to
reach the firm’s break even point.

For example, companies such as ONGCL where the stock price of the company increased from Rs, 745.60 as on
2/08/2011 to Rs.1098 as on 31/08/2011.

c) Nature of the product- The products produced by the companies in certain industries are demanded by
consumers in other industries.

For example, the differences in stock prices between companies such as Tata Steel Ltd and Essar Steel Ltd where
the ratio of production and consumption of the company during 2007-08 was56.1%, 43.9%, during 2008-09 was
Rs.56.4%, 43.6% and the Company has generated consistent sales revenue during March 2008 of Rs. 3898.5 crores,
during March 2009 of Rs. 3869.6 cr and During 2010 of Rs. 3057.2 crores.
 d) Nature of competition- Nature of competition is an essential factor that determines the demand for a
particular product , it’s profitability and the price of the company’s stocks. For example, MNC’s manufacturing
products in foreign markets and distributing it at a competitive price.

For example, companies such as Procter & Gamble where the products of the company provide serious competition
to the Indian companies and the recent favourable performance of Procter & Gamble Hygiene and Healthcare
Services Ltd in NSE where on 07/09/2011 has reached 1971.40, with an increase of 1.62 %.

e) Government policy- Factors such as tax subsidies and other policies of the Govt. which have an
influence on the stock prices of the companies.

For example, the fluctuation in the stock prices of Kingfisher Airways during April 2008 when the price of the
takeover bids was decided by the dominance of foreign investors over the takeover bid.

f) Labor- The impact of trade unions and labor policies on the performance of the company.

g) R & D- The cost incurred by companies for its R & D activities.

h) Pollution Standards- For example, industries such as leather manufacturing industries whose
productivity and performance is influenced by pollution control standards.

3. Write notes on Company Analysis

 In a company analysis, the investor assimilates several bits of information related to the company and
evaluates the present and future values of the stock.

 The risk and return associated with the purchase of a stock is analyzed by the investor by taking into
account the company related variables for effective investment decisions.

Factors Factors

 i) Competitive edge i) Historical price of stock

 ii) Earnings of the company ii) Price Earnings Ratio

 iii) Capital structure iii) Economic condition

 iv) Management iv) Stock market condition

 v) Operating Efficiency

 vi) Financial Performance

Future price Present Price

Factors influencing the future prices of the stocks of the company:

 In all industries, selected companies rise to the position of eminence and dominance.
  These companies obtain the leadership position in the market and they seldom lose it. Over a time period,
they would have proved their ability to withstand competition and to hold majority of the market share in
that industry.

 The competitiveness of a company can be understood through the following aspects:

a) The market share- The market share of annual sales of the company helps to determine a company’s relative
position within the industry.

b) Growth of annual sales- A consistent growth in sales needs to be ensured by the company for better performance
of it’s stocks.

For example, Reliance Communications during April- June 2011, has raised debt worth Rs. 500 million through
foreign bonds, has also added 2.1 million new subscribers in June 2011 and the net sales revenue and the growth of
sales decreased as on April 2011 .Closing Price of stocks of Reliance Communications on 27/04/2011 was Rs.
105.15 and the closing price on 29/04/2011 was Rs. 99.60, Closing price of the stock on 27/05/2011 was Rs. 85.05
and on 30/05/2011 was Rs.83.55 On the other hand, the stocks of Tata Communications Ltd had a growth in sales of
39.6 % during the same period . The closing price of the stock on 4/04/2011 was Rs. 248.15 and the CP on
6/04/2011 was Rs. 256.25.

c) Stability of sales- A company needs to achieve stability in it’s level of sales for ensuring effective performance of
the company’s stocks and also the competitor’s market share and sales.

For example, companies like Dr. Reddy’s Laboratories which has achieved stable sales growth during 2009 to 2011.

During the year 2011, the company became the only Indian pharmaceutical company to celebrate the 10 th continuous
year of listing in the New York Stock Exchange (NYSE), acquired the company Glaxo SmithKline Ltd, the Year-
on- Year sales during the year 2009-10 was around 10% and the Year- on- Year sales growth of 6 % during the year
2010-2011.

The Closing Price of stock of Dr. Reddy’s Laboratories as on 31/03/2011 was Rs. 1639.05 which increased from
1634.40 on 30/03/2011

The closing price of the stock on 31/03/2010 was Rs. 1274.95which increased from 1262.95 on 30/03/2010.

d) Sales forecast- An indication to the investor regarding the forecasting of future sales for the company so that the
investor can take a decision whether the company would continue profitably in the future or not.

A sales forecast is done by a company in any of the following ways:

 By fixing a trend line, either linear or non- linear, whichever is suitable.

 By calculating the historical percentage of the company sales to the industry sales. Generally, a company
makes such an analysis by using a least square method.

 Sales growth of a company can be compared with macro economic variables such as GDP, per capita
income and the population growth.

 Estimating the demand for substitutes and competitor’s products.

Factors influencing the earnings of the company:

i) Capital structure of the company- The ability of the company to maintain a debt equity ratio of 1:1 for a long time
period.

For example, Aditya Birla Nuvo Ltd, which is involved in manufacturing of textile yarn, garments and also offers
agri- solutions providing company for it’s clients which witnessed an additional increase it’s stock prices on
31/03/2010 because of the company raising more equity funds.

ii) Management- The influence of the changes taking place in the management hierachy of the organization and the
extent to which it influences the stock prices of the company.

For example, the recent fall in the stock prices of about 5% in the stocks of Apple Computers on 25/08/2011 from
384.25$ to 364 $ after the announcement of resignation of their CEO Steve Jobs.

iii) Preference shares- The money which the company raises through preference shares.

iv) Debt – the total debt of the company through ratio between earnings limit to debt and between fixed assets to
debt.

Measures of earnings of a company:

5. Write notes on Financial Analysis

A financial analysis done by a company serves as a source of primary information for an investor to evaluate the
prospects of a company.

The current information helps to analyse the present status of the company and also helps to predict the future.

Two main statements which are used for a financial analysis are:

i) Balance Sheet and

ii) Profit and Loss Account

Methods of analysing financial statements:

i) Comparative financial statements

ii) Trend analysis

iii) Common size statements

iv) Fund flow and cash flow analysis

v) Ratio analysis- Ratios for the purpose of analyzing the inter- relationship between financial variables. The
following are some of the important ratios which enable the investors to make stock investment decisions of a
particular company:

a) Liquidity ratios- Liquidity ratios indicate the ability of a firm to meet it’s short- term obligations. Two common
types of liquidity ratios are:

 Current ratio- which indicates the ability of the company to meet it’s short- term obligations or short- term
liabilities.
For example, increase in stock price of DLFLtd which increased during 31/03/2011 due to a favourable current ratio
of 3.7

 Acid test ratio or the quick ratio- indicates the ratio between the net current assets and the current liabilities
of the company.

For example, increase in the stock price of Sterlite Industries Ltd which increased on 31/03/2011 due to a favourable
quick ratio of 1.62.

b) Turnover ratios- the turnover ratios of the company indicate how well the assets of the company are used and
whether there is excess inventory maintained by the company or not.

Some of the different types of turnover ratios used by a company for assessment are:

 Inventory turnover ratio- indicates the ability of inventory management of the company.

 Receivables turnover ratio- indicates the effectiveness of receivables management of a company.

 Fixed assets turnover ratio- indicates the extent of utilization of fixed assets by the company.

For example, the increase in the Fixed Assets Turnover ratio of HDFC from 2.6 to 3 as on 31/03/2011 and an
increase in stock prices due to this factor.

 Total assets turnover ratio- indicates the utilization of sales towards the assets of the company.

 Working Capital Turnover ratio- indicates the effectiveness of sales towards the company’s working
capital.

 Debtors Turnover Ratio- indicates the level of sales revenue of the company and how it is raised by having
an effective debtor’s collection policy.

 Creditors Turnover Ratio- indicates the influence of an effective Creditors policy on the sales level of the
company.

c) Leverage ratios- Investors are interested to find out the performance of debt of the company because excess debt
of the company would affect the profits of the company and also the dividend or interest payable to investors.

The following are some of the leverage ratios which are used by a company for assessment:

 Debt to assets ratio- indicates the percentage between the total debt of the company and it’s total assets.

 Debt equity ratio- indicates the ratio between the total debt and the total equity funds raised by the
company.

 Long term debt to equity- indicates the proportion of the long- term borrowings of the company over the
equity funds.

d) Interest coverage ratio- This is an indicator as to whether the operating income of the company is sufficient to
cover the interest payment to it’s debenture holders and also banks who have lent money to the company.

e) Profitability ratios- These ratios indicate various factors to investors which generate profits for the company
such as sales, net profits, operating profits, net profits.
The following are the various profitability ratios which are analyzed by an investor for his stock investment
decision:

 Net profit ratio- indicates the level of net profits earned by the company and also it’s sales.

 Return on assets- it indicates the efficiency of total capital invested by a company.

 Return on equity- it indicates the level of profits earned by a company on the total operating capital
employed by the company.

Gross Profit ratio- indicates the ratio between the gross profits and the level of sales of a company.

Valuation Ratios:

i) Book value per share- it is the money which is due by a company to a shareholder after the company has paid all
it’s liabilities, creditors, debenture holders and preference shareholders in case of delisting or liquidation.

For example, UTV software Communications Ltd when it got delisted, repaid money @ 1.63 % to it’s equity
shareholders.

ii) Dividend to market price- indicates the relationship between the dividend received by the shareholder and the
current market price of the shares.

iii) Earnings per share- The earnings which is available to an equity shareholder on his outstanding shares.

For example, Dabur India Ltd which is currently providing an EPS of Rs. 2.67 to it’s shareholders.

Methods of forecasting earnings:

i) Price Earnings Ratio-the ratio between the Earning per share and the current market price of the share.

ii) Intrinsic value – the real future worth of the stocks in which an investor has invested.

Applied valuation methods or techniques:

i) Asset based valuation method- Under this method; an investor judges the financial strength of the company on the
basis of the value of fixed assets and current assets.

ii) Discounted cash flow method- Under the DCF method, an investor looks to maximize his present value of cash
flows by taking a present decision based on the future financial performance of the company in terms of its present
earnings, profitability and the growth of the company.

iii) The Price Earnings multiplier approach- An investor looks to maximize his earnings per share on the current
market price of the stocks.

6. Narrate about Graham Dodd Model

In 1934, David Dodd and Benjamin Graham (Warren Buffett’s teacher) wrote what would later be known
as the foundation for value investing. This happened post the Great Depression, as till such time investment in
stocks were analyzed primarily on reported earnings and for other various reasons brokerage reports were hence said
to be fundamentally flawed. It is important to note this bit of the history since a lot of the present day valuation
model had their inception during the time period of the Great Depression and presented a lot of uncomfortable
questions to be asked when it suddenly seemed that the never ending Bull run of the Wall Street was suddenly dead.
The Concept and Theory

Graham and Dodd came up with a method for valuing stocks, primarily looking for deeply depressed
prices. Graham and Dodd were looking for stocks that had a high earnings-to-price ratio, a low P/E (based on its
history), a high dividend yield, a price below its book and net current asset value. Today it might seem obvious but
back then when this concept was developed the market scenario was completely different. Think of the recent world
economy “recession”, and how valuations for markets, indices, sectors and stocks got redefined and revalued. It
seems that it takes only a couple of days of random bulk selling to send the market tizzy and back to the drawing
boards to evaluate everything “at fair value”.

In addition, they wanted to see total debt less than book value, a current ratio greater than two, earnings growth of at
least 7% for the past ten years, and no more than a 5% decline in earnings in more than two of those ten years (quite
interesting). Graham and Dodd believed that the intrinsic value of a stock can be determined based on the expected
future earnings and dividend – an approach that has come to be known as fundamental analysis.

Stocks that are selling at less than this intrinsic value may therefore be good as an investment opportunity.

The Valuation

Graham and Dodd observed that for a group of large mature companies, that there was a particular relationship
between Earnings Growth and Price to Earnings ratio (P/E). They found that the average no-growth stock sold at 8.5
times earnings and the price to earnings ratio increase by twice the rate of earnings growth. This lead to the earnings
multiplier which can be expressed as:

P/E = 8.5 + (2*Growth)

where G is the rate of earnings growth, stated as a percentage

This equation can also be structured to solve for Price:

Price = Earnings * (8.5 + (2*Growth))

If the calculated price is more than the current price, then, in theory, this is a “Buy” or available at a bargain.

The original formulation was made at a time when there was very little inflation and AAA corporate bond
interest rate was prevailing at 4.4%. In later years the formula was adjusted for higher current interest rates that were
due to higher inflationary pressure. Since interest rates effect P/E ratio, analyst must adjust their calculations for the
current interest rate.

P/E = [8.5 + (2*Growth)] * 4.4/Y

where Y is the current yield on AAA corporate bond

It is reasonable to say that this method is only an approximation of a fair price for a stock. They recommended that,
to reduce the risk to the investors, stocks should only be considered if the actual price was 80% or less than the
calculated price.

The model is considered most useful for evaluating stocks that have advanced through several years of business
cycle.
 Unit 4

UNIT-IV (TECHNICAL ANALYSIS)

1. Narrate the basics of technical analysis:

 Technical analysis- refers to a fairly wide range of techniques adopted by an investor- all based on the
concept that past information on prices and trading volume of stocks.

 It forecasts changes in prices of stocks by studying only the market data rather than information about a
company or its prospects.

Therefore, an investor considers factors such as the Weighted Average Price (WAP), Volume Weighted Average
Price (VWAP) and the daily Average Total Traded Volume (ATTV) to determine the supply and demand of stocks
of various companies.

Assumptions of technical analysis:

 Stock prices are usually discounted in advance with movements as well informed buyers and sellers take
stock investment decisions based on the supply and demand of stocks in the market.

 Before a stock experiences a continuous increasing trend, a period of accumulation of stock buying will
take place.

 Before a stock enters into a major or a minor downward trend, a period of excess selling of stocks will
happen before such trend.

 The third assumption is that a short period of stock price consolidation will be followed by a relative short-
term movement up or down in the stock prices.

2. Fundamental vs. Technical Analysis:

 A fundamental investor is a conservative investor who invests for a long- term and a technical investor is a
trader who buys and sells for short- term profits.

 A fundamental investor takes decision based on quality, value and depending on their specific investment
goals, the yield or growth potential of the security. They are concerned with the company’s financial
strength, record growth in sales and earnings, profitability, etc whereas a technical investor checks the
market action of the stock and it’s performance.
  Fundamental investors don’t look to build on the profits in the long- term but technical investors who want
to safeguard their stocks look to build on profits and their decisions are taken through a chart or a graph
analysis.

 Fundamental investors are committed to the buy and hold policy of stocks but the technical investors are
not under any such commitment to buy and hold.

 Fundamental analysts consider both income and capital gains equally important but technical analysts
consider capital gains more important.

 Fundamental analysts take decisions slowly whereas technical investors act more quickly to make
commitments and to take profits and losses.

 Technical investors believe that changing stock price trends are important signals whereas fundamental
investors do not believe so.

3. Narrate about The Dow Theory in technical analysis:

 The Dow Theory established by Charles Dow talks about 3 different market trends in the stock market
indices which influence the decision of investors in the stock market to buy or sell stocks.

Assumptions under the Dow Theory:

 The stock market has three trends:

a) The primary trend or the major market trend- which indicates the trend of stock price movements over a
period of one year or more than one year. In a primary market trend, the security price may be either increasing or
decreasing.

b) The secondary market trend or an intermediate trend which moves against the primary market trend for 1 month
to a few months, up to a period of 3 months.

c) The minor movements or the minor market trend which indicate the general trends in the stock market over a
period of 10 to 15 days.

 The stock market trend has the following three phases:

a) The accumulation phase- the period when investors are actively buying or selling stocks based on their opinion
about the stock market.

b) The public participation phase- this phase when more technical investors participate in the stock market.

c) The speculation phase- period where excess selling of stocks take place because of investors selling stocks for
higher gains.

 The stocks of a single company cannot influence the stock market in a large way.

 Stock markets discount the market price of stocks.

 Stock market trends are mainly confirmed by volumes.

 A particular trend exists in the stock market till positive signals in the market exist.
Concepts in Dow theory:

Trend:

 Trend refers to the direction of movement of stock prices.

 The three different directions of the share price movements are called as rising, falling and flat trends.

 Every rise or a fall in stock prices experiences a counter- move, that is if a share price has shown an
increasing trend, the counter- move will be a fall in price and vice- versa.

4. List the Methods of technical analysis:

Short sales or short selling or Shorting or Selling short:

 Short- selling is a technical indicator which is also known as short interest.

 Short- selling refers to the process of short sellers who sell securities which they do not own through the
stock brokers and repurchase the stocks of the same company or similar stocks at the lowest price to realize
a short gain or a short- selling interest.

 The borrower pays to the lender fixed fees called as lending fees for borrowing stocks from them.

 When the short- seller buys back the shares of the same company, it is called as short- covering or covering
the short position or buy to cover or buyback.

Odd Lot Trading:

 Shares are generally sold in lots of hundred. Shares, which are sold in smaller lots, fewer than 100 are
called as odd lots.

 Such buyers and sellers are called as odd lotters. Odd lot purchases to odd lot sales (in %) is calculated to
know the market trend with regard to the lot trading.

 Odd lots are not exercised for stocks on a daily basis, but they are exercised over a specific time period.

Moving Average:

 In a moving average, the market price of a stock does not rise or fall in a straight line.

 The upward and downward stock price movements are interrupted by counter moves.

 Moving Averages are generally calculated by investors from 5 days to 200 days.

Oscillators:

 Oscillators indicate the market momentum or the stock’s momentum which shows the share price
movement from one extreme to another.
  Oscillators indicate trend reversals for stocks that are generally confirmed by investors with the price
movement of the scrip.

Relative Strength Index (RSI):

 Relative Strength Index is an oscillator which is used to identify the inherent technical strength and
weakness of a particular stock.

 RSI = 100- (100)/ 1+ Rs

where RS= (Average Gain per day)/Average Loss per day

 An RSI index is generally calculated for a period of 5 to 14 days.

Support and Resistance Levels:

Support Level- refers to the lowest level of stock price fixed by the stock broker for an investor which indicates the
maximum risk level for an investor and beyond which he cannot buy the stocks,

Resistance Level- refers to the highest level of stock price fixed by a stock broker for an investor on a
particular trading day beyond which the investor does not exercise the selling of stocks.

THEORIES OF TECHNICAL ANALYSIS:

1) Efficient Market Theory:

 The Efficient Market theory is based on the assumption that the share price fluctuations are random and do
not follow any regular pattern.

5. explain the Concepts of the Efficient Market Theory:

a) Market efficiency- The efficiency and quickness in which the market translates the investor’s expectation of
stock prices into the actual market prices of stocks is known as market efficiency.

Market efficiencies can be either:

Operational efficiency- it is measured by factors like time taken to execute a buy or a sell order and the number of
bad deliveries in a trading day.

Informational efficiency- It is a measure of the speed of changes or the market’s reaction to new information.

b) Liquidity traders- Liquidity traders are investors who sell their shares without conducting an investigation about
the stock market and it’s trends.

c) Information traders- Information traders analyze their stocks before deciding on a buy or sell strategy. The
buying and selling decisions are based on the intrinsic value of shares where the intrinsic value of shares is
influenced through the supply and demand forces.

Weak form of EMH:

The following are the basic assumptions of the weak form of EMH
  The assumption behind the weak form of EMH is that current prices of various stocks generally reflect all
information found in the past prices and traded volumes.

 Future prices of stocks cannot be predicted by analyzing the prices from the past.

 In a weak form of EMH, short- term traders would earn a high and a positive return.

Tests adopted under the weak form of EMH:

 The filter rule:

Filters are generally used by short traders and speculators where the buying and selling decisions of investors are
taken only when there is a rise or a fall in prices of stocks within a specific range. For example, investors may take
decisions for a particular stock when price increases or decreases by 5 %. Generally, investors use filters ranging
from 0.5 % to 50 %.

 Runs test:

Runs test is used to find out whether a particular sequence of stock price movements has occurred by chance or there
is a consistency with regard to the movement of stock prices. A particular trend of stock prices is considered as a run
and an investor takes a buying or selling decision only when there are minimum runs of stock prices over a time
period.

 Serial correlation:

In a serial correlation, the correlation between the average stock prices for a time period of ‘t’ days and the average
stock prices for a time period of ‘t+1’ is being found out over different time periods.

Semi- strong form of EMH:

 The semi- strong form of EMH theory is based on the assumption that stock prices change or adjust rapidly
due to publicly available information regarding a particular company such as a bonus issue, rights issue,
mergers, acquisitions, etc.

For example, during January 2006 due to the merger between the companies NTPC SAIL Power Company Ltd and
Bhilai Electric Supply Company (BESCL) Pvt. Ltd, the share price of SAIL increased marginally from Rs. 54 to Rs.
55.40 on 12/01/2006 from 10/01/2006.

Strong form of EMH:

 In the strong form of EMH, the basic assumption is that stock prices of companies are not influenced by
information which is accessible by the public or the members of the stock exchange but they are influenced
by the stock market factors.

For example, o

n 3/10/2011, the 30-share BSE Sensex fell 318.69 points to 16,135.07, and the 50-share NSE Nifty slipped 97.05
points to 4,846.20. Due to the excessive selling of foreign investors which happened on 27/09/2011 and 28/09/2011.

2) The Random- Walk Theory:

  The basic assumption behind the random- walk theory is that successive changes in stock prices are always
independent of the previous change in the stock prices.

MARKET INEFFICIENCIES

 Market Inefficiencies refer to the abnormal return earned by an investor for the stocks of a particular
company. The following are some of the major reasons for market inefficiencies:

a) Low PE effect- A low price earnings which the company achieves during a specific time period.

b) Small firms effect- More number of small sized firms in a particular stock market index will provide only
minimum average market returns for investors over a particular time period.

c) The weekend effect- The influence of increased buying and selling of investors during the weekend on the stock
prices at the beginning of the first trading day of the next week.

Unit 5
1. Explain about Meaning of Portfolio Management:

 Portfolio Management- refers to the process of an investor selecting specific investment option or a
collection of investments schemes for the purpose of diversifying and minimizing risk over a time period.

 An investor can create a portfolio through various investment options like shares, bonds, mutual funds, etc.

Steps involved in the process of portfolio management:

1) Portfolio construction
 2) Portfolio selection

3) Portfolio analysis

4) Portfolio evaluation

5) Portfolio Revision

1) Portfolio Construction:

 Portfolio construction refers to the process of choosing the right kind of investment alternatives by the
investor for the purpose of maximizing returns over the different investment alternatives.

METHODS OR APPROACHES OF PORTFOLIO CONSTRUCTION:

i) The Traditional approach:

 The traditional approach of portfolio construction deals with the following two major decisions of
investors:

a) Determining the objectives of the portfolio

b) Selection of securities to be included in the portfolio through

 Analysis of constraints of the investor- consideration of financial constraints of the investor

 Income needs of investors- the level of regular income of investors

 Liquidity of the portfolio- the scope of the investor to sell his portfolio investments at a high price.

 Safety of the principal

 Time horizon

 Tax consideration

 The patience of investors

The traditional approach consists of performing the following steps:

Selection of Portfolio:

 An investor selects his portfolio based on the following objectives:

a) Investment objectives and asset mix

b) Growth of income and the asset mix

c) Safety of principal and the asset mix

d) Capital Appreciation and asset mix

e) Risk and return analysis

f) Diversification
ii) Modern approach:

 In the modern approach, importance is placed by investors on getting effective returns and income on
common stocks of companies than the bond portfolio.

MANAGING THE PORTFOLIO

 In managing portfolios, an investor can adopt either an active approach or a passive approach.

 In an active approach, an investor continuously makes an assessment of risk and return of the securities and
makes changes accordingly.

 In a passive approach, an investor would maintain the percentage allocation for various asset classes and
keep the security holdings within its place over an established holding period. In a passive approach, an
investor would maintain the percentage allocation of money for various asset classes over the holding
period.

2. NARRATE THE PORTFOLIO SELECTION AND IT’S THEORIES

1) Markowitz Portfolio theory or Simple Diversification theory:

Objectives of Markowitz Portfolio theory:

 To minimize the portfolio variances and to provide a simple diversification of assets.

 Addition of different type of assets to reduce the total risk for the investor.

Assumptions of the Markowitz Portfolio theory:

i) The investor estimates his risk on the basis of variability of returns.

ii) Investor decisions are based on expected returns of investors

iii) For a given level of risk, the investor prefers a higher return than a lower return. Similarly, for a given level of
return, the investor prefers low risk than high risk.

3. Concepts of the Markowitz Portfolio Theory:

a) Markowitz Efficient Frontier

 Markowitz Efficient Frontier- it measures the risk and return of all possible portfolios simultaneously for an
investor at any given point of time and the efficient frontier of Markowitz is identified.

b) Utility analysis

It refers to the maximum possible utility of return for a given level of risk.

c) Leveraged Portfolios

 In a leveraged portfolio, riskless assets are not included by the investor in his portfolio. Borrowed
investments are not selected by the investor.

 No default of risk and principal payment is undertaken by the investor.

2) Sharpe’s Index Model:

Assumptions of the Sharpe’s Index Model

i) Investors purchase a combination of stocks that provide them the highest return and the lowest risk.

ii) The second assumption is that the basic underlying factors relating to stock markets influence the stocks and the
market movements.

CONCEPTS UNDER THE SHARPE’S INDEX MODEL:

a) Sharpe’s corner portfolio:

In a Sharpe’s corner portfolio, an investors selects the portfolio which provides them the minimum risk and
return combination .

b) Sharpe’s Optimal Portfolio:

In the case of Sharpe’s optimal portfolio, an investor takes a decision after considering factors such as the risk- free
rate of return, the expected change of return in stocks beyond investor’s expectation which is also known as the
market risk.

5. SHARPE’S SINGLE INDEX MODEL:

 The Sharpe’s Single Index Model is based on the assumption that stock prices or bond prices always move
along with the stock market index.

6. EXPLAIN ABOUT PORTFOLIO ANALYSIS:

 After constructing and selecting the portfolio, an investor analyses his portfolio for the purpose of finding
out whether his investments in the portfolio would be profitable or not.

THEORIES OF PORTFOLIO ANALYSIS:

1) Capital Asset Pricing Theory or Capital Asset Pricing Model:

Assumptions of the Capital Asset Pricing Theory:

 A single individual, that is, a buyer or a seller cannot influence the price of a stock or a bond.

 Decisions are taken by investors on the basis only on the basis of expected returns, standard deviation and
co variances of all securities in a portfolio.

 Investors have homogeneous expectations during the decision- making period.

 Increasing buying of stocks or bonds will negatively influence the stock prices of companies.

 There is no transaction costs involved in the buying and selling of stocks and bonds.

 There is no personal income tax paid by investors.

CONCEPTS UNDER THE CAPM THEORY:

Security Market Line or the Capital Market Line (SML or CML):

  The risk- return relationship of an efficient portfolio is measured by the capital market line.

 In a security market line analysis, inefficient portfolios generally fall below the capital market line and the
risk- return relationship cannot be identified for such portfolios with the help of the Capital Market Line.

Market Imperfection and SML:

 Imperfection- refers to the information regarding the share price and the market conditions may not be
immediately to all investors simultaneously.

 Imperfect information may affect the valuation of securities.

2) The Arbitrage Pricing Theory:

 Arbitrage- is the process of profits earnings by investors by taking advantage of differential pricing for the
same asset.

 In a stock market or a bond market situation, selling at a high price and simultaneously purchasing the same
security at a lower price provides an arbitrage profit to investors.

Assumptions of the Arbitrage Pricing Theory:

i) Investors have homogeneous expectations.

ii) The investors are risk averse and are willing to utilize maximum return for a given level of risk.

iii) Perfect competition prevails in the market and there is no transaction costs and taxation costs involved.

7. PORTFOLIO EVALUATION

 The evaluation of a portfolio provides a feedback about the performance of the portfolio for the portfolio
managers as well as the investors.

Methods of Portfolio Evaluation:

1) Sharpe’s Performance Index:

 The Sharpe’s index measures the influence of risk premium of a portfolio on the total risk which is
undertaken by the investor on his portfolio.

2) Treynor’s Performance Index:

 The Treynor’s Performance Index measures the influence of the risk premium of the portfolio on the total
market risk of the portfolio.

3) Jensen’s Performance Index:

 The Jensen’s Performance Index is measured by considering the factor of prediction of the portfolio
manager on the return of the portfolio. The index value is calculated by considering the predictive value of
the portfolio manager, the market risk and the difference between the average market return and the
investor’s expected return.

8. SHOOT OUT ABOUT PORTFOLIO REVISION

  An investor, after constructing and selecting his portfolio, should have the skill and competence to revise
his portfolio.

 The portfolio held by the investor needs frequent changes in the composition of the stocks and bonds.

 In a portfolio, the type of securities held by the investor, is revised according to the portfolio policy.

 If the policy of the investor shifts from earnings to capital appreciation, the stocks shall be revised
accordingly.

Methods of Portfolio Revision:

1) Passive Management method:

 Passive management method is a process of holding a well diversified portfolio for a long term with the
objective of buying and holding stocks.

 In the case of the passive management approach, the portfolio manager guides the investor to buys stock in
proportion to the number of stocks which are outstanding for a particular company in the stock market
index.

2) Active Management Method:

 Active Management method refers to the investor holding securities based on the forecast about the future.
The portfolio managers, who guide investors under this method, are called as ‘market timers’.

3) Formula Plans:

 Formula plans provide the basic rules and regulations for investors for the purchase and sale of securities.
The initial portfolio investment of the investor is based on some factors or criteria where effective portfolio
decisions are taken on the basis of these factors.

Assumptions of the formula plan:

i) The first assumption is that investors always invest minimum percentage of funds is allotted towards fixed income
securities and common stocks.

ii) The second assumption is that if the market moves higher, the proportion of stocks in the portfolio may either
decline or remain constant.

iii) The third assumption is that stocks are bought and sold whenever there is a significant change in the price of
stocks.

Methods of formula plans:

a) Rupee Cost averaging- In the case of rupee cost averaging, investors buy stocks in large numbers regularly to
avoid risks due to continuous fluctuation of stock prices.

b) Constant Rupee plan- In the case of a constant rupee plan, investors buy and sell on the basis of increasing or
decreasing stock prices. Investors sell when the prices are high and buy stocks when the prices are low.

c) Constant Ratio Plan- In a constant ratio plan, the investor maintains a constant ratio of investments between bonds
and stocks in the portfolio.
d) Variable Ratio Plan- According to the variable ratio plan, the investments in bonds and stocks depend on the
varying levels of market price of stocks.

9. LIST THE VARIOUS CONCEPTS ABOUT MUTUAL FUNDS

A mutual fund is a professionally managed type of collective investment scheme that pools money from
many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities
Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue
Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk
startup companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your
investment criteria and style is important.

Types and Schemes of Mutual Funds.

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and
return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

 By Structure
o Open - Ended Schemes
o Close - Ended Schemes
o Interval Schemes
 By Investment Objective
o Growth Schemes

Schemes

o Balanced Schemes
o Money Market Schemes
 Other Schemes
o Tax Saving Schemes
o Special Schemes
 Index Schemes
 Sector Specific Schemes

Value stocks

Stocks from firms with relative low Price to Earning (P/E) Ratio usually pay good dividends. The investor is looking
for income rather than capital gains.

Growth stock

Stocks from firms with higher low Price to Earning (P/E) Ratio usually pay small dividends. The investor is looking
for capital gains rather than income.

Based on company size, large, mid, and small cap

Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid
and below $1 Billion for small.
Income stock

The investor is looking for income which usually comes from dividends or interest. These stocks are from firms
which pay relative high dividends. This fund may include bonds which pay high dividends. This fund is much like
the value stock fund, but accepts a little more risk and is not limited to stocks.

Index funds

The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poor's.
The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following.

Enhanced index

This is an index fund which has been modified by either adding value or reducing volatility through selective stock-
picking.

Stock market sector

The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc.

Defensive stock

The securities in this fund are chosen from a stock which usually is not impacted by economic down turns.

International

Stocks from international firms.

Real estate

Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc.

Socially responsible

This fund would invest according to non-economic guidelines. Funds may make investments based on such issues as
environmental responsibility, human rights, or religious views. For example, socially responsible funds may take a
proactive stance by selectively investing in environmentally-friendly companies or firms with good employee
relations. Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling,
pornography etc.

Balanced funds

The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore
the fund is a balance between various attributes desired.

Tax efficient
Aims to minimize tax bills, such as keeping turnover levels low or shying away from companies that provide
dividends, which are regular payouts in cash or stock that are taxable in the year that they are received. These funds
still shoot for solid returns; they just want less of them showing up on the tax returns.

Convertible

Bonds or Preferred stock which may be converted into common stock.

Junk bond

Bonds which pay higher that market interest, but carry higher risk for failure and are rated below AAA.

Mutual funds of mutual funds

This funds that specializes in buying shares in other mutual funds rather than individual securities.

Closed end

This fund has a fixed number of shares. The value of the shares fluctuates with the market, but fund manager has
less influence because the price of the underlining owned securities has greater influence.

Exchange traded funds (ETFs)

Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar to mutual funds, except that
they trade the same way that a stock trades, on a stock exchange.

Mutual Funds in India- Developing, Launching and Computation and Relevance of NAV.

Offshore Mutual Funds

Offshore mutual funds are mutual funds that are based in and managed from jurisdictions outside of the
investor's home country. These types of investments can offer investors access to international markets and major
exchanges. In order to qualify as an offshore fund, a mutual fund must be incorporated in a foreign location. The
fund must also be intended to be used by investors who are not residents of the fund’s jurisdiction.

Money Market Mutual Fund

An open-end mutual fund which invests only in money markets. These funds invest in short term (one day to
one year) debt obligations such as Treasury bills, certificates of deposit, and commercial paper. The main goal is the
preservation of principal, accompanied by modest dividends.