TIME

VALUE OF
MONEY

DR TARUN K SONI

ASSISTANT PROFESSOR, FINANCE &

ACCOUNTING

LBSIM, DWARKA, NEW DELHI

EX CONSULTANT, MINISTRY OF FINANCE,

PRIME MINISTER’S OFFICE & NITI AAYOG,
NEW DELHI
INTRODUCTION

What is Time Value?

• Which of the two will you prefer?
• Rs. 50,000 Today vs. Rs. 50,000 after a Year?
• Rs. 50,000 Today vs. Rs. 55,000 after a Year?
• Rs. 50,000 Today vs. Rs. 61,000 after 2 Years?

Not only absolute amount but when you get money

(Timing) is also important.
• Why Time Value?

• Risk/ Uncertainty

• Preference for Consumption

• Investment Opportunities
BASIC CONCEPTS

• Present Value
• Present value (PV) is the current value of a future sum of money or stream of cash flows
given a specified rate of return.
• Future Value
•  Future value (FV) is the value of a current asset at a specified date in the future based on
an assumed rate of growth.
• Time
• The period for which the amount is invested.
• Interest:
• The reward for parting away with liquidity/bearing risk.
• Risk Free rate
• Required Rate: Risk Free Rate+ Risk Premium
PRESENT VALUE/FUTURE VALUE: CASELETS

Caselet A:
Your Insurance company promises to pay you a lumpsum amount of 1 crore when you complete the
age of 70. How much is the Present Value of the same if you assume a rate of Interest of 10%, if your
current age is 30 years.
• PV= ₹ 2,20,949.3

Caselet B
You are depositing a lump sump of Rs. 10 lakhs in 2019 in your PPF account. What will be future
value of such investment in 2029. (Assumption of ROI)
• FV= ₹ 25,93,742.46
DOUBLING YOUR INCOME

Caselet C:
An investment guarantees a return of 12% per Annum. How
many years it will take to double the investment?
Rule of 72
• Caselet D:

An investment guarantees a return of 5% per Annum. How

many years it will take to triple the principle?
Rule of 115
 DOUBLING
NATIONAL INCOME
• GDP of India in 2017- 2.6 Trillion US Dollar
• At what average rate should the GDP grow so that the
National Income doubles by 2022?
• Required Rate: 14.4%
• Ordinary Annuity: Constant Cash Flow Each Year
• PV of Annuity
• FV of Annuity
ANNUITY

Caselet E:
Your friend is paying Rs. 20512 per annum as insurance premium to LIC. The term of the insurance plan is for
20 years. The plan guarantees a sum of Rs. 10 lakh on Maturity along with a lumpsum of Rs. 8 lakhs in case of
premature death. As a Wealth Manager what should be your advice to your friend?
Annuity in Perpetuity

Caselet F
You have invested Rs 6,00,000 in irredeemable preference shares having a fixed dividend of 15% per year.
What is the present value of perpetual future payments today if the interest rate is 10%?
Formula=Int. Income/Rate of Int.
Growing Annuity: Contribution increases as fixed percentage: Formula=Int. Income/Rate of Int.-growth rate
Contribution increases with fixed amount
RISK PROFILING &
ASSET ALLOCATION
• Risk Profiling:
• A blanket term to describe the various facts and
investor traits that need to be taken into account to
identify suitable investments for an investor.
• Combination of risk capacity and risk aversion.
• Risk capacity applies to the objective ability of an
investor to take on financial risk.
SEVERAL FACTORS WHICH COULD EFFECT INVESTORS PREFERENCE
• Investor’s goals/objectives
• Time horizon,
• Liquidity needs,
• Risk aversion,
• Age
• Other investments,
• Financial situation and needs,
• Tax status,
• Investment experience
• Investors Lifecycle
• Unique needs and preferences
INDIVIDUAL INVESTOR LIFE CYCLE
The individual investors life cycle can often be described using four separate phases or
stages:
• Accumulation Phase
• Consolidation Phase
• Spending Phase
• Gifting Phase
WHAT IS ASSET ALLOCATION?

• The process of deciding how to distribute wealth

among asset classes, sectors, and countries for
investment purposes.
• Not an isolated choice, but rather a component of the
portfolio management process.
TYPES OF ASSET
ALLOCATION
• Strategic Asset Allocation:
• Based on Risk Profile, Age, Liquidity needs
• Tactical Asset Allocation:
• Risky
• Based on the views of the market.
• When market is undervalued, buy equity and vice versa
• Fixed Asset Allocation
• Flexible Asset Allocation
ASSET ALLOCATION STRATEGIES

• Risk Avoidance
• Can avoid any real chances of loss
• Generally a poor strategy except for a part of an overall portfolio

• Risk Anticipation
• Position part of your portfolio to protect against anticipated risk factors
• For example, maintain a cash reserve
RISK MANAGEMENT STRATEGIES

• Risk Transfer
• Insurance and other investment vehicles can allow for the transfer of risk, often at a price, to
another investor who is willing to bear the risk

• Risk Reduction
• Effective diversification and asset allocation strategies can reduce risk, sometimes without
sacrificing expected return.
• Thank You
• Questions?
THE PORTFOLIO MANAGEMENT PROCESS

A four step process:

1. Construct a policy statement
2. Study current financial conditions and forecast future trends
3. Construct a portfolio
4. Monitor needs and conditions
THE PORTFOLIO MANAGEMENT PROCESS

1. Policy statement
• Specifies investment goals and acceptable risk levels
• The “road map” that guides all investment decisions
THE PORTFOLIO MANAGEMENT PROCESS

2. Study current financial and economic conditions and forecast future trends
• Determine strategies that should meet goals within the expected environment
• Requires monitoring and updates since financial markets are ever-changing
THE PORTFOLIO MANAGEMENT PROCESS

3. Construct the portfolio

• Given the policy statement and the expected conditions, go about investing
• Allocate available funds to meet goals while managing risk
THE PORTFOLIO MANAGEMENT PROCESS

4. Monitor and update

• Revise policy statement as needed
• Monitor changing financial and economic conditions
• Evaluate portfolio performance
• Modify portfolio investments accordingly
• Role of Financial Planner
FINANCIAL PLANNING PROCESS

• Contract and Documentation

• Client Data Collection
• Life Cycle
• Wealth Cycle
SYSTEMATIC APPROACH TO INVESTING

• Systematic Investment Plan

• Systematic Withdrawal Plan
• Systematic Transfer Plan
HIGH NET WORTH INDIVIDUAL

• https://www.cnbc.com/2018/09/12/heres-how-some-of-the-wealthiest-people-are-investin
g-their-cash.html

• Further readings
• https://www.cnbc.com/2019/09/06/mohamed-el-erian-on-bonds-if-you-stick-with-old-rul
es-you-will-lose.html
PORTFOLIO OF RAKESH JHUNJHUNWALA

• https://trendlyne.com/portfolio/superstar-shareholders/53781/latest/rakesh-jhunjhunwala/
INVESTMENT AND RISK MANAGEMENT

• Role of Equity Markets

• Why Equity?
• Higher Return

• Types:
• Primary Market
• Secondary Market

• How: DMAT Account

• Precaution?
TYPES OF EXPOSURES

Active Exposure Passive Exposure

Index-based investing
ACTIVE EXPOSURE-MULTIBAGGERS STOCKS

Year Stock Initial Investment Value as on Date

1993 Infosys 10,000 5.17 crores

2000  Eicher Motors 55,000 4.80 crores

1990-91 HDFC Banks 1,500 Rs.25 lakhs

1989  ITC 1,00,000 10 crores

1980 Wipro 10,000 ?

WIPRO GROWTH STORY
NUMBER OF
YEAR ACTION SHARES FACE VALUE
1980 Initial Investment 100 Rs. 100
1981 1:1 Bonus 200 Rs. 100
1985 1:1 Bonus 400 Rs. 100
1986 Stock split to FV Rs.10 4,000 Rs. 10
1987 1:1 Bonus 8,000 Rs. 10
1989 1:1 Bonus 16,000 Rs. 10
1992 1:1 Bonus 32,000 Rs. 10
1995 1:1 Bonus 64,000 Rs. 10
1997 2:1 Bonus 1,92,000 Rs. 10
1999 Stock split to FV Rs.2 9,60,000 Rs. 2
2004 2:1 Bonus 28,80,000 Rs. 2
2005 1:1 Bonus 57,60,000 Rs. 2
2010 2:3 Bonus 96,00,000 Rs. 2
2017 1:1 Bonus 1,92,00,000 Rs. 2

2019 1:3 BONUS 2,56,00,000 626 CRORE

OTHER SIDE OF THE COIN
STOCK DATE OF PRICE ON THAT CURRENT PRICE
INVESTMENT DATE
Vodafone Idea April 2015 115 5.25
Tata Motors September 2016 588 129
Jaypee Infra September 2010 100 1.50
Indian Overseas Bank January 2008 227 10
Reliance January 2008 739 0.90
Communications
Reliance Power July 2008 421 3.32
PASSIVE INVESTMENTS

• Portfolio Management Companies

• Mutual Funds
• Index Funds
• Exchange Traded Funds
ADVANTAGES OF ETF’S

• Tracks an index/Provides diversification benefits

• Real time prices
• Intraday trading on the exchange
• Higher transparency as compared to actively managed schemes
• Lower expense ratio compared to actively managed schemes
• Put limit orders
SECTOR EXPOSURE AND DIVERSIFICATION

AGGRESSIVE DEFENSIVE

• Auto • FMCG
• Real Estate • Education

• Metal • Pharma

• Media • IT

• Private Banking • Financial Services

• https://www.moneycontrol.com/stocksmarket • PSU Banking Sector

sindia/?dashboard=l2
HOW TO SELECT STOCKS ?
FUNDAMENTAL ANALYSIS
• Fundamental analysis examines the key
ratios of a business to determine its
financial health. It can also be used to
determine the value of what a company's
stock should be.
TECHNICAL ANALYSIS
• Technical analysts believe past trading
activity and price changes of a security
can be valuable indicators of the
security's future price movements.
FUNDAMENTAL ANALYSIS-
SELECT INDICATORS
• Earnings Per Share
• Price to Earnings
• Price to Book Ratio
• Dividend Yield Ratio
• Dividend Payout Ratio
• Price to Sales Ratio
• Return on Equity
KEY RATIOS

• Earnings per share (EPS) is calculated as a company's profit divided by the outstanding
shares of its common stock. The resulting number serves as an indicator of a company's
profitability. 
• Price Earnings ratio is the ratio of company's current share price to its earnings per
share. Price Earnings ratio is the ratio of company's current share price to its earnings per
share. It gives us an idea of what the market is willing to pay for company's earnings.
KEY RATIOS

• The price-to-book, or P/B ratio, is calculated by dividing a company's stock price by

its book value per share, which is defined as its total assets minus any liabilities. Low
P/B ratios can be indicative of undervalued stocks, and can be useful when conducting a
thorough analysis of a stock.
• The dividend yield is a financial ratio that measures the amount of cash dividends
distributed to common shareholders relative to the market value per share. The dividend
yield is used by investors to show how their investment in stock is generating either cash
flows in the form of dividends or increases in asset value by stock appreciation.
KEY RATIOS

• The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders
relative to the net income of the company. It is the percentage of earnings paid to shareholders in
dividends. The amount that is not paid to shareholders is retained by the company to pay off debt
or to reinvest in core operations. It is sometimes simply referred to as the 'payout ratio.’
• The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its
revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues. The
P/S ratio can be calculated either by dividing the company’s market capitalization by its total sales
over a designated period – usually twelve months, or on a per-share basis by dividing the stock
price by sales per share. The P/S ratio is also known as a "sales multiple" or "revenue multiple."
KEY RATIOS

• Return on equity (ROE) is a measure of financial performance calculated by dividing net

income by shareholders' equity. Because shareholders' equity is equal to a company’s
assets minus its debt, ROE could be thought of as the return on net assets.
• ROE is considered a measure of how effectively management is using a company’s assets
to create profits.
ASSIGNMENT 1

• FUNDAMENTAL ANAYSIS OF ANY TWO RELATED STOCKS

• INDIVIDUAL ASSIGNEMENT
• MAX MARKS-15
• LAST DATE: 28TH SEPTEMBER
• MODE OF SUBMISSION: EMAIL TARUN@LBSIM.A
• LATE SUBMISSIONS: NOT ALLOWED
 Technical Analysis

• Technical analysis is a security analysis technique that claims the ability to

forecast the future direction of prices through the study of past market data,
primarily price and volume.
• In its purest form, technical analysis considers only the actual price and
volume behavior of the market or instrument.
• Contradicts EMH, ignores" the actual nature of the company, market, currency
or commodity and is based solely on "the charts,“
• Any institution will typically have both a technical analysis and fundamental
analysis team.
• Users hold that even if technical analysis cannot predict the future, it helps to
identify trading opportunities.

MACD and Technical Analysis 45

 Exhibit 15.1

MACD and Technical Analysis 46

 Advantages of Technical Analysis
• Technical analysis is not heavily dependent on financial accounting
statements. The technician contends that there are several major problems
with accounting statements:
– Lack information needed by security analysts
– GAAP allows firms to select reporting procedures, resulting in
difficulty comparing statements from two firms
– Non-quantifiable factors do not show up in financial statements

MACD and Technical Analysis 47

 Challenges to Technical Analysis
• For Assumptions of Technical Analysis
– Empirical tests of Efficient Market Hypothesis (EMH) show that
prices do not move in trends
• For Technical Trading Rules
– The past may not be repeated
– Patterns may become self-fulfilling prophecies
– A successful rule will gain followers and become less successful
– Rules require a great deal of subjective judgement

MACD and Technical Analysis 48

 Technical Analysis Tools
• GRAPHS/PLOTS • BOLLINGER BANDS
• MOVING AVERAGES • KST
• MACD • DOW
• RSI • OBV

MACD and Technical Analysis 49

 Moving Averages (MA)
and Exponential Moving Averages (EMA)
1. MA(current) = { Price(past1) +
Price(past2) + … Price(pastN) } / N CLOSE MA (3 day) EMA (3)

2. EMA(current) = ( (Price(current) - 23.00 23.00 23.00

EMA(prev) ) x Multiplier) +
22.87 22.87 22.94
EMA(prev) where the Multiplier = 2
/ (N + 1) and N in the time period is 29.22 25.03 26.08
the fixed period one 20.90 24.33 23.49
3. Percentage EMA uses a set 26.55 25.56 25.02
percentage multiplier and the above
equation. 26.85 24.77 25.93

4. In EVA (3), multiplier is 2/(3+1) or . 20.33 24.58 23.13

5 19.88 22.35 21.51
5. Ex: EVA at period 3 is (29.22 –
30.33 23.51 25.92
22.94)(.5)+ 22.94 = 26.08 in oval
using fixed period of 3 example. 26.00 25.40 25.96

MACD and Technical Analysis 50

 SMOOTHING BY MOVING AVERAGE &
EXPONENTIAL MOVING AVERAGE
35.00

30.00

25.00

20.00 CLOSE
MA (3 day)
15.00 EMA (3)

10.00

5.00

0.00
1 2 3 4 5 6 7 8 9 10

EMA is subject to quicker turns than a simple MA is.

MACD and Technical Analysis 51
 Simple Price Analysis

SELL BUY SELL

• If buy when price is above 70 day EMA and sell

when below, then sell in mid MAY, buy back again
in mid October, and sell again in early 2000.
MACD and Technical Analysis 52
 Two Moving Averages
(for momentum price oscillators)
• Short run moving average emphasizes what is
currently occurring
– Someone could be accumulating shares and bidding the
price up
– Someone could be dumping shares to bring it down
• A long run moving average is the base line against
what is happening generally
• When the short run crosses the long run, we see
momentum in the price (BUY).

MACD and Technical Analysis 53

 Momentum Price Oscillator
• A Price oscillator is the difference between a
short and long exponential moving average as a
percent or as an amount
• When line goes above zero, buy as the 9 day
is above the 25 day
• It is good in a trending market, but it
whipsaws with too many trades in sideways
markets

MACD and Technical Analysis 54

 Moving Average Covergence-
Divergence (MACD)
• MACD is an updated price momentum indicator (Gerald Appel)
which includes a signal or trigger line.
• It is a smoothed oscillator based on the point spread difference
between two exponential moving averages, constructed as a (Short –
Long) oscillators.
 A 26 week EMA (long) & a 12 week EMA (short)
 The difference (short - long) is MACD line
 9 week EMA to form the SIGNAL or TRIGGER line
 Buy when MACD crosses Trigger Line

MACD and Technical Analysis 55

 Moving Average Covergence-
Divergence (MACD)
Moving Average Convergent Divergent (MACD) is a trend deviation
oscillator that measures the difference between two exponential
moving averages of different lengths.
1. MACD line = subtract a 26 period exponential moving average
from a 12 period (a price oscillator)
2. The SIGNAL line - dotted line is a 9 period exponential moving
average of the MACD line as an early trigger.
– Buy when MACD crosses above Trigger line.
– Sell when MACD crosses below the Trigger line
• Brown & Bentley in Cyber Investing suggest 17 days (long) and 8
days (short), and signal line 9 days

MACD and Technical Analysis 56

 RSI INDICATOR
• Early watch signals occur when the RSI indicator crosses above or
below its 10-day moving average.

The Relative Strength Index • Buy signals occur when the RSI indicator crosses above
(RSI) indicator – is a method of 30% level.
measuring the relative strength of a • Sell signals occur when the RSI indicator crosses below
share against itself. This indicator works on the 70% level.
principle of what goes up for a "time“ must come
down and is a simple ratio of how much the
share goes up in
a certain period of time versus how much it goes
down in the same
period. Put another way, imagine an elastic band. If
you stretch it too far and let one side go, it will
snap back. In the same way, if the market has
risen or fallen too
far, it will 'snap‘ back.

MACD and Technical Analysis 57

 RSI (Relative Strength Indicator)
 100 
RSI  100  

Total "Up" points 
1  Total "down" points 
If “Up Points” = 0, RSI = 0
If “Down Points” = 0, RSI = 100

RSI < 30 (Oversold)

RSI > 70 (Overbought)

MACD and Technical Analysis 58

 RSI (Relative Strength Indicator)
 100 
RSI  100  
1   Total "Up" points
Total "down" points  


Chart Interval: 15 minutes 7

RS     .636
Period Length: 20 (300 minutes)  11 
Total “up” points = 7
 100 
Total “down” points = 11 RSI  100   
1  RS 
RSI  38.89

MACD and Technical Analysis 59

 Bollinger Bands
• Bollinger Bands provide relative definitions of high and
low that can be used to create rigorous trading approaches.
• Bollinger Bands are plotted at standard deviation levels above and
below a moving average.
• When displaying Bollinger Bands you are required to select the
number of periods in the bands and the number of standard
deviations between the bands and the moving average.
• Default values of "20" for the number of periods, "simple" for the
moving average method, and "2" deviations.

MACD and Technical Analysis 60

MACD and Technical Analysis 61
 Bollinger Bands
Estimation of Bollinger Bands.

• Compute the simple moving average of the security

• Calculate the standard deviation of the security's price.
• Multiply that standard deviation value by two
• Add and subtract that amount from each point along the SMA.

MACD and Technical Analysis 62

 Bollinger Bands
• The bands widen when the security becomes more volatile, and
contract when the security becomes less volatile.
• Sharp price changes tend to occur after the bands tighten, as
volatility lessens.
• When prices move outside the bands, a continuation of the trend is
implied.
• Bottoms/tops made outside the bands followed by bottoms/tops
made inside the bands call for reversals in the trend.
• A move that originates at one band tends to go all the way to the
other band. This observation is useful when projecting price targets.

MACD and Technical Analysis 63

 KST-Know Sure Thing

• KST measures price momentum for four different price

cycles, combining them into a single momentum oscillator.
• A positive reading means the weighted and smoothed 
rate-of-change values are mostly positive and prices are
moving higher. 
• A negative reading indicates that prices are moving lower.
• A rising and negative KST line indicates that downside
momentum is waning.
MACD and Technical Analysis 64
 • Conversely, a falling and positive KST line indicates that
upside momentum is waning.
• Even though there are many different signals possible with
KST, the basic centerline and signal line crossovers are
usually the most robust.

MACD and Technical Analysis 65

VALUATION APPROACHES

• Absolute
• Dividend discount model (DDM)
• Discounted cash flow model (DCF).

•  Relative
• Comparable Companies Analysis
• https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/stock-valuati
on/
LEVERAGING