INVESTMENT ANALYSIS AND

PORTFOLIO MANAGEMENT

Introduction to Investment
Management
Investment
Monetary Commitment with a view to earn some
return.

Investment

Economic Real Financial

Investment Investment Investment
Investment Vs. Speculation

 Type of Contract
 Period
 Risk
 Stability of Income
 Source of Income
 Psychological Attitude of Purchaser
 Basis of Acquisition
 Return Expectations
Gambling Vs. Investment

 Nature of Risk: Artificial; Already Existed

 Basis of Decision: Rumors, Tips and Hunches; Planned
and Scientific Procedure
 Legitimacy
 Stability of Income
 Psychological Attitude of Purchaser
Investment Avenues
 Equity Shares  Real Estate
 Bonds including Government  Agricultural Land
Securities, Saving Bonds,
 Residential House
Debentures
 Semi-urban Land
 Money Market Instruments
 Commercial Land
 T-Bills
 Holiday Resort
 Commercial Paper
 Precious Objects
 Certificate of Deposit
 Gold and Silver
 Non-Marketable Financial Assets
 Precious Stones
 Bank Deposits
 Art Objects
 Post-Office Deposits
 Financial Derivatives
 Company Deposits
 Options
 Provident Fund Deposits
 Forward
 National Saving Certificates
 Futures
 Kisan Vikas Patra
 Swap

 Life Insurance Policies

 Attributes / Features of Investment
Avenues
Common attributes:
 Capital Appreciation

 Risk

 Returns

 Liquidity

 Tax Benefit

 Growth Rate

Specific features (from next slides….)

 Attributes: Equity Shares
 Features
 Claim on Income
 Claim on Assets
 Right to Control
 Voting Rights
 Pre-emptive rights
 Limited Liability

 Advantages
 Permanent Capital
 Borrowing Base

 Discretion in payt. of Dividend

 Disadvantages
 Cost
 Risk
 Earning Dilution
 Ownership Dilution
Attributes: Right Issue
It involves selling of ordinary shares to the existing shareholders of the
company. Those shareholders who renounce their rights are not entitled for
additional shares. Such shares are offered to those shareholders who have
applied for some additional shares on pro- rata basis.

The price of the shares before ex-right date is called right on or cum-right
price whereas price after this date is known as ex-right price.

Value of Right = (Original Price – Subscription Price) / N + 1

Where, N is the ratio of existing shares to new shares

Attributes: Right Issue
Existing shareholder may
 Accept the offer
 Reject the offer
 Sale his offer

Advantages:
 No dilution of Control

 Lesser Flotation Cost

 More successful in case of profitable organisation

Disadvantages:
 Loss to those shareholders who don’t exercise the option

 Less lucrative if shareholding is concentrated in the hands of financial

institutions due to conversion of loan into equity
Attributes: Preference Shares
 Features
 Claim on assets and income
 Fixed Dividend

 Voting Rights
 Sinking Fund

Types
 Participativeor Non- Participative Preference Shares
 Redeemable or Non- Redeemable Preference Shares
 Convertible or Non- Convertible Preference Shares

 Cumulative or Non- Cumulative Preference Shares

Attributes: Preference Shares
 Advantages
 Riskless Leverage

 Dividend can be postponed

 Fixed Dividend

 Limited Voting rights

 Disadvantages
 Obligatory Payment

 Financial Risk

 Restricted Covenants

 Cash Outflow
Attributes: Debentures /Term Loans
Features

Claim on Assets and Income

Interest Rate

Maturity

Sinking fund

Indenture

Security

Convertible and Non-Convertible Debenture
Attributes: Debentures /Term Loans
Advantages

Less Costly

No Ownership Dilution

Fixed Payment of Interest

Lesser Real Obligation
Disadvantages

Obligatory Payment

Financial Risk

Restricted Covenants

Cash Outflow
Attributes: Venture capital

A venture capital company is defined as a financing

institution which joins an entrepreneur as a co-
promoter in a project and shares the risks and
rewards of the enterprise.
Nature:
 Equity financing to new companies

 Long term investment

 Provide capital as well as business skills

 Involves high risk-return spectrum

Attributes: Venture capital
 Continuous involvement in business after investment
 Disinvest the holdings either to the promoter or in the market

Scope:
 Development of an idea- Seed Finance

 Implementation Stage- Start Finance

 Fledging Stage- Additional Finance

 Establishment Stage- Establishment Finance

Attributes: Private Equity

 Equity capital that is not quoted on a public exchange.

 It consists of investors and funds that make investments directly into private
companies or conduct buyouts of public companies .
 It is raised from retail and institutional investors .
 It can be used to fund new technologies, expand working capital within an
owned company, make acquisitions, or to strengthen a balance sheet.
 It is a long Run Investment.
Attributes: Private Equity
 Private equity firms will sometimes pool funds
together to take very large public companies private.
 Many private equity firms conduct what are known
as leveraged buyouts (LBOs), where large amounts of
debt are issued to fund a large purchase.
 Private equity firms will then try to improve the
financial results and prospects of the company in the
hope of reselling the company to another firm or
cashing out via an IPO.
Attributes of Investment Avenues:
ADR and GDR
Companies are permitted to raise foreign currency
resources through two main sources:
a) issue of foreign currency convertible bonds more
commonly known as ‘Euro’ issues and
b) issue of ordinary shares through depository
receipts namely ‘GDR and ADR to foreign
investors i.e. to the institutional investors or
individual investors.
American Depositary Receipt
American Depositary Receipt is a physical certificate evidencing
ownership of American Depositary Shares which is a U.S.
dollar denominated form of equity ownership in a non-U.S.
company.

It represents the foreign shares of the company held on deposit

by a custodian bank in the company's home country and
carries the corporate and economic rights of the foreign
shares, subject to the terms specified on the ADR certificate.
Global Depository Receipts
Global Depository Receipts (GDRs) may be defined as a global
finance vehicle that allows an issuer to raise capital
simultaneously in two or more markets through a global
offering.

GDRs may be used in public or private markets inside or outside

US. GDR, a negotiable certificate usually represents
company’s traded equity/debt.

The underlying shares correspond to the GDRs in a fixed ratio

say 1 GDR=10 shares.
Financial Market
 Nature of Claim: Debt Market, Equity Market
 Maturity of Claim: Money Market, Capital Market
 Seasoning of Claim: Primary Market, Secondary
Market
 Delivery Time: Cash or Spot Market, Forward or
Future Market
 Organisational Structure: Exchange Traded Market,
Over the Counter Market
Meaning of Investment Management

Investment management is the professional asset

management of various securities (shares, bonds
and other securities) and other assets (e.g., real
estate) in order to meet specified investment goals
for the benefit of the investors. The provision of
investment management services includes elements
of financial statement analysis, asset selection, stock
selection, plan implementation and ongoing
monitoring of investments.
Process of Investment Management

 Investment Objectives and Constraints

 Assets Mix
 Portfolio Strategy
 Selection Of Securities
 Portfolio Execution
 Portfolio Revision
 Portfolio Evaluation
Process of Portfolio Management
 Investment Objectives and Constraints
 Assets Mix
 Portfolio Strategy
 Selection Of Securities
 Portfolio Execution
 Portfolio Revision
 Portfolio Evaluation
Types of Investment Management
Strategies
 Active management Strategy
 Passive Management strategy

Detailed discussion in Unit IV

 Approaches to Investment
 Fundamental Approach:
According to this approach stock prices are guided by the underlying economic (fundamental) factors. It
may be predicted through the analysis of the fundamental factors relating to the company, industry,
and economy.
 Psychological Approach:
According to this approach stock prices are guided by emotion, rather than reason. Stock prices are
believed to be influenced by the psychological mood of the investors.
 Academic approach:
Stock price behaviour corresponds to a random walk. This means that successive price changes are
independent. As a result, past price behaviour cannot be used to predict future price behaviour.
 Eclectic Approach:
This is the hybrid approach. Its operational implications are as follows: ·
 Conduct fundamental analysis to establish certain value ‘anchors’.
 Do technical analysis to assess the state of the market psychology. ·
 Combine fundamental and technical analyses to determine which securities are worth buying, worth
holding, and worth disposing of. ·
 Always remember higher level of return often necessitates the assumption of a higher level of risk.
Section: A
Chapter 2
Total Risk
 Total risk = systematic risk + unsystematic risk
 The standard deviation of returns is a measure of
total risk.
 For well-diversified portfolios, unsystematic risk is
very small.
 Consequently, the total risk for a diversified
portfolio is essentially equivalent to the systematic
risk.
 Investment risk

Investment risk may be defined as the probability or

likelihood of occurrence of losses relative to the
expected return on any particular investment.
Components of Risk
We can break down the total risk of holding a stock into
two components: systematic risk and unsystematic risk:
2
Total risk
R  R U
becomes
 R  Rmε
where
unnsystematic Risk: 
m is the systematic risk
Systematic Risk: m ε is the unsystematic risk

n
Measurement of Risk
 Standard Deviation
 Regression equation

 Covariance

As discussed in class........
Return
Return on investment is a performance measure used
to evaluate the efficiency of an investment or to
compare the efficiency of a number of different
investments. It may be calculated as follows:
 Expected Yield

 Actual Yield

 Holding Period Yield

Description as per the discussion in the class......

Relationship between Risk and
Return
The principle that potential return rises with an
increase in risk. Low levels of uncertainty (low-risk)
are associated with low potential returns, whereas
high levels of uncertainty (high-risk) are associated
with high potential returns.