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SUBMITTED BY: PAYAL GOYAL SEMESTER:-II MBA SESSION- 2011-2013.
SUBMITTED TO: AMIT KUMAR
This project report could not have been completed without the guidance of My Project Guide AMIT KUMAR Faculty – SIMCS Jaipur I express my sincere thanks and gratitude to the above stated person who Have helped me directly and also to those who have indirectly helped me.
MBA II SEM.
As a part of subject requirement of my MBA program From SIMCS Jaipur, I have prepared a report on seminar on Investment management by an individual and organization So as to give exposure to practical management and to get With various investments making by an individuals And organizations.
The report has been prepared to deliver as much information -on as I could gather from whatever limited resources I have.
It is very important for every organization to invest their Money at right place and right time.
My report is based on this important topic i.e. InvestmentManagement.
INTRODUCTION TO INVESTMENT MANAGEMENT
2.0 INVESTMENT ALTERNATIVES 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 NON MARKETABLE FINANCIAL ASSETS EQUITY SHARES BONDS & DEBENTURES MONEY MARKET INSTRUMENTS MUTUAL FUNDS LIFE INSURANCE REAL ESTATE PRECIOUS OBJECTS FINANCIAL DERIVATIVES WHAT ARE OPTIONS?
3.0 INVESTMENT MANAGEMENT PROCESS
3.1 3.2 3.3 SETTING THE INVESTMENT OBJECTIVE ESTABLISHING INVESTMENT POLICY. SELECTING THE PORTFOLIO STRATEGY. SELECTING THE ASSETS. MEASURING AND EVALUATING PERFORMANCE
Part-4 .4.0 INTRODUCTION TO THE INVESTMENT ENVIRONMENT Part-5 5.0 INVESTMENT ATTRIBUTES 5.1 5.2 5.3 5.4 5.5 Rate of return Risk Marketability Taxes Convenience
3 12.Part-6 6.0 THE FIVE QUESTION 12.2 12.0 INVETMENT DECISION MAKING: APPROACHES Part-8 8.0 COMPARISON OF INVESTMENT AVENUES Part-7 7.0 THE BROKER Part-12 12.5 WHY TO INVEST? WHAT TO INVEST? WHERE TO INVEST? WHEN TO INVEST? HOW TO INVEST? 6 .1 12.0 INVESTMENT WISDOM: ONE LINERS Part-10 10.4 12.0 INVESTMENT AND SPECULATION Part-9 9.0 THE SECURITIES MARKET Part-11 11.
Part-13 13.0 QUALITIES OF THE SUCCESSFUL INVESTOR Part-16 16.0 INVESTMENT MANAGEMENT AND FIRST POSITION Part-14 14.0 INVESTMENT MANAGEMENT AND INVESTOR PREPARATION Part-15 15.0 IMPORTANCE OF INVESTMENT MANAGAMENT CONCLUSION 7 .
the purchase of a financial product or other item of value with an expectation of favorable future returns.0 What is Investment? In its broadest sense. such as durable equipment or inventory. However. Also called portfolio management and money management. they are prone to making grave errors.g. Thereby causing much harm to themselves. real estate). due to their ego they carry these errors for many years into the future. the purchase by a producer of a physical good. The main reason for the publication of this report.PART-1.) And assets (e. An Investments is a sacrifice of current money Or other resources for future benefits. when it comes to real time investing and decision making. DEFINITION 1 In finance. their immediate environment and financial well-being PART 2. investment means the use money in the hope of making more money. the process of managing money. We have observed that on an average most individuals believe (with much conviction) that they know it all. Definitions of Investment management Investment management is the professional management of various securities (Shares. Then to compound the matter further. in the hope of improving future business. In general terms.0 8 . is to make you (the reader) aware of the investment world and how to manage your way around it.. bonds etc. DEFINITION 2 In business.
1 NON MARKETABLE FINANCIAL ASSETS:A good portion of the Financial assets of individuals investors is held in the 9 .MARKETABLE FINANCIAL ASSETS EQUITY SHARES BONDS MONEY MARKET INSTRUMENTS MUTUAL FUND SCHEMES LIFE INSURANCE POLICIES REAL ESTATE PRECIOUS OBJECTS FINANCIAL DERIVATIVES 2.INVESTMENT ALTERNATIVES NON.
A distinguishing feature of these assets Is that they represents personal transaction between the investors and the issuer.2 EQUITY SHARES:Equity Capital represents ownership capital. In contrast. While fixed income investment avenues may be more important to most of 10 . For example. you deal with the Bank personally. Equity shareholders collectively own the Company. They bear the risk and enjoy the reward of ownership of all the form of Securities.Form of Non marketable financial assets. These can be classified into the following broad categories:- Bank deposits Post office deposits Post office time deposits Monthly income scheme Kisan vikas patra National savings certificate Company deposits Provident fund deposits 2. when you open a saving bank account at a bank. when you buy equity shares in the stock market you do not know who the seller is and you do not care.
The issuer of a bond to pay a stipulated stream of cash flow. you have an ownership stake in the company.3 BONDS & DEBENTURES:- Bonds and Debentures represent long term debt instruments. As an equity share Holder. This generally comprises of periodic Interests payments over the life of the instrument and principal payment at the time Of redemption.4 MONEY MARKET INSTRUMENTS:11 .The investors. Stock Market Classification of Equity Shares:Blue chip shares Growth shares Income shares Cyclical shares. Equity shares seem to capture their interest the most. Speculative shares 2. Bonds may be classifieds into the following categories:Government Securities Saving bonds Debentures of private sector companies Preference shares Public sector undertaking bonds 2.
Dividends. the money market is dominated by the government. Mutual fund in India are comprehensively regulated under the SEBI (mutual funds) Regulations.5 MUTUAL FUNDS:What's a mutual fund? A mutual fund. is an investment company that spreads its money across a diversified portfolio of securities including stocks. Shareholders who invest in a fund each own a representative portion of those investments. bonds. less any expenses charged by the fund. and corporate. also referred to as an open-end fund. And shareholders generally are allowed to sell (redeem) their shares at any time for the closing market price of the fund on that day. interest and profits from the sale of any securities (capital gains) are passed on to the shareholders in the form of distributions. These instruments are highly liquid and have Negligible risk. Individual investors scarcely participate in the Money market directly. Mutual fund investors make money either by receiving dividends and interest from their investments. A brief description of money market instruments is given below:- Treasury bills Commercial Paper Certificate of Deposits 2. financial institutions. or by the rise in value of the securities. or money market instruments. banks. Some of the important provisions of this regulation are as follows: 12 . 1996.Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments.
The offer document and advertisement materials shall not be mis -leading 2.A mutual shall be constituted in the form of a trust executed by the Sponsor in favor of the trustees. life insurance may be viewed as an investment. Insurance premiums represent the sacrifice and the assured sum. Policies provide protection benefits are designed to protect The policy holder (or his dependents) for the financial consequence Of unwelcome events such as death or long term sickness/ disability. The sponsor or if so authorized the trust deed. The mutual fund shall appoint a custodian. the trustees shall Appoint an asset management company (AMC).6 LIFE INSURANCE:In a broad sense. The common types of insurance policies are:Endowment assurance Money back plan Whole life insurance Unit linked plan Term assurance Immediate annuity Differed annuity Riders Some of the big life insurance companies are 13 . No schemes shall be launched by the AMC unless it ties approved By the trustees and a copy of the offer document has been filed With SEBI.
the more affluent investors are likely to be interested in the followings types of real estate:- Agriculture Land Semi-urban land Commercial Property Residential house Time share in a holiday resort 2. Some important Precious Objects are:14 .8 PRECIOUS OBJECTS:- Precious objects are items that are generally small in size but highly valuable in monetry terms.Life insurance Corporation (LIC) ICICI Prudential HDFC Standard Life Bajaj Allianz Birla Sun Life Max newyork Ing vsya Kotak mahindra TATA Aig 2.7 REAL ESTATE:- Unlike financial assets For the bulk of the investors the most important asset in their Portfolio is a Residential house. In addition to a Residential house.
the "Call" option and the "Put" option . but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date. an option is a contract. In the stock markets. the Most important financial derivatives from the point of view of investors are:- Options Futures 2. as options are built into everything from mortgage to insurance. To begin with there are two kinds of options. "Option". Which we shall explain presently.9 FINANCIAL DERIVATIVES:A financial derivatives is an instrument whose valued is derived from the Value of an underlying asset. which gives the buyer the right.Gold and Silver Art Objects Precious stones 2. or if he chooses not to. namely. as the word suggests. is a choice given to the investor to either honor the contract. walk away from the contract.10 What are Options? Most people remain puzzled by Options. The truth is that most people have been using options for some time now. It may be viewed as a side bet on the asset. 15 .
When you buy a Call option. call options are like security deposits. However. class and series and option concepts . Call options usually increase in value as the value of the underlying instrument rises. A "Put Option". We would strongly recommend that the investor first study these investment instruments. you would give up your security deposit. If for example. types of options. secures your right to buy that certain underlying stock at a specified price called the strike price on or before a specified date.A "Call Option". option styles. your only cost is the option premium. If you decide not to use the option to buy the stock and you are not obliged to. but you would have no other liability. conduct dry runs with pen and paper. if you never returned. put options are like insurance policies For a better understanding of options. you want to rent a certain property and left a security deposit for it. we would suggest that the investor read about role of options and futures. understand the nuances of the dynamics of the underlying security and the connectivity between the various risks that he or she would be taking on during the pendency of a futures or options position held by him. the price you pay for it called the option premium. The money would be used to insure that you could in fact rent the property at the price agreed upon when you returned. In this way. is an option to buy a stock at a specific price on or before a certain date . In this way. is an option to sell a stock at a specific price on or before a certain date. 16 .
PART-3. etc. 3. insurance companies. ESTABLISHING INVESTMENT POLICY. SELECTING THE PORTFOLIO STRATEGY. This process has 5 steps: 1. banks. SETTING THE INVESTMENT OBJECTIVE 1. financial institutions. dividends or claim settlement payouts. 17 . Which would vary for individuals. SELECTING THE ASSETS. MEASURING AND EVALUATING PERFORMANCE 3. pension and mutual funds. 2.1 SETTING THE INVESTMENT OBJECTIVE The first step for the investor is to set the investment objective. These liabilities would include redemption. For instance the objective for a pension or mutual fund or insurance company maybe to have a cash flow specification to satisfy liabilities at different dates in the future.0 THE INVESTMENT MANAGEMENT PROCESS The starting point would be an understanding of the investment management process. 4.
2 ESTABLISHING INVESTMENT POLICY Setting policy begins with asset allocation amongst the major asset classes available in the capital market. On Sunday he takes the day off and enjoys himself.3 SELECTING THE PORTFOLIO STRATEGY The portfolio strategy selected would have to be in conformity with both the objectives and policy guidelines. Any contradiction here would result in a systems break down and losses. another would be the operating system of the market place. Where is the time for thought. debt. The environment would include: government rules and regulations (or restrictions). real estate. While setting the investment policy the constraints of the environment and that of the investor have to be kept in perspective. 18 . On Saturday he helps the family with household chores. Which range from equities. To maximize return would imply the maximization of risk. availability of time to undertake the exercise. we cannot expect him to obtain optimal returns from investments in the equity market. Now with such a busy life. fixed income securities. For the individual investor the objective maybe to maximize return on investment. and foreign securities to currencies. five days of the week. As the individual would achieve optimum return at optimum risk. which would not be practical or sustainable.For a bank it maybe to lock in a minimum interest spread over their cost of funds. 3. analysis and action? He would at best be playing a game of Russian roulette. risk profile and the level of understanding the investor has of the investment environment 3. Let‟s consider a person with a job that keeps him busy for 10-12 hours a day. Individual constraints would include financial capability. A more appropriate word would be „optimize‟.
However. analysis and action required for success in this endeavor. In the fixed income segment. Here the aim would be to achieve a predetermined performance in relation to a benchmark. structured portfolio strategies have become popular.4 SELECTING THE ASSETS It is of importance for the investor to select specific assets to be included in the portfolio. Portfolio strategies are mainly of two types: Active strategies and Passive STRETEGIES . The asset classes he can choose from are: Equity Fixed income securities (which would include RBI bonds and bank deposits) Debt instruments Real estate 19 . Then he would have to create the time for the thought. if this average. The latter would include indexing which would require the investor to replicate the performance of a particular index. Where there is a lower but assured return. insurance. hard working and successful person still wants to invest in the equity market for a relatively higher rate of return. Which would give the expected return for a given level of risk. While Passive strategies involve a minimum expectation input. Between these two extremes we have a range of other strategies which have elements of both active and passive strategies.For a person with such a busy life schedule it would be best to invest in fixed income securities. 3. These would include RBI bonds. Active strategies have a higher expectation about the factors that are expected to influence the performance of the asset class. These are frequently used to fund liabilities. It is here that the investor or manager attempts to construct an optimal or efficient portfolio. etc. Bank deposits. or the lowest risk for a given expected return.
Further. depending on his objectives with respect to this portfolio. against a predetermined. whether the returns were worth the risk. whether the portfolio has achieved commensurate returns. given the risk exposure of the portfolio.5 MEASURING AND EVALUATING PERFORMANCE This step would involve the measuring and evaluating of portfolio performance relative to a realistic benchmark. These objectives may be time based or asset price based or a combination of both 3. namely risk and return. He would measure and evaluate. or whether the risk was worth the return. The investor or manager would consider two main aspects. This would then require the investor to rebalance the various components of his overall portfolio from time to time. 20 . we would evaluate the portfolio performance relative to the objective and other predetermined performance parameters.Art objects Rare stamps Currencies The investor would ideally have all the above in his investment portfolio. The issue here is. We would measure portfolio performance in both absolute and relative terms . realistic and achievable benchmark.
the trading platform and its system. Let us visualize the world and its economy. We see the interaction between countries at different stages in their development. There are many countries with their many economies in this environment.PART-4. as it would also encompass the demand supply match/mismatch. Here it is a question of demand and supply of various commodities. We see the many markets to enable this interaction between the various countries. products & services and trading instruments. 21 .0 INTRODUCTION TO THE INVESTMENT ENVIRONMENT To study the investment environment would be of importance to the investor. And the analysis would encompass the demand-supply match/mismatch. Each of these markets has its regulator. its agents (or brokers). and the participants.
Convenience Each of these attributes of investment avenues is briefly described and explained below. the highe the marketability the better it is for the investor. An investment instrument is considered to be highly marketable when: 22 . A further study can be done with the help of variance. 5.3 Marketability: It is desirable that an investment instrument be marketable. it is the deviation of the outcome of an investment from its expected value. 5. 5. Marketability 4.0 INVESTMENT ATTRIBUTES To enable the evaluation and a reasonable comparison of various investment avenues. the investor should study the following attributes: 1.2 Risk: The risk of an investment refers to the variability of the rate of return. Taxes 5. Risk 3.PART 5. Rate of return 2. To explain further. standard deviation and beta. To simplify it further look below: Rate of return = Annual income + (Ending price .Beginning price) / Beginning price The rate of return on various investment avenues would vary widely. namely the annual income and the capital gain or loss.1 Rate of return: The rate of return on any investment comprises of 2 parts.
The transaction cost (including brokerage and other charges) is low. 23 . For example. like life insurance. Shares of large. Tax benefits are mainly of 3 types: Initial tax benefits.5 Convenience: Here we are talking about the ease with which an investment can be made and managed. Then we would consider other factors like.4 Taxes: Some of our investments would provide us with tax benefits while other would not. While shares of small and unknown companies have low marketability.It can be transacted quickly. 5. Continuing tax benefit. well-established companies in the equity market are highly marketable . This is the tax gain at the time of making the investment. 5. can we make a substantial withdrawal without much penalty. a withdrawal from a provident fund account is not taxable. The degree of convenience would vary from one investment instrument to the other. such as dividends. This would also be kept in mind when choosing the investment avenue. This is the tax relief the investor gains when he liquidates the investment. The price change between 2 transactions is negligible. or can we take a loan against the accumulated balance at an interest rate not much higher than our earning rate of interest on the provident fund account. Terminal tax benefit. To gauge the marketability of other financial instruments like provident fund (which in itself is non-marketable). Is the tax benefit gained on the periodic return from the investment.
PART-6.0 COMPARISON OF INVESTMENT AVENUES Rate of return Annual Income ROR Capital Appreciation RISK MKTABILITY TAX BENIFIT Convenience Financial Securities Equity Non-convertible Debentures Financial Securities (Nonsecuritized) Bank deposits Low Nil Low High Yes Provident fund Nil High Nil Average Yes Life insurance Mutual funds Growth/equity Income/debt Real assets Real estate Gold/silver Low Nil High Average Low Average Low Average Limited Nil Average Average Low High High Low High Low High High Yes Yes High High Nil High Nil Average Yes High High High Low High High Low High Low High Average Yes Nil High High 24 .
Fundamental approach: In this approach the investor is concerned with the intrinsic value of the investment instrument. This intrinsic value can be ascertained by an in-depth analysis of the fundamental or economic factors related to an economy. sometime in the future the current market price would become the same as its intrinsic value. As investors we would have diverse investment strategies with the primary aim to achieve superior performance.0 INVESTMENT DECISION MAKING: APPROACHES As investors we would have diverse investment strategies with the primary aim to achieve superior performance. which are explained below. many securities have current market prices.PART 7. which are explained below. which would also mean a higher rate of return on our investments. All investment strategies can be broadly classified under 4 approaches. which are different from their intrinsic values. However. There is an intrinsic value of a security. At any point in time. 25 . All investment strategies can be broadly classified under 4 approaches. We as fundamental investors can achieve superior results by buying undervalued securities and selling overvalued securities. which in turn is dependent on the underlying economic factors. Given below are the basic rules followed by the fundamental investor. which would also mean a higher rate of return on our investments. industry and company.
26 . market breadth analysis amongst others. This would imply that the stock prices are influenced by the prevalent mood of the investors. Academic approach: Over the years. Which seem to alternate one after the other? This approach is also called “Castle-in-the-air” theory. the academics have studied many aspects of the securities market and have developed advanced methods of analysis. the current market price would reflect its intrinsic value at all times. And when “fear” takes over stock prices get depressed to lower than lower levels. with a view to study the internal market data. In this approach the investor uses some tools of technical analysis. which can be derived from market trading data. This would mean "Current market price = Intrinsic value". In technical analysis the basic premise is that price movement of stocks has certain persistent and recurring patterns. This mood would swing and oscillate between the two extremes of “greed” and “fear”. point and figure charts. moving. it is suggested that it would be more profitable to analyze investor behavior as the market is swept by optimism and pessimism. As psychic values seem to be more important than intrinsic values.Psychological approach: The psychological investor would base his investment decision on the premise that stock prices are guided by emotions and not reason. So. towards developing trading rules to make profits. When “greed” has the lead stock prices tend to achieve dizzy heights. Technical analysts use many tools like bar charts. The basic rules are: The stock markets are efficient and react rationally and fast to the information flow over time. Average analysis.
27 . The basic rules of this approach are: Fundamental analysis would help us in establishing standards and benchmarks. The market has imperfections.Stock prices behave in a random fashion and successive price changes are independent of each other. In the securities market there is a positive and linear relationship between risk and return. present price behavior cannot predict future price behavior. Eclectic approach: This approach draws upon all the 3 approaches discussed above. Technical analysis would help us gauge the current investor mood and the relative strength of demand and supply. The market is neither well ordered nor speculative. there is a positive correlation between risk and return. Although some securities would be mispriced. That is the expected return from a security has a linear relationship with the systemic or non-diversifiable risk of the market. . Thus. but reacts reasonably well to the flow of information.
holding period few days or months. or a brokerage. we are here to learn and apply investment management and not speculation management. a bank. Fundamental factors. rarely high risk. Planning horizon Very short. a financial institution. a pension fund. a Moderate. To be part of the speculative herd in a bull market situation has been the waterloo of many participants in the financial markets across the globe. Moderate returns at limited risk. There is a tendency for investors to be speculative when the markets are bullish and buoyant. for long term and profitable survival in the markets we must try and control this urge to speculate.PART 8.0 INVESTMENT AND SPECULATION There is a very thin and blurred line between investing and speculating (or gambling). technical charts and market psychology. holding period of at least 1 year. 28 . After all. Relies on hearsay. Investors Relatively long. Risk disposition Normal to assume high risk. To have a clearer understanding of this. a NBFC. tips. This participant maybe an individual investor. Return expectation High return at high risk exposure. we would differentiate between the two. However. Some are responsible corporate citizens while others are not. careful evaluation of proposed investment.
nerves and luck. Never confuse brilliance with a bull market. No price is too high for a bull or too low for a bear.PART 9. A pie doesn‟t grow through its slices. To err is human. Two things cause stocks to move – the expected and the unexpected. it is the price that makes it so. Ride the winners and sell the losers. All generalizations are false. No tree grows to the sky. Be long term but watch the ticks. Investment management is 10% inspiration and 90% perspiration. o o o o o o o o o o o You never understand a stock unless you are long or short in it. Never throw good money after bad. including this one. No stock is good or bad. The market makes mountains out of molehills.0 INVESTMENT WISDOM: ONE LINER Listed below are wisdom one liners which would give an investor an insight to what he or she is up against: o o o o o o o o The market is a discounting machine. Successful investment managers have brains. to hedge divine. To achieve superior performance. A cynic knows the price of everything and the value of nothing. Somebody is wrong every time a trade is made. you have to differ from the majority. 29 .
and then invest.o o o Investigate. o o It is only a step from the sublime to the ridiculous. There is no man for all seasons. o The market is a pendulum that swings back and forth through the median line of rationality. Open-mindedness and independent thinking will pay big dividends in the stock market. The memory of people in the stock market is very short. It is only a step from common stock investment to common stock speculation. o o No investment manager can perform successfully in all kinds of markets. o Better is one forethought than two after 30 . The only way to beat the market is to discover and exploit other investors‟ mistakes.
These securities markets can be classified into four types of markets: 1. buy and sell) these securities through the markets. 31 . i. 3. Primary market: Corporate entities offer new issues to the investing public through the issue of equity shares. Capital market: Securities with a maturity period of more than one year are traded in the capital market The existence of these markets is advantageous to both the issuer of the security and the investor. After the initial issue. respectively . Secondary market: Have securities of corporate entities that are already outstanding and owned by investors. the securities are subsequently shifted to the secondary market. as they are able to invest their excess funds or savings through the market in the expectation of a future return on their investments. The markets allow the transfer of funds from the surplus to the deficit sectors both efficiently and at low cost.e. 4. The investors also benefit. The investors are also able to trade (i. where they can be traded.e. 2. These securities can be traded (i.0 THE SECURITIES MARKET The term securities markets enclose a number of markets in which securities can be bought and sold.PART 10. The “issuers”. Money market: Enables trading of securities with maturity of one year or less. business entities and government need to raise funds or capital at competitive rates for productive and improvement activities.e. bought and sold) in the secondary market.
The markets on their part. are too large. Which is a percentage of the value traded by the investor? 32 . We want to buy a car or motor cycle or scooter. For instance.0 THE BROKER As investors we are not able to deal with the market directly. We want to buy a pair of trousers or shirt or a dress. This middleman is also called the “Broker”. We want an insurance policy. consider the following: 1. the markets introduce and authorize the middleman to act on its behalf. and they perform the same function. This would be a Herculean task and a management nightmare for it. We want to buy the shares of a company traded in the NSE or BSE. So. or Reliance or Bombay Dyeing. we would go to the retail store which sells these products. To reinforce this point. representatives and brokers mean the same thing. 4. we would deal with the dealer of the automobile manufacturer 3. 2. It would be like entering and trying to find our way through an unending maze. Which is that of a middleman? They do this function as they would be receiving commissions in return for the services they provide. whether an investor buys or sells a stock in the stock exchange the middleman or broker would receive a commission either ways. The retail store would be the representatives of Raymond Ltd. dealers. We would have to deal with the broker of these exchanges. to attend to every single investor directly.PART 11. we would deal with the insurance company‟s agent. Agents.
Is the brokerage well established and known in the market? 2. is the representative of the brokerage house able to attend to him or is he overloaded with too many accounts? 33 .For investors it is very important to choose a broker correctly. the investor would be well advised to consider the following: 1. Also that the broker is able to provide the services that the investor requires. In this selection of a broker.
All this money which is lying in his bank account is earning only the savings bank rate. which would be 4% to 6% per annum.PART-12.1 WHY TO INVEST? The investor would want to invest mainly to increase the rate of return on his assets.3 WHERE TO INVEST? 12.1 WHY TO INVEST? 12. 34 . an additional source of income or to further creates an asset base to fund future requirements (like a personal pension fund). Which after a period of time would add up to a substantial amount (given the added advantage of interest on bank balances)? The person may have received an inheritance or a legacy.5 HOW TO INVEST? 12. Let us consider why people invest.2 WHAT TO INVEST? 12. This too is lying in the bank.4 WHEN TO INVEST? 12. A person does a job of work to earn an income. At the end of the month he manages to save a residual amount of his income.0 THE FIVE QUESTION 12. Through our need to create a source of income.
00 higher.00.The person is rational and knows that today even inflation ranges from 5% to 7%. As he has employed the money in the present. he would have invested INR 22. the investment risk is known (which in this case is zero) and the person goes ahead and invests. The aim is clear (to obtain a higher rate of return that is above the inflation rate). he sees it move up to INR 260.18% return on investment over a 3 month period. He looks through this page every morning and starts monitoring a particular stock. In three months time he would have brought home a profit of INR 4. let's say ACC. the next 3 months. to increase the rate of return in the future. Let us consider another situation. This is fantastic!! No bank is going to give this kind of return! 35 . The person reads many news papers In each of them he sees a business section. Which has a whole page dedicated to the equity price movement of the previous day.00. Here he is able to get an interest rate of 7% to 8% per annum. for all the stocks traded in the equity markets? With graphs depicting the movement of the index over the duration of the previous day. He does a little moths and sees that if he had bought 100 shares of ACC at INR 220.000. He realizes that leaving the money in a savings bank account would tantamount to losing the value of money over time. Over. By definition this person has invested his money. Now the stock is at a price INR 40.00 per share.00 per share. the financial instrument is available (Fixed deposit). that is a 18.00 per share.000. This sounds good. He sees the stock at INR 220. he decides to shift the money not required for current expenses into a 3-5 year fixed deposit. To stop this loss of value.
Given the situation in our country today.00 per share. investing INR 28. The point I am trying to make here is that when we expect a higher rate of return on our investment. Promising never to gamble again. What went wrong? Well. Thus.00 per share. given a lower level of return to individuals from bank deposits and other debt instruments.00. There was only temptation and probably greed. we are also exposed to a higher level of risk.00. After another three months ACC was trading at over INR 350. in this case the person had not considered the 5 questions. That we must respect this risk and take appropriate steps to manage and control it. more funds would be deployed in equity and other financial instruments to increase the rate of return on our asset 36 .00 per share. Disillusioned. In the next two months he sees the stock down at INR 250. with the ongoing liberalization and globalization process.000.A month later he buys 100 shares of ACC at INR 280. This lower interest rate (or cost of capital) would enable our industry and services sector to be more globally competitive. It would be rational to expect that interest rates would remain at a lower level when compared to earlier years. He did not have an aim to start with. he sells his 100 shares and books a loss of INR 3.000.
real estate. a hobby. what do we have that we can invest? Well. For doing this. bonds. art objects. money. at the individual level.2 WHAT TO INVEST? The investor would mainly invest his time. are only the mediums through which we invest or employ or deploy our time. rare stamps and coins). deposits. analysis and action to accomplish the job at hand. analysis and action to accomplish it. effort and financial resources (including savings and reserves) in this endeavor of investment management. an expertise. we only have time which we can invest. for starters he would have to invest his time in thought. he is investing his time in thought. This person has invested his time in doing a job of work in a corporation. debt. the corporation compensates him for his valuable time through the payment of pay and perks to him. etc. The rest. perks and other facilities the corporation gives him every month. Similarly. He knows exactly what the job requires and further what is expected of him. the person wants a higher rate of return on his financial investments (may they be in equity. As individuals. Let‟s consider a person working in a large corporation. 37 . While doing his job. He is given a job description and further a job specification. Well.12. which is also called contribution. whether it be a job. and his return on investment is the pay.
Luckily.. in India due to our past we do not have many markets to trade in. 12. We expect that in all probability there would be a positive return on our investment the quantum of return would depend on the risk profile of the financial instrument and the level of risk adopted by the person. and when those results are achieved would be the right time to invest or divest.3 WHERE TO INVEST? There are many financial investment avenues available today to the investor. we have the equity market. to investments in equity. We would have to quantify the results we expect. keeping the return on investment in mind. debt.4 WHEN TO INVEST? Here the investor would decide when to invest (or buy) and when to divest (or sell) a financial instrument. There is no Holy Grail. Risk here would mean reasonable and rational risk and definitely not wonton risk. which has a fully functional trading platform. Our discussion at present is restricted to the investment or employment or deployment of our financial resources from our bank to a financial instrument and back to the bank. etc. However. ranging from bank deposits and bonds.12. to doing a job of work. given that the larger parameters 38 . In a sense we would be detached from the day to day fluctuations of the financial instruments. currencies. which would guide you to this decision. A starting point would be an introspection and self-evaluation to access our strengths and weaknesses and also our capacity for risk. But let‟s get specific here. Not so long ago a commodities exchange has been established in India. to real estate. commodities. It is safest to set in advance the parameters for investment and divestment decisions.
but if he himself is not in the best (that is balanced) frame of mind. The investor should have the time available every day to undertake this exercise in investment and its management. Through: A monthly pay package. 4. and we can safely conclude that this list is not exhaustive). We shall add to this list in due course. Let‟s put it this way. By which we would have to set the parameters for when to invest and when to divest. 3. fear and greed have caused much harm to investors across the globe. Most of all. Or a passive income (through rental income from another real estate asset owned or mortgaged. An investor may have the best systems in place. he should have the knowledge to put his best foot forward.of our investment plan are intact. The investor should have control over his emotions. 39 . The investor should have a steady source of income to enable the provision for current expenses. 2. Or a pension. There are other sources of passive income. 1. do research and take action on his leads. That is when an Individual can and should start investing his or her hard earned resources in financial instruments. happiness. We would now like to add another dimension to the equation. That is to say that the individual's place of residence should be owned and without any mortgage. The investor should have a roof over his head. if the investor wants to create wealth from the investment environment. sadness. to be able to study. Emotions like anger. The results too would not be the best. Dividend income from investments in financial instruments already made.
However. we have observed and can safely conclude that errors made by investors have been caused by factors that have nothing to do with their investment t environment. There are other qualifications to help an investor decide when he is able to or would be able to start investing.Further. 40 . We shall add to the list in due course. we expect that you would have enough food for thought at this stage.
That whichever the financial instrument chosen for investment. I must caution you at this stage. It is an ongoing process and would require adjustments from time to time to optimize and maintain the expected rate of return on our investments. it is an art.5 HOW TO INVEST? This would require the investor to have in place an investment system with all its checks and balances. In conclusion. from the „why‟ we get the aim. Good and bad decisions will be made. From the „what‟. From the „when‟ we have an understanding when to invest or divest. Investment and its management are not gambling.12. This would include investment strategy and tactics with all their accompanying rules. 41 . we are able to think. analyze and act. And from the „how‟ we get our investment system. which is as interesting or as boring as you make it to be. there will be ups and there will be downs. From the „where‟ we see the financial instruments available for investment. The main aim being to be ahead and above of inflation. Fundamental and technical analysis and their relevance to the financial instrument targeted for investment.
you have understood the various aspects of the first trade. to begin with we would initiate a position only when we have a confirmation of oversold levels and that there is a reasonable margin of safety available to us.PART 13. 42 . while purchasing the same stock over various price levels. we have allocated INR 30. before we proceed to the rules of trading. 00. Thus. However. Let's say we have INR 3. However. we must realize that we do this at the expense of increased risk exposure. as the stock (or stocks) may not perform as expected. Given our initial requirement to diversify our risk exposure over more than one stock.000/= per position Please note. that we may change this allocation to a larger amount depending on market action and news flow with regard to that particular stock.000/= in our equity trading account.0 INVESTMENT MANAGEMENT AND THE FIRST POSITION A position in a stock or financial instrument is built over a period of time. We expect that. we would apportion this initial capital into 10 equal risk segments. Each of these risk segments would be a position in a stock. it would be appropriate to have an understanding of how to build a position in a particular stock or financial instrument. However.
50 below the initial oversold price level. By this action we have initiated our position in XYZ Ltd. we have pyramided correctly. In fact. its price is quoting near its 52 week low.650/=. as our overall purchase price is INR 4.Let us explain this with an example. the price down move from here would be 6% to 9 %.700/= and have added another 100 equity shares to our position in XYZ Ltd. So. they are taking action to expand capacity to meet future export demand for their products. we mark this with the purchase of 50 equity shares of this stock. the next few weeks the stock price meanders down to INR 93/=. there is nothing alarming. has given an oversold signal at INR 100/=. At this point we would invest the remainder with the purchase of 150 equity shares. Further. Over the next few days we find the stock quoting at a price of INR 97/=. and are holding a position of 300 equity shares at an average purchase price of INR 95. Now. and in some cases may expand to 12%.50. Depending on the volatility of the stock and its Beta. to provide for a further 43 . However. now we have invested INR 9. Let's say that XYZ Ltd. We have observed a stock (XYZ Ltd. Here we would purchase 100 equity shares of this company. It has a reasonable EPS and P/E. So. When we check current news flow with regard to this stock. Here we have invested INR 13. At this point we have invested a total of INR 28.950/=. Further. Over.) with good fundamentals and reasonable growth projections. this stock has given an oversold price level confirmation. Still. due to adverse market action. we have built a certain margin of safety in this position under normal market conditions (or moves). we can reasonably invest our remainder of INR 25. As it would be difficult to purchase the stock at rock bottom prices.000/= in the next 6% down move.
and by then there would be more clarity with relevant news flow in this regard. and it would be reasonable to sell this position at this price. a fall below this price would mean that we have built a position that has a longer down move to cover. there maybe certain government regulatory changes which effect the profitability of all companies in this industry or sector or certain clarifications maybe need with regard to certain policy decisions. These are all signals for an impending up move in the price of the stock. For instance. So. under normal market conditions. before initiating the sale of our position in XYZ Ltd.adverse market action usually caused by an unobserved larger trend that maybe Against our expectations we would apply a stop loss at 8% below our purchase price at INR 87. we could invest again in this stock at a lower price at a later date. it would be advisable to hold on to the position while it starts its upward journey. Better still it may make a head and shoulder bottom formation. 44 . the stock price would make one bottom and then retest it after a few days or weeks. It would be relevant to observe that this stop loss is a good 12.85.15% below the initial oversold price of INR 100/=. We must await the confirmation of an overbought price level confirmation. However. Of course. Thus.
We are to consider whether we: # is secure in our present circumstances. If an error is observed it must be corrected immediately. and are both the employer and the employee. The investor realizes that he is on his own. 2. Of course. In a matter of speaking we are reporting to ourselves. If the sequence of steps and actions we implement is correct we are justly rewarded and if they are wrong we are punished.PART 14. # has the frame of mind to take on risk and wait long enough to achieve profitable returns. # have done a “what if” analysis to know in advance what we would do given the various circumstances and situations the equity and other allied markets would put us through. This is to bring to your attention that.0 INVESTMENT MANAGEMENT AND INVESTOR PREPARATION At this stage we expect that the investor has done the preliminary preparation to undertake his investment management exercise. there are no free lunch tickets. # has gained an understanding of investment management and the processes involved. We are our own boss. 45 . # has a documented plan of action available. 1. we cannot indulge in a blame game. Are we up to the challenge? It is advisable to do a SWOT analysis on ourselves and our present circumstances.
In fact some banks (like in India) have developed fully functional brokerage arms. Do we have the commensurate resources available? Given our present secure circumstances. The individual investor must also do periodic reviews to ensure that the integrity of the objective is maintained in all his transactions. in certain circumstances we may consider modifying the objective to include the deviant action as it may have proved profitable over a period of time. The selection of the broker is of importance. Have we prepared a project report? The investor must prepare a project report. Using the brief list above as a guide. and there is nothing personal or emotional about the selection of this broker we would be dealing through. the investor may use his or her own initiative to increase this list of things to do for their prepared 46 . We must realize that a brokerage is a business entity in itself. 4. We would have to take a broker alongside. we should have commensurate personal free reserves available to start the investment management exercise to develop a profitable portfolio of stocks and other financial instruments. We as investors have a choice. and may avail the services of a consultant to do so. 5.3. Any deviation from the objective must be corrected. However. We must always go for the best (optimal) deal available. Have we a good association with a trustworthy market intermediary (broker)? As individual investors we cannot deal directly in the equity and other markets. and profits from the brokerage that we investors pay them to execute our transactions on the trading floor of the exchange.
they can also be learnt and taught. Now. Winners and Losers: Vast fortunes can be made and lost during brief periods of trading in the equity markets. would also be relevant to the other financial markets.PART 15. The successful investor exudes self-confidence . They know that the power to achieve comes from within . His handshake is solid. Attitude verses Luck: The winners realize and recognize the importance of a positive mental attitude. one must have the correct attitude to recognize the opportunity for success. purposeful and firm. These qualities of the successful investor listed and described below. They are of the view that. However. and that positive motivation overcomes all obstacles to success. self-assurance and singleness of purpose.0 QUALITIES OF THE SUCCESSFUL INVESTOR Given the potential rewards. He looks you straight in the eye. the investor would require qualities of head and heart to achieve this success. the risks being reasonable and given a method of well-defined risk management the equity markets across the globe (to our thinking) are the best game in town. what separates the winners from the losers? The key to successful trading in the equity markets are not only attainable. He is well groomed and dressed. 47 .
Also. You must think. So. As the investor had failed to see opportunities.We do realize that. And lastly. In our struggle for success. you must think. he could not act in order to get a successful result. he organizes for it. he did not see the opportunities when they did present themselves. you must act when the opportunity presents itself. First. See and Do: To be successful. Next. he was sorely lacking. you must see an opportunity as it develops. Think. Then. he did not visualize opportunities when they presented themselves. Though these methods mentioned earlier also have their place in the scheme of things. see and do. because he was so intent on not missing opportunities and unsure about what opportunities he is looking for. you need to emphasize on these elements. but not replace it. a negative attitude can easily spell ruin. You must think about what you want to do and how you will do it. and can and should be utilized to reinforce our positive mental attitude. 48 . comforting to most people: The investor hopes for success in vague terms. when it came to visualizing a plan of attack (or action plan). positioning or political influence. a positive attitude cannot be replaced by the concepts of luck. But. just as the lack of a positive attitude easily inhibits success. as these are the important elements to success. A counter view.
without them we would be lost. Effectively controlling and channeling emotions are two very important issues in the equation for success. The idea is not to punish or ridicule something done or gone wrong. than the way in which we deal with success. Although success is important. it is equally important to understand failure and its role in shaping investor behavior. The weak link: The markets offer fortunes without limit to those who master the few simple rules of profitable investing. we as investors deal with loss and failure is just as important. Allure: It is said that we learn more from our mistakes than our successes. But to understand it. you need to develop and maintain similar attitudes. has been and always will be the investor himself. Goals are wonderful. attitude. if not more important. if you provide the proper psychological and behavioral background for it to occur. Yet. Each person has his own personal psychology and response style. so that the rewards of being right may reinforce the winning behavior.Success follows: Success will tend to take care of itself. the road to success must be paved with behavior. To be successful as an investor. Those who have been successful and continue to be successful as investors recognize the importance of market psychology and incorporate it in their work to a certain extent. There are four elements that comprise the essence of success theory: The way in which. behaviors and opinions. the weakest link in the chain is. However. opinions and visualization. correct it and do it right in the future. 49 .
Further. which is a necessary part of the system. then the system would recoup and move on to bigger and better things. based on the trading signals generated by the system. Consider an investment or trading system that is so profitable that it makes thousands in a short period of time. consider a period of "drawdown". the investor himself is the weakest link in the chain. To put it into perspective. but the man holding that gun". This drawdown is what really makes or breaks an investment or trading system. as it is you and only you who can make that system work as it is intended to.The investor would be well advised not to fall prey to the belief that a better investment and/or trading system will make you a better investor. On the other hand. then the drawdown period will either be longer than intended. If the investor were to limit the drawdown to what they should be. It does not matter how good your investment or trading system is. if the investor is undisciplined and unwilling to accept losses when they should be taken according to the system. "It is not the gun that counts. the ability of an investor to cope with such periods of drawdown and paper losses will either make or break a system. Thus. The world's best investment or trading system in the hands of an incompetent. Now. the investment or trading system would deteriorate because of the investor‟s lack of action. No matter how good the system is. This lack of action on the part of 50 . undisciplined and unsophisticated investor will prove to be a vehicle for consistent losses and disaster.
behavior. At this point the psychology of the investor becomes most important. which would include both method and procedure. You may read autobiographies of the great investors and speculators to reinforce your investment or trading system. Finally. and attitudes. Whichever way you look at it. perceptions and experience become important factors for success.the investor will break the back of the system and of the investor himself quicker that any unexpected adverse market event. You could enroll in a success motivation course that may be of some help. You may undergo a long drawn psychiatric treatment that may or may not have the desired result. Short-cut to learning: You can learn the various aspects and elements of successful investing in many ways. only to discover later that it does not suit your style. The rest of the 80% would include the following: Effective risk management tools. A good investment or trading system is only 20% of the input for success. You can read extensively about investment theory and practice. your focus should be on technique and investor psychology. and develop your own system. as against market methodology or investment system which are secondary. There is no predetermined formula to deal with such adverse situations. but there are methods and procedures to minimize the degree of investor error. or in other words to maximize dependence on the investor's response style. 51 . by correctly applying experience and coping with losses. You could also undertake a course to discover the perfect investment or trading system for yourself. the investor will either make or break the investment or trading system.
time is at a premium due to its limited availability. A positive mental attitude. then you would allow yourself the liberty to be dissuaded from acting on the opportunity. If however. However. To develop this winning attitude and behavior you have to work with yourself and develop your skills by yourself with your own effort. Winning attitudes and behavior: Every signal generated by your investment or trading system must be considered to be the signal that will produce a vast fortune. You should focus on your personal 52 . Discipline and structure. A personal investor style or psychology. No individual or course or tape or lecture or article can do for you what you can do for yourself. you do not look upon each investing opportunity as a significant opportunity for profit. so you would have to be selective in what you study and learn. Consistency and persistence.
0 IMPORTANCE OF INVESTMENT MANAGEMENT 1. 6. SOCIAL WELFARE. SECURITY FROM FUTURE UNCERTAINITY. 53 . 4. 8. PREVENTING BLACK MONEY. BENEFIT OF TAX REBATES. GROWTH OF SHARE MARKET. INFRASTRUCTURAL DEVELOPMENT. INCREASE CAPITAL FORMATION. 10. 2. 3. FULLFIL THE NEEDS OF THE INDIVIDUAL. 7. 9. ECONOMIC DEVELOPMENT.PART 16. INCREASE LIVING STANDARD OF THE SOCIETY. 5.
flexibility and openness. as any other games. 54 . patience.CONCLUSION :- The game of investments. Contrary thinking.-mentators tends to vary the following qualities are found on most. to be successful in the long run. requires certain qualities and virtues on the part of the investors. While the list prescribed by various co. composure. Decisiveness.
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