CHAPTER 1: INTRODUCTION

WHAT IS INVESTMENT ANALYSIS?

Investment analysis is a broad term encompassing many different aspects of evaluating
financial assets, sectors, and trends. It can include analysing past returns to predict
future performance, selecting the type of investment instrument that best suits an
investor's needs, or evaluating securities such as stocks and bonds, or a category of
securities, for risk, yield potential or price movements.
Investment analysis is a key to any sound portfolio management strategy.

HOW INVESTMENT ANALYSIS WORKS

Investment analysis can help determine how an investment is likely to perform and how
suitable it is for a given investor. Key factors in investment analysis include entry price,
expected time horizon for holding an investment, and the role the investment will play
in the portfolio.
In conducting an investment analysis of a mutual fund, for example, an investor looks at
factors such as how the fund performed compared to its benchmark or peers. Peer fund
comparison includes investigating the differences in performance, expense ratios,
management stability, sector weighting, investment style, and asset allocation.
In investing, one size does not always fit all. Just as there are many different types of
investors with varying goals, time horizons, and incomes, there are also securities that
match best within those individual perimeters. An older investor may be more risk-
averse than a young one who is just beginning to save for retirement.

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Investment analysis can also involve evaluating an overall investment strategy, in terms
of the thought process that went into making it, needs and financial situation at the time,
how decisions affected a portfolio's performance and the need for correction or
adjustment if any.
Investors who are not comfortable doing their investment analysis can seek advice from
an investment advisor or another financial professional.

INVESTMENT PROCESS
An organized view of the investment process involves analysing the basic nature of
investment decisions and organizing the activities in the decision process.
Investment process is governed by the two important facets of investment they are risk
and return. Therefore, we first consider these two basic parameters that are of critical
importance to all investors and the trade-off that exists between expected return and
risk.
Given the foundation for making investment decisions the trade-offbetween expected
return and risk- we next consider the decision process in investments as it is typically
practiced today. Although numerous separate decisions must be made, for
organizational purposes, this decision process has traditionally been divided into a two-
step process: security analysis and portfolio management. Security analysis involves the
valuation of securities, whereas portfolio management involves the management of an
investor’s investment selections as a portfolio (package of assets), with its own unique
characteristics.
Security Analysis:
Raditional investment analysis, when applied to securities, emphasizes the projection of
prices and dividends. That is, the potential price of a firm’s common stock and the
future dividend stream are forecasted, and then discounted back to the present. This
intrinsic value is then compared with the security’s current market price. If the current
market price is below the intrinsic value, a purchase is recommended, and if vice versa
is the case sale is recommended. Although modern security analysis is deeply rooted in

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the fundamental concepts just outlined, the emphasis has shifted. The more modern
approach to common stock analysis emphasizes return and risk estimates rather than
mere price and dividend estimates.
Portfolio Management:
Portfolios are combinations of assets. In this text, portfolios consist of collections of
securities. Traditional portfolio planning emphasizes on the character and the risk
bearing capacity of the investor. For example, a young, aggressive, single adult would
be advised to buy stocks in newer, dynamic, rapidly growing firms. A retired widow
would be advised to purchase stocks and bonds in old-line, established, stable firms,
such as utilities.
Modern portfolio theory suggests that the traditional approach to portfolio analysis,
selection, and management may yield less than optimum results. Hence a more
scientific approach is needed, based on estimates of risk and return of the portfolio and
the attitudes of the investor toward a risk-return trade-off stemming from the analysis of
the individual securities.

CHARACTERISTICS OF INVESTMENT
The characteristics of investment can be understood in terms of as
- Return,
- Risk,
- Safety,
- Liquidity etc.
1) Return: All investments are characterized by the expectation of a return. In fact,
investments are made with the primary objective of deriving return. The expectation of
a return may be from income (yield) as well as through capital appreciation. Capital
appreciation is the difference between the sale price and the purchase price. The

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expectation of return from an investment depends uponthe nature of investment,
maturity period, and market demand and so on.
2) Risk: Risk is inherent in any investment. Risk may relate to loss of capital, delay in
repayment of capital, non-payment of return or variability of returns. The risk of an
investment is determined by the investments, maturity period, repayment capacity,
nature of return commitment and so on. Risk and expected return of an investment are
related. Theoretically, the higher the risk, higher is the expected returned. The higher
return is a compensation expected by investors for their willingness to bear the higher
risk.
3) Safety: The safety of investment is identified with the certainty of return of capital
without loss of time or money. Safety is another feature that an investor desires from
investments. Every investor expects to get back the initial capital on maturity without
loss and without delay.
4) Liquidity: An investment that is easily saleable without loss of money or time is said to
be liquid. A well-developed secondary market for security increases the liquidity of the
investment. An investor tends to prefer maximization of expected return, minimization
of risk, safety of funds and liquidity of investment.
INVESTMENT CATEGORIES:
Investment generally involves commitment of funds in two types of assets:
 Real assets: Real assets are tangible material things like building, automobiles,Land,
gold etc.
 Financial assets: Financial assets are piece of paper representing an indirectclaim to
real assets held by someone else. These pieces of paper represent debt or equity
commitment in the form of IOUs or stock certificates. Investments in
Financial assets consist of –
 Securitised (i.e. security forms of) investmentNon-securities investment

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The term ‘securities’ used in the broadest sense, consists of those papers which are
quoted and are transferable. Under section 2 (h) of the SecuritiesContract (Regulation)
Act, 1956 (SCRA) ‘securities’ include:
 Shares., scrip’s, stocks, bonds, debentures, debenture stock orOther marketable
securities of a like nature in or of any incorporated company orother body corporate.
 Government securities.
 Such other instruments as may be declared by the central
 Government as securities, and,
 Rights of interests in securities.
Therefore, in the above context, security forms of investments include Equity shares,
preference shares, debentures, government bonds, Units of UTI and other Mutual
Funds, and equity shares and bonds of Public Sector Undertakings (PSUs). Non-security
forms of investments include all those investments, which are not quoted in any stock
market and are not freely marketable. viz., bank deposits, corporate deposits, post office
deposits, National Savings and other small savings certificates and schemes, provident
funds, and insurance policies. Another popular investment in physical assets such as
Gold, Silver, Diamonds, Real estate, Antiques etc. Indian investors have always
considered the physical assets to be very attractive investments. There are a large
number of investment avenues for savers in India. Some of them are marketable and
liquid, while others are non-marketable;some of them are highly risky while some
others are almost risk less. The investor has to choose proper avenues from among
them, depending on his specific need, risk preference, and return expectation.
Investment avenues can be broadly categorized under the following heads:
1. Corporate securities
 Equity shares .Preference shares
 Debentures/Bonds . GDRs /ADRs
 Warrants . Derivatives
2. Deposits in banks and non-banking companies
3. Post office deposits and certificates
4. Life insurance policies
5. Provident fund schemes

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6. Government and semi government securities

7. Mutual fund schemes
8. Real assets
1) Corporate securities
Joint stock companies in the private sector issue corporate securities. These include
equity shares, preference shares, and debentures. Equity shares have variable dividend
and hence belong to the high risk high return category; preference shares and debentures
have fixed returns with lower risk. The classification of corporate securities that can be
chosen as investment avenues can be depicted as shown below.
 Equity Shares-: By investing in shares, investors basically buy the ownership right to
that company. When the company makes profits, shareholders receive their share of the
profits in the form of dividends. In addition, when a company performs well and the
future expectation from the company is very high, the price of the company’s shares
goes up in the market. This allows shareholders to sell shares at profit, leading to capital
gains. Investors can invest in shares either through primary market offerings or in the
secondary market. Equity shares can be classified in different ways but we will be using
the terminology of Investors. It should be noted that the line of demarcation between the
classes are not clear and such classification are not mutually exclusive.

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

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A safe, liquid, and convenient investment option, a savings bank account is an ideal
investment avenue for setting aside funds for emergencies or unexpected expenses.
Investors may prefer to keep an average balance equal to three months of their living
expenses. A bank fixed deposit is recommended for those looking for preservation of
capital along with current income in the short term. However, over the long-term the
returns may not keep pace with inflation.
4) Company Fixed Deposits:
Many companies have come up with fixed deposit schemes to mobilize money for their
needs. The company fixed deposit market is a risky market and ought to be looked at
with caution. RBI has issued various regulations to monitor the company fixed deposit
market. However, credit rating services are available to rate the risk of company fixed
deposit schemes. The maturity period varies from three to five years. Fixed deposits in
companies have a high risk since they are unsecured, but they promise higher returns
than bank deposits. Fixed deposit in non-banking financial companies (NBFCs) is
another investment avenue open to savers. NBFCs include leasing companies, hire
purchase companies, investment companies, chit funds, and so on. Deposits in NBFCs
carry higher returns with higher risk compared to bank deposits.

5) Post Office Deposits and Certificates:

The investment avenues provided by post offices are non-marketable. However, most of
the savings schemes in post offices enjoy tax concessions. Post offices accept savings
deposits as well as fixed deposits from the public. There is also a recurring deposit
scheme that is an instrument of regular monthly savings.
National Savings Certificates (NSC) is also marketed by post office to investors. The
interest on the amount invested is compounded half-yearly and is payable along with the
principal at the time of maturity, which is six years from the date of issue. There are a
variety of post office savings certificates that cater to specific savings and investment
requirements of investors and is a risk free, high yielding investment opportunity.
Interest on these instruments is exempt from income tax. Some of these deposits are
also exempt from wealth tax.

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6) Life Insurance Policies:

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

TYPES OF RISK
Thus far, our discussion has concerned the total risk of an asset, which is one important
consideration in investment analysis. However modern investment analysis categorizes
the traditional sources of risk identified previously as causing variability in returns into
two general types: those that are pervasive in nature, such as market risk or interest rate
risk, and those that are specific to a particular security issue, such as business or
financial risk. Therefore, we must consider these two categories of total risk. The
following discussion introduces these terms. Dividing total risk in to its two
components, a general (market) component and a specific (issue ) component, we have
systematic risk and unsystematic risk which are additive:
Total risk = general risk + specific risk
= market risk + issuer risk
= systematic risk + non-systematic risk
 Systematic risk: Variability in a securities total return that is directly associated with
overall moment in the general market or economy is called as systematic risk. This risk
cannot be avoided or eliminated by diversifying the investment. Normally
diversification eliminates a part of the total risk the left over after diversification is the
non-diversifiable portion of the total risk or market risk. Virtually all securities have
some systematic risk because systematic risk directly encompasses the interest rate,

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market and inflation risk. The investor cannot escape this part of the risk, because no
matter how well he or she diversifies, the risk of the overall market cannot be avoided.
If the stock market declines sharply, most stock will be adversely affected, if it rises
strongly, most stocks will appreciate in value. Clearly mark risk is critical to all
investors.
 Non-systematic risk: Variability in a security total return not related to overall market
variability is called un systematic (non market) risk. This risk is unique to a particular
security and is associated with such factors as business, and financial risk, as well as
liquidity risk. Although all securities tend to have some non-systematic risk, it is
generally connected with common stocks.
Key Takeaways
 Investment analysis involves researching and evaluating securities to determine their
future performance and their suitability, given an investor's needs, goals and risk
tolerance.
 Investment analysis can also involve evaluating an overall financial or portfolio strategy.
 Types of investment analysis include bottom-up, top-down, fundamental, and technical.
Choice is required to be made amongst available alternative revenues for investments.
As such investment decisions are concerned with the choice of acquiring real assets
over the time period in a productive process.Holding of stocks of materials is
unavoidable for smooth running of a business. The expenditure on stocks comes in the
category of investments.
1) Strategic Investment Expenditure: In this case, the firm makes investment decisions
in order to strengthen its market power. The return on such investment will not be
immediate.
2) Modernisation Investment Expenditure:In this case, the firm decides to adopt a new
and better technology in place of the old one for the sake of cost reduction. It is also
known as capital deepening process.
3) Expansion Investment on a New Business: In this case, the firm decides to start a new
business or diversify into new lines of production for which a new set of machines are
to be purchased.
4) Replacement Investment:In this category, the firm takes decisions about the
replacement of worn out and obsolete assets by new ones.

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5) Expansion Investment: In this case, the firm decides to expand the productive capacity
for existing products and thus grows further in a uni-direction. This type of investment
is also called capital widening.
TYPES OF INVESTMENT ANALYSIS
While there are countless individual ways to analyse securities, sectors, and the markets,
investment analysis can be divided into a few different categories.
 Top-Down vs. Bottom-Up
When making investment decisions, investors can use a bottom-up investment analysis
approach or top-down approach. Bottom-up investment analysis entails analysing
individual stocks for their merits, such as valuation, management competence, pricing
power, and other unique characteristics of the stock and underlying company. Bottom-
up investment analysis does not focus on economic cycles or market cycle’sfirst-hand
for capital allocation decisions. Instead, it aims to find the best companies and stocks
regardless of the overarching economic, market, or particular industry macro trends. In
essence, bottom-up investing takes more of a microeconomic—small scale
economic—approach to investing rather than a large scale, national economy or
global—macroeconomic—approach.
The macroeconomic approach is a hallmark of top-down investment analysis. It
emphasizes economic, market, and industry trends before making a more granular
investment decision to allocate capital to specific companies. An example of a top-down
approach is an investor evaluating different company sectors and finding that financials
will likely perform betterthan industrials. As a result, the investor decides the
investment portfolio will be overweight financials and underweight industrials. They
then proceed to find the best stocks in the financial sector. On the contrary, a bottom-up
investor may have found that an industrial company made for a compelling investment
and allocated a significant amount of capital to it even though the outlook for its broader
industry was negative.
 Fundamental vs. Technical Analysis
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Other investment analysis methods include fundamental analysis and technical analysis.
The fundamental analysis stresses evaluating the financial health of companies as well
as economic outlooks. Practitioners of fundamental analysis seek stocks they believe the
market has mispriced—trading at a price lower than that warranted by their companies'
intrinsic value. Often encompassing bottom-up analysis, these investors will evaluate a
company's financial soundness, future business prospects, dividend potential, and
economic moat to determine whether they will make satisfactory investments.
Proponents of this style include Warren Buffettand his mentor, Benjamin Graham. 
The technical analysis stresses evaluating patterns of stock prices and statistical
parameters, via computer-calculated charts and graphs. Unlike fundamental analysts,
who attempt to evaluate a security's intrinsic value, technical analysts focus on patterns
of price movements, trading signals, and various other analytical charting tools to
evaluate a security's strength or weakness. Day traders make frequent use of technical
analysis in devising their strategies and timing their positions' entrances and exits.
 Real-World Example of Investment Analysis
Research analysts constantly release investment analysis reports on individual
securities, asset classes, and market sectors, evaluating the outlook and recommending a
buy, sell, or hold the position on the sector. For example, on March 28, 2019, Charles
Schwab issued an analysis of consumer staples equities. The report takes a
macroeconomic approach, looking at various positive and negative political and
economic developments that could influence the sector. They looked at retailer cost-
cutting efforts, the increase in merger and acquisitions (M&A), trade disputes, and
geopolitical anxieties. The analyst's then assigned an overall neutral assessment rating
of "market performs." This neutral rating basically means the subject of the analysis
should provide returns in line with that of the S&P 500.
These days almost everyone is investing in something… even if it’s a savings account at
the local bank or a checking account the earns interest or the home they bought to live
in.
However, many people are overwhelmed when they being to consider the concept of
investing, let alone the laundry list of choices for investment vehicles. Even though it
may seem the everyone and their brothers knows exactly who, what and when to invest
in so they can make killing, please don’t be fooled. Majorities of investor typically jump

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on the latest investment bandwagon and probably don’t know as much about what’s out
there as you think.
Before you can confidently choose an investment path that will help you achieve your
personal goals and objectives, it’s vitally important that you understand the basics about
the types of investments available. Knowledge is your strongest ally when it comes to
weeding out bad investment advice and is crucial to successful investing whether you
go at it alone or use a professional.
The investment option before you are many. Pick the right investment tool based on the
risk profile, circumstance, time available etc. if you feel the market volatility is
something, which you can live with then buy stocks. If you do not want risk, the
volatility and simply desire some income, then you should consider fixed income
securities. However, remember that risk and returns are directly proportional to each
other. Higher the risk, higher the returns.
Savings and Investments form an integral part of one’s life. Investments refer to the
employment of funds with an objective of earning a favourable return on it. In other
words, investment is a process, where money is being utilized with a hope of making
more money.
Investment is the commitment of money that have been saved by deferring the
consumption and purchasing an asset, either real or financial with an expectation that it
could yield some positive future returns.
There is a plethora of investment avenues, each associated with varied risk-return trade-
offs. Every investment avenue is distinct in its characteristic, which makes the
investment decision fascinating.
The investor thus needs to carefully analyse each of its characteristics and build a basket
of assets that suits his risk profile and complies with his objectives and goals. Hence,
investment decision making is a fascinating task to the investor.
There are different categories of investors. The investment strategies differ from each
other, with regard to size of the investment, time-period, objectives, risk appetite etc.
The investors can be classified into,

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 Individual investors
 Corporate
 Institutional investors
 Domestic and Foreign
 Pension Funds
 Government
According to Babylonian Talmud, any person should always segregate his wealth
into three portions, namely,
 One-third in land
 One-third in commerce
 One-third retained in his own hands
The sages of the Talmud suggested, what is possibly the world’s first diversified
investment portfolio, and despite the vicissitudes of fifteen hundred years their device is
not without merit even today. A formal statement of investment management through
risk diversification and portfolio selection, however, did not become available until the
1950’s when Harry Markowitz and James Tobin published their pioneering studies –
 “Portfolio Selection”, Journal of Finance, VII in March 1952 by H M Markowitz – New
York
 “Liquidity Preference as Behaviour towards Risk”, Review of Economic Studies, XXVI
in February 1958 by James Tobin
These studies were basically an attempt to explain in a systematic manner, why for
almost two millennia, most investors have been following the advice implied in the
Talmudic dictum.
Such attempts, following Markowitz, are usually classified as belonging to the theory
of portfolio selection. Portfolio theory, like most economic theories, has two distinct
aspects,
 Viewed as a positive theory, it attempts to explain and predict phenomena in capital
markets
 Viewed as a normative theory or as an art, it sets out criteria concerning the way in
which investment decisions should be made and stipulates the rules for attaining desired
ends

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The above distinction was possible as a result of efforts put in by John Neville Keynes,
the distinguished Victorian logician and political economist.
The Indian economy is growing at a faster pace, which has resulted in higher disposable
income level and a plethora of investment avenues. There are numerous options like,
Government savings deposits, banks, NBFCs and mutual fund houses are vying for a
share in the savings of investors. Investors now have wide-ranging options for making
investments like equity, debt, mutual funds, gold etc. (Kathuria 2012: 45-56).
Investment is defined as a commitment of funds made in the expectations of some
favourable rate of return. If the investment exercise is properly undertaken, the return
will be corresponding with the risk the investor assumes. (Fischer 2008: 2)
Investment is an acquisition of a financial product or other item of value with an
anticipation of favourable future returns. Investing is a serious subject that can have a
major impact on investors’ future well-being. Investors have series of investment
avenues and each of them differ in terms of risk, return, safety, security, regular income
and various other parameters. The investor has to choose proper investment avenue,
depending upon his specific need, risk preference and expected returns. (Kothari 2013 :
476-480)
Investment has got two attributes – time and risk. The sacrifice takes place in the
present and is certain. The reward to be received in future is generally uncertain. In
some cases, the time element dominates, as in case of government securities. Either time
or risk or both are important. (F Sharpe W et al. 1996)
Investment decision-making process is concerned with how an investor should proceed
in making a decision about what marketable securities to invest in, how extensive an
investment should be and when the investment should be made. Investment is a
sacrifice of current rupees for future rupees. Investors’ investment pattern has witnessed
a metamorphic change and this change can be attributed to changing scenario of
investment alternatives available. Investors have started investing more in modern
financial products like equity, mutual funds, ULIPs than the ordinary financial product
like term deposits, post office deposits, etc. (Warne 2012 : 1)

TYPES OF INVESTMENT OPTIONS

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A brief preview of different investment options is given below:

1) Equities: Investment in shares of companies is investing in equities.Stocks can be

brought/sold from the exchanges (secondary market) or via IPO’s – Initial Public
Offerings (primary market). Stocks are the best long-term investment options wherein
the market volatility and the resultant risk of losses, if given enough time, are mitigated
by the general upward momentum of the economy. There are two streams of revenue
generation from this from of investment.
 Dividend: Periodic payments made out of the company’s profits are termed as
dividends.
 Growth: The price of the stock appreciates commensurate to the growth posted by the
company resulting in capital appreciation.
 On an average an investment in equities in India has a return of 25%. Good portfolio
management, precise timing may ensure a return of 40% or more. Picking the right
stock at the right time would guarantee that your capital gains i.e. growth in market
value of stock possessions, will rise.

2) Bonds: It is a fixed income (debt) instrument issued for a period of more than one year
with the purpose of raising capital. The central or state government, corporations and
similar institutions sell bonds. A bond is generally a promise to repay the principal
along with fixed rate of interest on a specified date, called as the maturity date. Other
fixed income instruments include bank deposits, debentures, preference shares etc.The
average rate of return on bond and securities in India has been around 10-13% p.a.

3) Mutual Fund: These are open and close-ended funds operated by an investment
company, which raises money from the public and invests in a group of assets, in
accordance with a stated set of objectives. It is a substitute for those who are unable to
invest directly in equities or debt because of resource, time or knowledge constraints.
Benefits include diversification and professional money management. Shares are issued
and redeemed on demand, based on the funs net asset value, which is determined at the
end of each trading session. The average rate of return as a combination of all mutual
funds put together is not fixed but is generally more than what earn is fixed deposits.
However, each mutual fund will have its own average rate of return based on several

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schemes that they have floated. In the recent past, Mutual Funs have given a return of
18 – 35%.
4) Real Estate: For the bulk of investors the most important asset in their portfolio is a
residential house. In addition to a residential house, the more affluent investors are
likely to be interested in either agricultural land or may be in semi-urban land and the
commercial property.
5) Precious Projects: Precious objects are items that are generally small in size but highly
valuable in monetary terms. Some important precious objects are like the gold, silver,
precious stones and also the unique art objects.

6) Life insurance: In broad sense, life insurance may be reviewed as an investment.

Insurance premiums represent the sacrifice and the assured the sum the benefits. The
important types of insurance policies in India are:
 Endowment assurance policy.
 Money back policy.
 Whole life policy.
 Term assurance policy.
 Unit-linked insurance plan.

EQUITY INVESTMENT
Stocks are investments that represent ownership or equity in a corporation. When you
buy stocks, you have an ownership share however small in that corporation and are
entitled to part of that corporation’s earnings and assets. Stock investors called
shareholders or stockholders make money when the stock increases in value or when the
company the issued the stock pays dividends, or a portion of its profits, to its
shareholders.
Some companies are privately held, which means the shares are available to a limited
number of people, such as the company’s founders, its employees, and investors who
fund its development. Other companies are publicly traded, which means their shares
are available to any investor who wants to buy them.
1. The IPO

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A company may decided to sell stock to the public for a number of reasons such as
providing liquidity for its original investor or raising money. The first time a company
issues stock is the initial public offering (IPO), and the company receives the proceeds
from that sale. After that, shares of the stock are treaded, or brought and sold on the
securities markets among investors, but the corporation gets no additional income.