SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT
- Prof. SAMIDHA ANGNE
List of Topics
Lecture Topic
1 Basics of Investment
2 Financial Markets
3 Fixed Income Securities
4 Fixed Income Securities
5 Fixed Income Securities
6 Fixed Income Securities
7 Modern Portfolio Theory
8 Modern Portfolio Theory
9 Modern Portfolio Theory
10 Financial Analysis and Valuation
11 Financial Analysis and Valuation
12 Financial Analysis and Valuation
13 Investment Management
Internal Marks Out of 40

Name of Activity Marks

Attendance 10

Assignment 20

Midterm Test 10

Total 40
Defining Investment
•An investment is an asset or item acquired with the goal of
generating future income and / or appreciation in the
asset’s value. It is a monetary asset purchased with the idea
that the asset will provide income in the future or will later be
sold at a higher price for a profit.
Savings Account has Negative Returns
• Savings rate offered by various banks is around 3-4% p.a
• Inflation rate in India is on an average 5-6% measured with the help of Consumer Price Index
(CPI).
No.. Name of the item March 2023) Weightage in % Current YoY increase in
inflation (Combined)

1 Food and Beverages 54.18 6.71

2 Pan, tobacco and intoxicants 3.26 1.78

3 Clothing and footwear 7.36 9.91

4 Fuel and Light 7.94 11.76

5 Miscellaneous 27.26 5.91

100 5.8%

Source :- http://www.mospi.gov.in/ (Ministry of Statistics and Programme Implementation)

SAVINGS VS INVESTING
SAVINGS INVESTING

Safe – Little chance for loss of principle Risky – Chance of loss as well as gain

Low return on Investment – low interest rates Higher return on investment – chance for
appreciation and income

Use for – emergency funds and goals to be Use for – goals longer than 5 years, or also
completed in less than 3 years retirement

Liquid – easy to turn into cash with little or no loss Less liquid – marketable but may lose principle.
of principle

Savings Bank account, Fixed Deposit account Stocks, Bonds, Mutual Funds, Real estate
investment, Gold, businesses, Derivatives etc.
 Most Common Investment Options
•Fixed Deposits / Recurring Deposits
•Mutual Funds
•Stock Market
•Unit Linked Insurance Plans (ULIP)
•Retirement Planning Products
✔ Public Provident Fund (PPF)
✔National Pension Scheme (NPS)
•Fixed Income Securities (Corporate /
Government)
Cont.… Investment Avenues

•Real Estate or Real Estate Investment Trust (REIT)

•Art work / Jewellery / Foreign Currency
•Derivative Products
•Gold in various forms :- Physical, Digital, Gold, SGBs
Unit Linked Insurance Plans (ULIP)
• A ULIP plan is a combination of life insurance and investment. ULIPs requires the
policyholder to make regular premium payments, part of which is utilized to
provide life insurance coverage. The remaining is pooled with the assets received
from other policyholders, and then invested in financial instruments (i.e. equity
and debt), similar to mutual funds.
• It comes in E-E-E category. (tax deduction + no tax on returns earned during the
holding period + no tax on maturity value) but lock in for 5 years.
• ULIP premiums are deductible from the taxable income U/S 80C up to a
permissible limit which is currently ₹1.5 lakhs. The only condition is that the
premium amount should be less than or equal to 10% of the sum assured under the
ULIP. So, if the sum assured is ₹15 lakhs and the premium paid is under ₹1.5
lakhs, then the entire premium amount is allowed for deduction u/s 80C.
• There is no tax exemption for maturity proceeds of unit-linked insurance policies
(Ulips) with an annual premium above ₹2.5 lakh, according to the budget
provisions. The rules will apply for Ulips issued on or after 1 February 2021.
Aman a 30 year old working professional earning Rs 7 lakhs p.a
is confused between Investment in ULIP or Investment in
Mutual Fund. He can invest Rs 1,20,000 annually and is
looking for tax exemption as well as insurance coverage.
Kindly suggest best investment option.
•Tax Exemption u/s 80C up to Rs 1.5 lakhs. (ULIP or
ELSS)
•Insurance Coverage = 2O times of current annual
salary
= 20 X 7 lacs = 1 crore 40 lacs
Option I:- Investment in ULIP (3 in 1 product)
• Annual Premium = Rs 1,20,000
• Sum Assured = 10 X 1,20,000 = 12,00,000 (12 Lacs)
• Maturity Period = 20 years
• Premium payment period = 10 years
• Maturity Amount = Fund Value = 50 Lacs
• Therefore if he wants to Sum Assured for his family of Rs 1 crore, he
will have to pay annual premium of Rs 10 lakhs.
Option II – Term Insurance + ELSS Mutual
Fund / Wealth Creating Mutual Fund
• Investment Outlay = Rs 1,20,000
• Annual Premium for 50 years coverage for Rs 1 crore 40 lacs will be
around Rs 20,000 per year. ( 50 years X Rs 20,000 = 10 lacs ).
• Remaining 1,30,000 Rs he can invest in any ELSS Fund for long term
and can get average return of 15 – 20 %.
Public Provident Fund (PPF)
• Public Provident Fund (PPF) scheme is a long term investment option that offers an
attractive rate of interest and returns on the amount invested. The interest earned and
the returns are not taxable under Income Tax. One has to open a PPF account under
this scheme and the amount deposited during a year will be claimed under section
80C deductions.
• EEE Category Investment
• Interest is decided and published by the Government of India on quarterly basis.
• Lock in period 15 years
• The current interest rate is 7.1% p.a. (for the quarter I April to June 2023).
•  The net collections are invested in central and state government special securities.
Net collections are also invested in various public agencies like Food Corporation of
India and National Highways Authority of India as well. Interest payment to
subscribers of small savings schemes and cost of management constitute the
expenditure of the fund and interest on central government securities, state
government securities and loan advanced to public agencies forms the income of the
fund.
National Pension System (NPS)
• The NPS or National Pension System is a voluntary retirement scheme
through which you can create a retirement corpus or your old-age pension.
It’s managed by PFRDA (Pension Fund Regulatory and Development
Authority) and available to all Indian citizens.
• To provide choice, the NPS funds are regulated by the PFRDA, and 7
pension fund companies are managing the schemes. These entities actively
manage the four different types of asset classes permitted by the regulator as
per the investment guidelines provided.
• Within the available asset classes, NPS subscribers can opt for active or auto
choice for asset allocation. In the active choice, the subscriber decides how
much money gets invested in each asset class
• While in automatic choice, asset allocation gets determined based on the
subscriber’s age. There are advantages under both options, and the choice
should be based on how much you feel confident to manage the allocation
on your own. Given the long-term nature of the NPS, there is the flexibility
to move between the two variants. However, one needs to exercise choice in
advance and only once in a financial year.
Comparison of PPF vs NPS
Public Provident Fund (PPF)
Government backed scheme
No Age restrictions, even minor can open PPF
account with their guardians
Lock in period = 15 years
Minimum amount = Rs 500
More safety and Assurity as backed by the
Government
Fixed returns, set quarterly by the govt
Investment upto Rs 1.5 lakhs is exempt from tax
Comes under EEE Category
Entire corpus can be withdrawn without paying
tax
National Pension System (NPS)
Market dependent pension savings scheme
Min Age = 18 years and max – 65 years
Lock in period = Till 60 years of age
Minimum amount is = Rs 1000 per year
Market driven returns and hence little risky compared to
PPF
Returns vary depending on funds performance
Investment upto Rs 2 lakhs is exempt from tax in 80C and
80 CCD (1B)
Comes under EET category
60% Lumpsum that is withdrawn at retirement is taxable in
that year. 40% corpus under annuity is taxed yearly as per
individual’s income tax slab.
Comparison of NPS Returns
Pension Funds 3 year returns 5 year returns

ICICI Pru Pension Fund 14.70% 50.10%

UTI Retirement Benefit 2.40% 6.63%

Fund

LIC Pension Fund 8.20% 41.50%

Kotak Mahindra Pension 25.40% 57.30%

Fund

SBI Pension Funds 14.80% 51.80%

Equity Linked Savings Scheme (ELSS)
• ELSS Funds are diversified equity funds. These funds primarily invest
in stocks of listed companies in a specific proportion according to the
investment objective of the fund. The stocks are chosen from across
market capitalization (Large Caps, Mid Caps, Small Caps) and
industry sectors. These funds aim to maximize capital appreciation
over the long run. The fund manager picks stocks after conducting an
in-depth market research to deliver optimal risk-adjusted portfolio
returns.
• Lock in period is 3 years.
• Tax deduction u/s 80 C.
• The Long-Term Capital Gains on ELSS are tax-exempt up to Rs 1
lakh without the indexation benefit.
Fixed Income Securities
• Fixed income securities refer to debt instruments that offer a fixed
interest income on one’s investment. The corpus value that one will
get post maturity of the securities is known in advance. Because of
this, risk-averse investors prefer fixed income securities over
market-linked securities; these securities are apt for such people who
want to earn steady returns as well.
• Types of FIS
• Debt Mutual Funds
• Bonds
• Treasury Bills
• Bank FDs
• Money Market Instruments
Physical Gold (Coins / Bullion)
• Investment in the form of Gold Bar,
coins etc.
• Making Charges and GST
• Risk of purity
• Storage cost
 Digital Gold
Digital gold is a mode of investing in physical gold.
It is offered by MMTC – PAMP and Digital Gold India Pvt. Ltd
(Metals and Minerals Trading Corp. (MMTC), a government of India initiative,
and Switzerland-based MKS PAMP.
It is been sold to customers through various intermediaries like Paytm, Google Pay and PhonePe etc.
Minimum investment is Re 1
Buy and Sell any no.. Of quantities anytime
24k Purity of the Gold of is of International Standard with 99.99 purity.
Protection of the Gold :- IDBI Trusteeship Services Ltd as their trustees. The work of the trustee is to
ensure the quality of the gold and that the gold being sold to buyers is segregated and available in the
vaults. The vendors also have the gold insured.
Absence of regulator: The biggest risk of investing in digital gold is that there is no regulator for the
product. When you buy digital gold, the producer purchases gold of the equivalent amount in your name.
This gold is stored in vaults of a third party or in the vaults of the seller as in the case of MMTC-PAMP.
In normal circumstances, a trustee is appointed to see if the quantity and purity of gold are maintained in line
with the gold purchased by the investor. However, there is no regulator to oversee if the trustee is doing the
work properly.
Gold Exchange Traded Fund
• It is an ETF that tracks domestic physical gold price.
• It acts as a passive investment.
• It is form of cash settlement and not physical delivery.
• One Gold ETF unit is equal to 1 gram of Gold.
• The inclusion of making charges, jeweler margin, storing costs and so on will
make the physical gold costlier, on the other hand, the absence of these charges in
case of paper gold i.e., ETF's, will reduce its prices.
• It is listed on NSE and BSE
• Regulated by SEBI
Gold Mutual Fund
• It invests in various forms of Gold (physical gold, stock of gold
mining companies).
• Is issued by an Asset Management Company
• Is regulated by SEBI
• Open –ended funds
• They invest in Gold ETF
• Investor can consider it as an investment option though it gives lower
returns and is mostly seasonal driven.
Sovereign Gold Bonds
• Issued by RBI
• RBI sells bonds at discount price of Rs 200 and does not charge any
making charges.
• Ownership without risk and cost of storage
• Long term capital gains arising on SGB is exempted from tax
• Interest of 2.5% p.a paid semi-annually
• Minimum Investment 1gm gold bond
• Can be sold on Stock exchange before lock in period
• Maturity 8 years (can be redeemed to RBI after 5 years)
• Cash Settlement
Comparison of various Gold Instruments

Parameters Physical Gold Digital Gold Gold ETF Gold MF SGB

GST 3% 3% - - -
Storage, - 2 – 3% - - -
Transaction &
Delivery
Expense ratio - - 0.5 to 1% (per 0.5 – 1%(MF) -
(Management year) + 0.5 – 1% ETF
fees) (per year)
Exit load - - - 1 – 2% (<1 year) -
Returns (5 years) 40% 40% 40% 40% 40%
Interest - - - - 12.5% (2.5% * 5)
Effective 37% 35% 35% 30% 52.5%
Returns
Cont..
Other factors Physical Gold Digital Gold Gold ETF Gold MF SGB
SIP No Yes No Yes No
Liquidity High High Moderate High Moderate
Min Invest 0.5 – 1 gm Re 1 1 gm Rs 500 1 gm
Delivery Yes Min 0.5 – 1 gm Min 1 kg No No
Loan Coins < 50 gm No No No Yes
How to buy Dealers, banks Paytm ,Google Demat account MF apps (Zerodha Banks, Post
pay, PhonePe etc coins, grow, office, Demat
paytm money) account.

Taxation Holding period Holding period Holding period Holding period Interest is taxable
less than three less than three less than three less than three as per tax slab,
years – STCG (as years – STCG (as years – STCG (as years – STCG (as Maturity value is
per tax slab) per tax slab) per tax slab) per tax slab) tax free after 8
More than 3 More than 3 More than 3 More than 3 years, and if sold
years – LTCG years – LTCG years – LTCG years – LTCG after 5 years LTCG
(20% after (20% after (20% after (20% after at 20% with
indexation) indexation) indexation) indexation) indexation.
Objectives of Investment Decisions
• Depending on the life stage and risk appetite of the investor, there are three main
objectives of investment: safety, income and growth.
• Safety:- While no investment option is completely safe, there are products that are
preferred by investors who are risk averse. Some individuals invest with an
objective of keeping their money safe, irrespective of the rate of return they
receive on their capital. Such near-safe products include fixed deposits, savings
accounts, government bonds, etc.

• Income:- Some individuals invest with the objective of generating a second source
of income. Consequently, they invest in products that offer returns regularly like
bank fixed deposits, corporate and government bonds, etc.
Cont.. Objectives of Investment Decisions
• Growth :- While safety is an important objective for many investors, a majority of
them invest to receive capital gains, which means that they want the invested
amount to grow. These include stocks, mutual funds, gold, property, commodities,
etc.
• Tax exemption:- Some people invest their money in various financial products
solely for reducing their tax liability. Some products offer tax exemptions while
many offer tax benefits on long-term profits.

• Liquidity:- Many investment options are not liquid. This means they cannot be
sold and converted into cash instantly. However, some people prefer investing in
options that can be used during emergencies.
 Types of Investor
• Individuals:-

✔ In terms of numbers, individuals comprise the single largest group in most markets, the size of the portfolio
of each investor is usually quite small. Individuals differ across their risk appetite and return requirements.

✔ Those averse to risk in their portfolios would be inclined towards safe investments like Government
securities and bank deposits, while others may be risk takers who would like to invest and / or speculate in the
equity markets. Requirements of individuals also evolve according to their life-cycle positioning.

✔ For example, in India, an individual in the 25-35 years age group may plan for purchase of a house and vehicle, an
individual belonging to the age group of 35-45 years may plan for children’s education.

✔ An individual in his or her fifties would be planning for post-retirement life. The investment portfolio then
changes depending on the capital needed for these requirements.
Continue..
• Institutions: Institutional investors comprise the largest active group
in the financial markets. As mentioned earlier, institutions are
representative organizations, i.e., they invest capital on behalf of
others, like individuals or other institutions. Assets under management
are generally large and managed professionally by fund managers.
Examples of such organizations are mutual funds, pension funds,
insurance companies, hedge funds, endowment funds, banks, private
equity and venture capital firms and other financial institutions
Institutions – Mutual Funds
• Mutual funds pool investors’ money and invest according to pre-specified,
broad parameters. These funds are managed and operated by professionals
whose remunerations are linked to the performance of the funds. The profit
or capital gain from the funds, after paying the management fees and
commission is distributed among the individual investors in proportion to
their holdings in the fund. Mutual funds vary greatly, depending on their
investment objectives, the set of asset classes they invest in, and the overall
strategy they adopt towards investments.
Pension Funds
• Pension funds are created to manage the retirement funds of the
employees of companies or the Government. Funds are contributed by
the employers and employees during the working life of the employees
and the objective is to provide benefits to the employees post their
retirement. The management of pension funds may be in-house or
through some financial intermediary. Pension funds of large
organizations are usually very large and form a substantial investor
group for various financial instruments.
Eight Pension Funds
• Birla Sun Life Pension Scheme
• HDFC Pension Fund
• ICICI Prudential Pension Fund
• Kotak Pension Fund
• LIC Pension Fund
• Reliance Capital Pension Fund
• SBI Pension Fund
• UTI Retirement Solutions
Endowment Funds
• Endowment funds are generally non-profit organizations that manage
funds to generate a steady return to help them fulfill their investment
objectives. Endowment funds are usually initiated by a non-refundable
capital contribution. The contributor generally specifies the purpose
(specific or general) and appoints trustees to manage the funds. Such
funds are usually managed by charitable organizations, educational
organization, non-Government organizations, etc.
Cont… Endowment Funds
• Who donates?
• The donations are majorly made my the alumni of the institute or their
near and dear ones as, either an act of gratitude for their own education
at the institute, or as a means to honor an individual (and his
contribution), or as a means of giving back to the society.
Examples of Institutes in India having
endowment funds (In place or in process)
• Indian Institute of Management, Ahmedabad
• Indian Institute of Technology, Madras
• XLRI Jamshedpur
• Indian Institute of Technology, Bombay
• Woodstock School
• Indian School of Business, Hyderabad
• College of Engineering, Pune
Insurance Companies (Life and Non-Life)
• Insurance companies, both life and non-life, hold large portfolios from premiums contributed
by policyholders to policies that these companies underwrite. There are many different kinds
of insurance polices and the premiums differ accordingly. For example, unlike term
insurance, assurance or endowment policies ensure a return of capital to the policyholder
on maturity, along with the death benefits. The premium for such polices may be higher than
term policies.

• The investment strategy of insurance companies depends on actuarial estimates of timing and
amount of future claims. Insurance companies are generally conservative in their attitude
towards risks and their asset investments are geared towards meeting current cash flow needs
as well as meeting perceived future liabilities.
Banks
• Assets of banks consist mainly of loans to businesses and consumers and their liabilities
comprise of various forms of deposits from consumers. Their main source of income is
from what is called as the interest rate spread, which is the difference between the
lending rate (rate at which banks earn) and the deposit rate (rate at which banks pay).
Banks generally do not lend 100% of their deposits. They are statutorily required to
maintain a certain portion of the deposits as cash and another portion in the form of
liquid and safe assets (generally Government securities), which yield a lower rate of
return. These requirements, known as the Cash Reserve Ratio (CRR ratio) and Statutory
Liquidity Ratio (SLR ratio) in India, are stipulated by the Reserve Bank of India and
banks need to adhere to them.
Other types of Investors:-
• Investors in the markets are also classified based on the objectives with which they trade. Under this
classification, there are hedgers, speculators and arbitrageurs.

• Hedgers invest to provide a cover for risks on a portfolio they already hold.

• Speculators take additional risks to earn supernormal returns and

• Arbitrageurs take simultaneous positions (say in two equivalent assets or same asset in two different
markets etc.) to earn riskless profits arising out of the price differential if they exist.

• Another category of investors include day-traders who trade in order to profit from intra-day price
changes. They generally take a position at the beginning of the trading session and square off their
position later during the day, ensuring that they do not carry any open position to the next trading day.
Traders in the markets not only invest directly in securities in the so called cash markets, they also
invest in derivatives, instruments that derive their value from the underlying securities.
Constraints:
• Portfolio management is usually a constrained optimization exercise:
Every investor has some constraint (limits) within which she wants the
portfolio to lie, typical examples being the risk profile, the time
horizon, the choice of securities, optimal use of tax rules etc. The
professional portfolio advisor or manager also needs to consider the
constraint set of the investors while designing the portfolio; besides
having some constraints of his or her own, like liquidity, market risk,
cash levels mandated across certain asset classes etc.
Constraint - Liquidity
• In investment decisions, liquidity refers to the marketability of the asset, i.e., the ability
and ease of an asset to be converted into cash and vice versa. It is generally measured
across two different parameters, viz., (i) market breadth, which measures the cost of
transacting a given volume of the security, this is also referred to as the impact cost; and
(ii) market depth, which measures the units that can be traded for a given price impact,
simply put, the size of the transaction needed to bring about a unit change in the price.
Adequate liquidity is usually characterized by high levels of trading activity. High
demand and supply of the security would generally result in low impact costs of trading
and reduce liquidity risk.
Constraint – Investment Horizon
• The investment horizon refers to the length of time for which an investor expects to
remain invested in a particular security or portfolio, before realizing the returns.
Knowing the investment horizon helps in security selection in that it gives an idea
about investors’ income needs and desired risk exposure. In general, investors with
shorter investment horizons prefer assets with low risk, like fixed-income securities,
whereas for longer investment horizons investors look at riskier assets like equities.
Risk-adjusted returns for equity are generally found to be higher for longer
investment horizon, but lower in case of short investment horizons, largely due to the
high volatility in the equity markets.
Constraint - Taxation
• The investment decision is also affected by the taxation laws of the land. Investors are
always concerned with the net and not gross returns and therefore tax-free investments or
investments subject to lower tax rate may trade at a premium as compared to investments
with taxable returns. The following example will give a better understanding of the
concept.
Asset Type Expected Return Net Return
A 10% taxable Bonds (30% tax) 10% 10% * (1-0.3) = 7%

B 8% tax-free bonds 8% 8%

• Although asset A carries a higher coupon rate, the net return for the investors would be higher for asset B
and hence asset B would trade at a premium as compared to asset A.
 Other Constraints
• In addition to the few mentioned here, there are other constraints like
the level of requisite knowledge (investors may not be aware of
certain financial instruments and their pricing), investment size (e.g.,
small investors may not be able to invest in Certificate of Deposits),
regulatory provisions (country may impose restriction on
investments in foreign countries) etc. which also serve to outline the
investment choices faced by investors.
To Summarize:-
Parameters Fixed Deposit PPF / EPF NPS Mutual Funds /
Equity/ ULIP / ELSS
Risk Low Low Moderate Moderate / High
Liquidity High Low Very Low High
Tax Benefits Negligible High Very High Low
Returns Low Low High High
Beats Inflation Marginally Better than FD Good returns over Good returns over
and above inflation and above inflation

Time Horizon 3 month – 2 years 15 years 15 years More than 3 years

Goals Short term: Long Term: Long Term: Mid to Long Term:
Save for Car, Child’s Education, Retirement Down payment for
Vacation, Wedding, Child’s Marriage, House, Car, Child’s
Electronic Retirement, Education etc.
equipment etc. Medical
Emergencies.