Investment Analysis and

Portfolio Management
Unit - I
 Investment
• It is the employment of funds with the aim of achieving
additional income (interest, dividend , rent, pension, etc…) or
growth in the value(capital appreciation).

• The essential quality of an investment is that it involves

‘waiting’ for a reward (long-term commitment)

• Involves the commitment of resources which have been saved

or put away from current consumption in the hope that some
benefits will accrue in the future.
Financial & Economic meaning of Investment

• Allocation of monetary resources to assets

that are expected to yield some gain or
positive return over a given period of time.
• The assets range from safe to risky
investments.
 Securities
• Securities broadly represent evidence to property rights.

• A security provides a claim on asset and any future cash

flows the asset may generate

• According to securities contract regulation act 1956,

securities include shares, bonds, debentures, etc.

• Securities are classified on the basis of return(fixed income

or variable income) and the source of issue(Government or
corporate).
 Investment/speculation/Gambling
• Investment - “The employment of funds to acquire certain assets after due

diligence for mid to long period of time, with the objective of wealth

creation and additional income in future”

• Speculation - “The employment of funds to acquire assets for shorter

duration of time to take advantage of fluctuations in prices of underlying

assets”

• Gambling - “The employment of funds for entertainment/fun with the

chances of return depends upon probability of certain situation or events”.

For example, deploying funds on horse racing, game of cards, lottery, etc.
 Investment Avenues
• Bank Deposits – Savings, Recurring and Fixed deposits

• Money market Instruments – Call money, CD, CP, T-Bills, etc.

• Equity Shares

• Mutual Funds – SIP, Lump sum

• Insurance products – Term life, endowment plan

• Real Estate - Residential, Commercial, Agricultural land, etc.

• Government Saving schemes – PPF, NPS, SSY, etc..

• Bonds or debentures

• Precious metals or objects – Gold, Silver, antiques, etc..

 Process of Investment
• Determination of financial goals/ objectives
• Determination of Investible fund
• Identification of potential investment asset based on:
Goals, Return, Risk, Liquidity and Tenure of investment.
• Security Analysis – Market, Industry and company analysis
• Portfolio Construction – Diversification, selection and
allocation
• Portfolio Evaluation – Appraisal and Revision
 Attributes of Investment

• Return

• Risk

• Liquidity

• Tax Benefits

• Convenience (ease of investment)

• Risk and Return (Two sides of the investment coin)

• Return – It is the primary motivating force that drives investment. It

represents the reward for undertaking investment.

• The return of an investment consists of two components:

– Current Return – Periodic cash flow (income), such as rent,

dividend, interest, etc…

– Capital Return – It is reflected in the price change. It is simply the

price appreciation(or depreciation) divided by the beginning price
of the asset.

• Rate of return = Annual Income + (Ending Price – Purchasing Price)/

Purchasing Price
• Risk – It is the probability of the actual return
becoming less than the expected return.
• The word ‘risk’ is synonymous with the phrase
‘variability of return’.
• Every investor likes to reduce the risk of his investment
by proper combination of different securities.
• The most commonly used measure of risk in finance is
variance or its square root the standard deviation.
 Systematic Risk
• Systematic risk affects the entire market.
(e.g.: Recession, catastrophic damages, etc.)
• It is also known as “undiversifiable risk,” “volatility” or “market risk,” . It
affects the overall market, not just a particular stock or industry.
• This type of risk is impossible to completely avoid.
• It cannot be mitigated through diversification.
• Types of systematic risk – Market risk, Interest rate risk, Purchasing power
risk.
• In finance, the beta (β or beta coefficient) of an investment is a measure
of the risk arising from exposure to general market movements.
 Non-systematic Risk
• Non-systematic risk or unsystematic risk is unique and peculiar to
a firm or an industry.

• Unsystematic risk stems from managerial inefficiency,

technological changes in production process, availability of raw
materials, changes in consumer preferences, labour problems etc..

• Types – Business risk and Financial risk.

• Unsystematic risk can be easily controlled and avoided, up to a

great extent through portfolio diversification.
 Equity Market
• The stock market refers to the collection of markets and exchanges

where regular activities of buying, selling, and issuance of shares of

publicly-held companies take place. Such financial activities are

conducted through institutionalized formal exchanges.

• Stock market or equity market is primarily known for trading

stocks/equities, other financial securities - like exchange traded

funds (ETF), corporate bonds and derivatives based on stocks,

commodities, currencies, and bonds - are also traded in the stock

markets.
 World Equity Market

• There are 60 stock exchanges in the world. Of these, there are

16 exchanges with a market capitalization of $1 trillion or

more, and they account for 87% of global market

capitalization.

• With the world's largest markets being in the United States,

United Kingdom, Japan, India, China, Canada, Germany

(Frankfurt Stock Exchange), France, South Korea and

the Netherlands
• The New York Stock Exchange (NYSE) is first on the list of the largest

stock exchange in the world and is a highly esteemed stock exchange

in the USA which is situated at Wall Street, New York City. It was

established on 1792, and consists of 2,400 listed companies.

• Second on the list of largest stock exchange in the world is NASDAQ

established in 1971, and is sighted as the world’s first electronically

traded stock market. 

• It consists of more than 3,000 stocks listed under it and comprises of

the world’s humongous tech giants such as Apple, Microsoft, Google,

Facebook, Amazon, Tesla, and Intel. 

• The Tokyo Stock Exchange (TSE) is located
in Tokyo, Japan. It has around 3,500 listed companies.
• The TSE’s metric indicator is Nikkei 225 and it is home to
some of the voluminous  Japanese giants like
Toyota, Suzuki, Honda, and Mitsubishi and Sony. 
• The Shanghai Stock Exchange (SSE) is located in the city
of Shanghai, China. It is the world’s fourth-largest stock
exchange. 
• The  Hong Kong Stock Exchange is the world’s fifth-
largest stock exchange.
• London Stock Exchange
• EURONEXT - acronym for European New Exchange
Technology.  EURONEXT was established in 2000 by
the consolidation of the exchanges in Amsterdam,
Paris, and Brussels.
• Shenzhen Stock Exchange, China

• The Toronto Stock Exchange (TSX), Canada. 

• Bombay Stock Exchange, India.

Operating stock exchanges in India
https://en.wikipedia.org/wiki/Indian_stock_exchange

• Bombay Stock Exchange (BSE) in Mumbai, one of the two

principal large stock exchanges of India

• National Stock Exchange of India (NSE) in Mumbai, one of

the two principal large stock exchanges of India

• Calcutta Stock Exchange in Kolkata, a smaller stock exchange

• India International Exchange (INX)

• NSE IFSC Ltd., Gujarat

 BSE
• Established in 1875, the BSE (formerly known as Bombay Stock Exchange
Ltd.) is Asia's oldest stock exchange.
• The BSE is the world's 10th largest stock exchange 
• Index - BSE SENSEX (30 stock index)
• Trading Time - Monday to Friday (9:15 a.m. - 3:30 p.m. )

• No. of Companies Listed – More than 6000 (world's No. 1 exchange in

terms of listed members)
• Settlement Cycle – T+ 2 days

• Automated, screen-based trading platform called BSE On-Line Trading

(BOLT) has a capacity of 8 million orders per day
 NSE
• Year of Establishment – 1992 ( first exchange in the country to
provide a modern, fully automated screen-based electronic trading
system). Index – NIFTY (50 stock index)
• No. of Companies Listed – More than 1500
• Automated, screen-based trading platform – National Exchange for
Automated Trading (NEAT)
• Instrumental in creating the National Securities Depository
Limited (NSDL) which allows investors to securely hold and transfer
their shares and bonds electronically.
• First to launch equity derivatives trading
 Players in the Equity market
(The three I’s )
 Issuers
 Corporate's issue both debt and equity securities

 Government issue debt securities.

 Investors
 Individual /Retail Investors

 Institutional / Corporate Investors - DIIs and FIIs

 Intermediaries
 Merchant bankers, Stock exchange, Stock Brokers, Depositories, Credit rating
agencies, SEBI, etc.
 Retail/Individual Investors
• SEBI law defines retail individual investor as an

investor who applies or bids for securities for a

value of not more than Rs 2,00,000 in an IPO and

buys or holds shares worth less than Rs 2,00,000

in a stock.

• There is no such limit in commodities to define a

retail investor.
 Cont…
• They purchase securities for their personal accounts and
often trade in much lower amounts compared with
institutional investors like mutual funds, pension funds
like EPFO or foreign institutional investors.

• Individual investors are thought to be less knowledgeable,

less disciplined, less skillful, and more prone to
behavioural and emotional errors than professionals.
 Institutional Investors
• An institutional investor is an organization, rather than
an individual, that invests on behalf of the organization's
members.
• Institutional investors are the biggest component of the
so-called "smart money" group.
• There are generally six types of institutional investors:
pension funds, endowment funds, insurance companies,
commercial banks, mutual funds and hedge funds.
 Cont.…
• Institutional investors have the resources to do extensive

research on wide ranging investment options, and due to their

specialized knowledge, they generally have an edge over retail

investors.

• An institutional investor is not expected to be the principal

beneficiary of any investment performance. Its business acts

broadly as a vehicle through which others may channel

investments. However, institutional investors also use their own

money.
 Pension Funds
Pension funds or retirement funds help investors to accumulate their part of savings

over a long-term period so that they can have a steady flow of income after

retirement.

kinds of pension plans:

• Plans that are sponsored by an insurer where the investment is solely in debt and

are best suited for conservative investors.

• Plans that are unit-linked and invest in both equity and debt.

• The National Pension Scheme, which invests either 100% in government

securities, 100% in debt securities (other than government securities), or a

maximum of 75% in equity

 EPF and NPS
• For most salaried individuals, the monthly contribution towards the
Employee’s Provident Fund (EPF) remains the only forced savings mechanism.

• The Employee Provident Fund (EPF) is a retirement-oriented investment with

tax-saving benefits.

• The National Pension System (NPS) is also considered as one of the best
investment tools for retirement. It is a voluntary contribution scheme.

• NPS offers three options of investment to its investors: equity, corporate debt,
and government bonds.

• Comparatively, investing in NPS can fetch higher returns as it allows its

investors to have higher exposure to equities.
How Mutual Fund Operates?
 Mutual Funds

• A mutual fund is a company that pools money from

many investors and invests the money in securities such
as stocks, bonds, and short-term debt.

• The combined holdings of the mutual fund are known as

its portfolio. Investors buy units (shares) in mutual funds.

• Each share represents an investor’s part ownership in the

fund and the income it generates.
 Benefits of Mutual Funds
• Professional Management

• Portfolio Diversification

• Reduction in transaction cost

• Liquidity

• Tax benefits

• Transparency

• Protection of the interest of investors

• Brings stability to the stock market

 Insurance companies
• What happens inside an insurance company is a smart investment of the crores

of rupees that are collected through small premiums by millions of investors.

• For example, thousands of people invest in a term plan with a coverage of Rs.

10,00,000 for a period of 15 years.

• Now, the investment experts in the insurance company will calculate the

probability of insurance claims every year and the long-term returns from a pool

of low risk and diverse financial investment instruments such as government

bonds, stocks, debentures and others as approved in the IRDA investment

guidelines.
• To ensure that funds in insurance companies are invested
responsibly, the insurers must follow the Insurance
Regulatory and Development Authority (Investment)
(Amendment) Regulations, 2001 by the IRDA. These
guidelines control the degree of the investments by insurers.
• For example, the insurers offering life-insurance plans must
invest their controlled funds in Government Securities and
other approved funds not less than 50%.
• The freedom to choose the investment route is given to the
experts of the insurance companies.
 Endowment Funds
• A pooled fund of money (or gifted property), the principal of which is

typically held in perpetuity and invested.

• A part of the returns is utilized by the institute to fulfil various objectives

which are in line with the institute’s vision, and the remaining part is

ploughed back into the principal to ensure market growth.

• An endowment, thus allows for both, immediate funding and long-term

financial security for the institution.

• https://

economictimes.indiatimes.com/markets/stocks/news/endowment-funds
 Banks
• A bank is a financial institution that
accepts deposits from the public and creates credit.
• Lending activities can be performed either directly or
indirectly through capital markets.
• Due to their importance in the financial stability of a
country, banks are highly regulated in most countries.
 Hedge Funds

• A hedge fund is an investment fund that

pools capital from HNI or institutional investors and invests in

a variety of assets, often with complicated portfolio-

construction and risk management techniques.

• It is administered by a professional investment

management firm, and often structured as a limited

partnership or  limited liability company.

 Cont…
• Hedge funds are generally distinct from mutual funds and

regarded as alternative investments, as their use of leverage is

not capped by regulators, and distinct from private equity

funds, as the majority of hedge funds invest in relatively liquid

assets.

• Hedge funds are made available only to certain sophisticated

or accredited investors, and cannot be offered or sold to the

general public.
 Constraints in Investment
• Liquidity Constraints
• Time Constraints
• Tax Constraints
• Legal Constraints
• Other Constraints
https://
analystnotes.com/cfa-study-notes-describe-the-i
nvestment-constraints-of-liquidity-time-horizon-
tax-concerns-legal-and-regulatory-factors-and-u
nique-circumstances-and-their-implications-for-t
he-choice-of-portfolio-assets.html
 Interest Rates
• Interest rates determine the amount paid by borrowers
(debtors) for holding money from lenders (creditors).
• These rates are usually expressed as a percentage of an
amount paid for a period of one year, however, they are
also sometimes calculated over shorter periods.
• Offered interest rates vary from product to product and
from bank to bank, with a number of factors contributing
to the rate of interest.
 Cont…

• When investors devote capital to a financial product, the

bank is in effect borrowing the money.

• The interest is the price paid by the bank for leaving the
money with them for a fixed period of time.

• For example, an investment of Rs. 10,000 for one year

with an interest rate of 2% means the investor will receive
a total of Rs. 200 in interest at the end of the term.
 Types of Interest Rates

• Nominal Interest rate - The nominal interest of an investment

or loan is simply the stated rate on which interest payments are
calculated.
• Essentially, this is the rate on which savings accrue interest over
a period of time.
• For example, an investment of Rs. 10,000, at a nominal interest
rate of 5% over 1 year, would earn the investor Rs. 500.
• Simple interest = (principal x interest rate x time)/100
• Effective Interest rate - Takes into account compounding
over the full term of the investment.
• It is often used to compare the annual interest rates with
different compounding terms (daily, monthly, annually,
etc.).
• This means that a nominal interest rate of 5% compounded
quarterly would equate to an effective rate of 5.095%,
compounded monthly at 5.116%, and daily at 5.127%.
• Compound interest = principal x [(1 + interest rate)n – 1]
• Real Interest rate - It is useful when considering
the impact of inflation on nominal interest rates.
• In essence, the real interest rate deducts the rate
of inflation from the nominal interest rate.
• This means that if the nominal interest rate is 5%
and the inflation rate is also 5%, the real interest
rate is effectively 0%.
• Fixed and Variable/floating interest rate
• As the name suggests, the fixed interest rate remains
constant for the entire loan tenure.
• Since this interest rate doesn’t fluctuate over time, the
borrower will have to pay a fixed monthly instalment
throughout the tenure.
• The fixed interest rate is usually 1% to 2.5% higher than the
floating interest rate offered by a bank or non-banking
financing company (NBFC)
 Cont..
• A floating interest rate implies that the rate of interest is subject to

revision every quarter.

• The interest charged on the loan will be pegged to the base rate,

which is determined by the RBI based on various economic factors.

• With changes in the base rate, the interest charged on the loan will

also vary.

• Mostly the Changes, if any, in the interest rate during the tenor of

the loan will not affect the EMI; instead, the tenor of the floating

interest loan will vary.

 Market Indices
• A security market index is a means to measure the growth of
value of a set of securities.

• Sometimes, an index is just an arithmetic average, but,

usually, it is a ratio where the current index value is divided by
the index value of some base year—the base market value.

• The two popular security market indices in India are Sensex

and Nifty.

• Index value = (total free-float market capitalisation/ Base

market capitalisation) * Base index value.
 Importance of Indices
• They help us recognise the broad trends in the market.

• They can be used as a benchmark for evaluating the

investor’s portfolio.

• They function as a status report on the general economy as

various economic policies have an impact on the stock
market.

• Technical analysts study the past performance of the indices

to predict the future movement of the stock market.
 SENSEX
• The BSE SENSEX  is also known as the S&P Bombay Stock

Exchange Sensitive Index or simply the SENSEX

• The index is calculated based on a free float capitalisation method

• It considers the stocks of top 30 well-established and financially sound

companies, representing various industrial sectors of the Indian economy.

• Published since 1986, the S&P BSE SENSEX is regarded as the pulse of the

domestic stock markets in India.

• The base value of the SENSEX is 100 and its base year as 1978–79.
 NIFTY
• Full form of NIFTY is National Index Fifty.

• It represents the weighted average of top 50 Indian company stocks listed in NSE from 13

sectors.

• The NIFTY 50 index is a free float market capitalisation weighted index.

• The base period for the CNX Nifty index is 1995 and the base value is 1000 and a base

capital of Rs 2.06 trillion.

• NSE Indices Limited also offers several other stock indexes with the NIFTY in the name that

are related to NIFTY 50. They include:

• Other broad-based indexes (NIFTY 100, NIFTY Mid-Cap 50, NIFTY Small Cap 50, etc.)

• Sector-based indexes (NIFTY Auto, NIFTY Media, NIFTY Bank, NIFTY Pharma, NIFTY Realty,

etc.)
 Foreign Market Indices
Some famous security market indices in the US are:

• Dow Jones Industrial Index (DJIA), which is a group of 30 stocks of the largest American

corporations

• Standard & Poor's Composite 500 Index (S&P 500), which comprises about 500 stocks

• NASDAQ Composite Index

Some famous international indices outside US include

•  DAX (Germany)

• Hang Seng (Hong Kong)

• FTSE (U.K.)

• Nikkei (Japan)

• TSX (Canada)

• KOSPI (South Korea)

 Bond Market Index

• A bond index or bond market index is a method of

measuring the value of a section of the bond market.
• It is computed from the prices of
selected bonds (typically a weighted average).
• It is a tool used by investors and financial managers
to describe the market, and to compare the return
on specific investments.
 Cont.
• The S&P BSE India Bond Index is designed to track the
performance of local-currency denominated government
and corporate bonds from India.
• NSE recently launched Nifty Bharat Bond Index series, which
will measure the performance of a portfolio of ‘AAA’ rated
bonds issued by the government-owned entities.