Investment Analysis and Portfolio

Management

Dr. Trinley Paldon

Investment Analysis is a pre-requisite for
making investments.
 What is investment?

Investment is parting with one’s fund, to be used by another

party, user of fund, for productive activity.

Generalised, investment means conversion of cash or

money into a monetary asset or a claim on future money for a
return.
This return is for saving (as abstaining from present
consumption), parting with saving or liquidity (to be
rewarded for waiting for a future consumption) and
lastly for taking a risk involving the uncertainty about
the actual return, time of waiting and cost of getting
back funds, safety of funds, and risk of the variability of
the return.
 What is security?
Investment in capital market is in various financial
instruments, which are all claims on money.

These instruments may be of various categories with

different characteristics. These are all called securities in the
market parlance.
 Investment Analysis
For making proper investment involving both risk and return, the
investor has to make a study of the alternative avenues of investment-
their risk and return characteristics and make proper projection or
expectations to his preferences of the risk and return of the
alternative investments under consideration.

The process of analyzing the individual securities and the market

as a whole and estimating the risk and return expected from each of
the investments with a view to identifying undervalued securities for
buying and overvalued securities for selling is both an art and a
science and is called investment analysis.
 What is Portfolio?
A combination of such securities with different risk-return
characteristics will constitute the portfolio of the investor.
Thus, a portfolio is a combination of various assets and/or
instruments of investment.

It is built out of the wealth or income of the investor over a

period of time, with a view to suit his risk or return
preferences to that of the portfolio that he holds.
Almost everyone owns a portfolio of investments.
 Investment Versus Speculation
According to Benjamin Graham “An investment operation is
one which, upon thorough analysis, promises safety of
principal and an adequate return. Operations not meeting
these requirements are speculative”.
Differences between Investor and Speculator
Investor
Planning horizon Longer planning horizon-
atleast one year holding
period.
Risk disposition Not more than moderate risk Willing to assume high risk
Return expectation Modest rate of return
Basis for decisions Greater significance to
fundamental factors-careful
evaluation
Leverage Own funds
Speculator
Short planning horizon-few
days to a few months
holding period
High rate of return
Technical charts-Market
psychology
Resorts to borrowings
 Stock market participants
They can be:

 Traders: short time horizon-within a day/week/a month-technical analysis.

 Speculators: may extend up to six months-technical analysis.

 Investors: longer time horizon-atleast a year-fundamental analysis.

Why invest?
•Longer life expectancy

•Increasing rates of taxation

•Interest rate

•Inflation

•Investment channels
Investment objectives
Safety

Rate of return

Growth

Liquidity

Protection from inflation

Investment channels
 Investment channels today

Simple/complex/familiar/new & unidentified

 Financial markets
A financial market is a market for creation and exchange of
financial assets.

Functions of Financial markets:

1. Financial markets facilitates price discovery
2. Financial markets provide liquidity
3. Reduce the cost of transacting-Search cost (explicit &
implicit costs) & information costs.
Classification of Financial Markets
Nature of claim Debt market
Equity market
Maturity of claim Money market
Capital market
Seasoning of claim Primary market
Secondary market
Timing of delivery Cash or Spot market
Forward or Futures market
Organizational structure Exchange traded market
Over-the-Counter market
 Portfolio management process:
1. Specification of investment objectives and constraints
2. Quantification of capital market expectations
3. Choice of the asset mix
4. Formulation of portfolio strategy
5. Selection of securities
6. Portfolio execution
7. Portfolio revision
8. Performance evaluation
Approaches to Investment decision
making:
• Fundamental approach

• Psychological approach

• Academic approach

• Eclectic approach
 Fundamental approach
• Intrinsic value-company/industry/economy

• Buy Undervalued stocks(whose intrinsic values exceed the market

price)

• Sell over-valued stocks (whose intrinsic values are less than the
market prices)
 Psychological approach
• When stock prices are guided by emotion, rather than reason.

• When greed and euphoria sweep the market, prices rise to

dizzy heights.

• When fear and despair envelop the market, prices fall to

abysmally low levels.
 Academic approach
• Academic research documented with the help of fairly
sophisticated methods of investigation.

• For example: stock prices reflects intrinsic values fairly well,

stock price behavior corresponds to a random walk, there is
a positive relation between risk and return.
 Eclectic approach
• Conduct the fundamental analysis to establish certain value
anchors’,
• Do technical analysis to assess the state of the market psychology,
• Combine fundamental and technical analyses-worth buying,
holding and dispose,
• Respect market prices and do not show excessive zeal in ‘beating
the market’,
• Accept the fact that the search of a higher level of return often
necessitates the assumption of a higher level of risk.
 Qualities for successful investing
• Contrary thinking

• Patience

• Composure

• Flexibility and openness

• Decisiveness
Investment/Speculation/Gambling
Investment alternatives and their evaluation
Two categories of investment alternatives:
1. Financial assets: Paper or electronic claims on some issuer such as
the government or a corporate body. Eg: equity shares, corporate
debentures, government securities, deposits with banks, mutual
fund schemes, insurance policies, and derivative instruments.

2. Tangible assets: Real estate and precious objects for eg: residential
house, commercial property, agricultural farm, gold, precious
stones, and art objects.
 Deposits:
1. Deposits: Bank deposit features: guarantees deposits, interest is generally paid quarterly, high
liquidity, loans can be raised against fixed deposits.
eg: Bank deposits, post office deposits, company fixed deposits.

2.Company Fixed deposits: Manufacturing-1-3 years/NBFC-25m-5yr. Interest rates higher than

bank deposits, credit rated.
 Government Savings schemes:
Government of India offers a number of small savings
schemes to individual investors.
Eg: Public Provident Fund Scheme, Senior Citizens’ Saving
Scheme, and National Savings Certificate etc.
 Public Provident Fund Scheme
Features includes:

•Individual (including minor) can participate in this scheme by opening bank

account either at nationalised banks or post offices.
•Minimum deposit is Rs. 500 and maximum is Rs. 150,000.
•Deposits in such can be deducted before computing the taxable income under
Section 80 C.
•7.1% interest rate; which is totally exempt from taxes.
•Original duration is 15 years – can be extended for 1 or more blocks of 5 years
each, with or without making further contributions.
 Post Office Time Deposits
•Deposits can be made in multiples of Rs. 200 without any limit.
•If the account is closed before one year, no interest is paid.
•On withdrawals after one year, but before the term of deposit,
interest is paid for the period the deposit has been held, subject to a
penal deduction of 2 percent.
•It can be pledged.
•An investment for a 5-year time deposit qualifies for tax relief under
Section 80 C.
•Latest rate around 5.5-6.7 as per maturity.
 Senior Citizens’ Saving Scheme
•Above 60 years of age or more.
•It is a 5-year deposit and can be extended by 3 years.
•Maximum deposit of Rs. 15 lakhs.
•Tax deduction under Section 80 C under the Income Tax Act
but interest is taxable.
•It is not transferable but premature withdrawal is possible
after one year with penalties.
•Latest rate 7.4%.
 National Savings Certificate
•It has a term of 5 years.
•The investments in NSC can be deducted before computing
the taxable income under Section 80 C (upto: 1.5 lakh).
•It can be pledged as a collateral for raising loans.
•Latest rate: 6.8%.
 Kisan Vikas Patra
•Initially, it was meant for farmers to enable them to save for
long-term, but now it is available for all.
•Maturity 125 months (interest 6.9%).
•Minimum deposit of Rs. 1000 and no maximum limit.
•80 C tax benefit is available.
 Sukanya Samridhi Yojana Account
•Girls only-has to be opened by parents for benefit and in the
name of girl child.
•The girl child should not have completed 10 years of age as
on date of opening the account.
•Parents are eligible for income tax exemption on deposit:
minimum Rs. 1000/ maximum of Rs. 1.50 lakh in a financial
year (Interest rate: 7.6%) (Section 80 C).
•The deposit in the scheme should continue for 14 years.
•The account shall mature on completion of 21 years from
the date of opening of the account, provided that where the
marriage of the account holder takes place before completion
of such period of 21 years, the operation of the account shall
not be permitted beyond the date of her marriage.

•After 18 years, to meet expenditure for marriage or higher

education of girl child, withdrawal up to a maximum of 50
percent of the deposit amount is allowed.
 Money market instruments
Debt instruments, which have a maturity of less than one year at the
time of issue, are called money market instruments.
They are:
•Treasury Bills
•Commercial paper
•Certificate of Deposit
•Call money market
•Repos
•Collateralised borrowing and lending obligations
 Treasury Bills
It is a claim against the government and does not require any
grading/endorsement/acceptance.
Treasury bills are largely held by banks. Provident funds, trusts, and
mutual funds have also become important investors in treasury bills
recently.

Presently 91/182/364-day treasury bill are issued. Most buyers of

treasury bills hold them till maturity and hence the secondary market
activity is quite limited.
 Cash Management Bills (CMBs)
In 2010, Government of India, in consultation with RBI introduced a
new short-term instrument, known as Cash Management Bills (CMBs),
to meet the temporary mismatches in the cash flow of the
Government of India. The CMBs have the generic character of T-bills
but are issued for maturities less than 91 days.

If the coupon payment date falls on a Sunday or any other holiday, the
coupon payment is made on the next working day. However, if the
maturity date falls on a Sunday or a holiday, the redemption proceeds
are paid on the previous working day.
 Repo Market
In a repo transaction, a holder of securities sells them with an
agreement to repurchase the same after a certain period at a
predetermined price which is higher than the sale price.
The party which lends securities (borrows cash) is said to be
doing the repo and the party which lends cash (borrows securities) is
said to be doing the reverse repo
It is generally done for a period not exceeding 14 days, though there is
no restriction on the maximum period for which a repo can be done.
It is settled on DVP (delivery vs payment) basis on the same
day. Participants in a repo transaction must hold Subsidiary General
Ledger account and current account with the RBI.
 Call money/ Money at call market
The loans are payable on demand, at the option of either the lender
or borrower and the maturity period varies from one day to fourteen
days.

It is unsecured lending and borrowing of funds restricted to Banks

and Primary Dealers for overnight purposes.

Typically used by banks when they do not have excess SLR to borrow
in LAF from the RBI.
 Commercial paper
Short term unsecured money market instrument. It can be issued by
corporates, primary dealers, and all India financial institutions.
It is meant to finance working capital needs of corporates.

Maturities- between 7 days to one year.

It is normally issued by firms with high-quality debt ratings.

 Certificate of Deposits
It is a negotiable money market instrument issued by a bank or an
eligible financial institution for a specified time period.
It is a product offered by banks and credit unions that provides an
interest rate premium in exchange for the customer agreeing to leave a
lump-sum deposit untouched for a predetermined period of time.

Almost all consumer financial institutions offer CDs, although it’s up to

each bank which terms it wants to offer, how much higher the rate will
be compared to the bank’s savings and money market products, and
what penalties it applies for early withdrawals.
Maturities: Banks: issues 7 day to one year.
Collateralised Borrowing and Lending
Obligation (CBLO)
CBLO is a secured borrowing and lending money market tool used for
short-term purpose. Borrowers of fund have to provide collateral in the
form of government securities and lenders will get it while giving loans.
There is no need of a collateral under the call money market.
Participants- Nationalised Banks, Private Banks, Mutual Funds, Primary
dealers, NBFC, Provident/Pension funds, Corporates etc. these institutions
have to avail a CBLO membership to do activities in the market.
Maturity – 1 day to 1 year. CCIL provides the Dealing System through
Indian Financial Network (INFINET) and Negotiated Dealing System for a
participating in the market.
 BONDS OR DEBENTURES
Bonds or debentures represent long-term debt instruments. The issuer of a
bond promised to pay a stipulated stream of cash flows. This generally
comprises of periodic interest payments over the life of the instrument and
principal payment at the time of redemption (s).
Types:
1. Central Government Securities
2. State Development Loans
3. Savings Bonds
4. Private Sector Debentures
5. PSU bonds
6. Preference shares
 Central Government Securities
Debt securities issued by the central government are popularly called G-secs.
Issued by the RBI on behalf of the Government of India, and dated G-secs
have a fixed maturity (2 to 30 years) and a fixed coupon rate and pay interest
semi-annually.
In India, the Central Government issues both, treasury bills and
bonds or dated securities.
Securities in demat form are maintained in SGL (Subsidiary General Ledger)
and CGSL (Constituents’ Subsidiary General Ledger). An investor can use the
depositories NSDL (National Securities Depositories Ltd) or CDSL (Central
Depository Services Limited) also for holding their demat government
securities.
Eg: 8.5 percent GOI 2024 matures in 2024 and carries a coupon of 8.5%
payable semi-annually.
 State Development Loans(SDLs)
State Development Loans (SDLs) are debt securities issued by the state
government. Each state is allowed to issue these securities up to a
certain limit each year. The coupon rates on SDLs are marginally higher
than those in G-secs for the same maturity.

Eg: G-SEC: 5.85% GS 2030

Eg: Andhra Pradesh: 7.42% SDL 2031, Haryana: 6.59% Haryana SDL 2030
 Public Sector Undertaking Bonds
Public Sector Undertakings (PSUs) issue debentures that are
referred to as PSU bonds.

Types:
1. Taxable bonds
2. Tax free bonds :HUDCO: 9.01% Maturing on 1/13/34
https://www.indmoney.com/bonds/public-sector-bonds
 Inflation Indexed Bonds
• Introduced in 2013-2014, Government of India’s inflation indexed
bonds.

• Individuals, HUF, Charitable institutions, and universities can invest

in these bonds.

• A minimum amount of Rs. 5000 and a maximum amount of Rs.

500,000 can be invested per annum.
 Private Sector Debentures
The obligation of a company towards its debenture holders is similar
to that of a borrower who promises to pay interest and principal at
specified times.

• Trustee
• Credit rated
• Maturity & Coupon rate & type (VARIES)
 Mutual fund
A Mutual fund is a type of investment vehicle consisting of a portfolio of stocks,
bonds, or other securities. It gives small or individual investors access to
diversified, professionally managed portfolio at a low price.

Sharing of risk and rewards (Market risk).

It can be growth schemes (large share of equities and is closed ended) and income
schemes (large share of fixed income securities and can be either closed ended or
open ended)

Regulator: SEBI
 Schemes
1. Equity schemes: Diversified/Index/Sectoral/Tax planning
2. Hybrid (Balanced) Schemes: Equity-oriented/Debt-
oriented/Variable asset allocation
3. Debt Schemes: Gilt/Floating rate/Money market
 Life Insurance
Life insurance is a contract between a person and an insurance
company for a number of years covering either the life time period or
a fixed number of years.

It is an investment due to:

• Protection against risk of early death,
• Collateral
• Tax advantage
• Money received at maturity
• Premium (usually 30 days grace period is given beyond the due date
of payment)
Types:
• Whole life policy (till death of the insurer)
• Endowment policy (event of death during the contract term or on
survival)
• Money back Insurance Contract (survival benefit paid at different
interval and also on death)
 Retirement products
• Mandatory retirement schemes: Employees’ Provident Fund
schemes, Employees’ Pension scheme, National Pension scheme

• Voluntary retirement schemes: Immediate Annuity plan, Deferred

annuity
 Real estate
•Semi-urban land
•A second house
•Commercial property
•Agricultural land
 Precious objects
•Precious metals: Gold, silver

•Precious stones: Diamonds, Others

•Art objects and collectibles: Paintings, sculptures, antiques etc.

 Financial derivatives
A derivative is an instrument whose value depends on the value of
some underlying asset that could be stocks or indices. It is used to
hedge risk.
It is a contract that indicates the rights and obligations of the parties
to the contract: the issuer of the derivative and the holder of the
derivative.

Two important financial derivatives are:

•Futures
•Options
 Forward or futures contract
A forward or futures contract imposes a firm obligation to go through
the transaction.

A futures contract is a standardized forward contract. (10% margin by

both the parties in cash or cash equivalents)/Settled: Marked to
market on a daily basis.
A forward contract is a tailor-made contract. (Settled: Maturity)
 Option
An option is a special contract under which the option owner enjoys
the right to buy or sell something without the obligation to do so.
A European option: Can be exercised only on the expiration date.
American option can be exercised on or before the expiration date.
Equity options in India:
1. Index options: Options on stock market indices (NSE & BSE)/S&P
CNX Nifty: European style option contract.
2. Options on individual securities: (NSE & BSE)/American style
options
 Equity shares
Equity capital represents ownership capital.

• Authorised capital: The amount of capital that a company can

issue as per its memorandum.
• Issued capital: The amount offered by the company to the
investors.
• Paid-up capital: That part of the issued capital that has been
subscribed to by the investors.
Stock Market classification of Equity shares:
• Blue chip shares

• Growth shares

• Income shares

• Cyclical shares

• Defensive shares

• Speculative shares
 Securities market
• Equity
• Debt: Government/corporate/Money market
• Derivatives: Options/futures
 Participants in the securities market
Regulators : - Company law board(responsible for administration of the Companies Act, 1956)
- RBI (responsible for the supervision of banks, money market and government
securities)
- SEBI (responsible for the regulation of the capital market)
- Department of Economic Affairs (concerned with the functioning of the financial
markets)
- Ministry of Company Affairs (responsible for the administration of corporates)

Stock exchanges: NSE/BSE

Depositories: National Securities Depository Limited (NSDL) and the Central Securities Depository
Limited (CSDL)
Brokers Registered members of the stock exchanges
Foreign Institutional Foreign firms registered with the SEBI to undertake transactions in the Indian capital
Investors market
Primary Dealers Bank or other financial institutions has been approved to trade securities with a
national government, with the intention to resell them to their clients or investors.
Merchant bankers Offers trade financing and Advisory to small scale companies
 Primary market
There are three ways in which a company may raise equity capital in
the primary market:

1. Public issue: Companies Act/Issue of capital & disclosure

requirements/SEBI
2. Rights issue:
3. Private placement
 Secondary Equity Market
•NSE : (1994)
•BSE : (1875)

•Screen based system

•From August 13, 2001, BSE like NSE, became a completely
order-driven market.
 Trading and Settlement
•Trading: Screen-based system: Market order/limit order
•Circuit breakers: Market Wide Circuit Breakers (10/15/20%).
Eg: if there is 10 percent movement in index before 1 p.m, trading is
suspended for 1 hour, between 1-2.30 p.m (suspended: 30 minutes), after
2.30 p.m (no suspension).
Settlement: Depository(NSDL & CDSL) , SEBI (2021) reported having
depository agents around 903 (281 depository participants under NSDL & 622
under CDSL)
• SEBI has made dematerialised trading compulsory.
• Rolling settlement: stocks, government bonds, and options (T+2).
Eg: trades placed on Monday are settled on Wednesday etc.
 NSE
1

8 9
Buyer Clearing
Depositories NSECL Seller
bank
6 7
10 5 2 3 4 11

Custodians
Transaction costs: trading costs (brokerage, service tax, stamp duty,
SEBI charge and securities transaction tax) , clearing costs (resolving
defaults fee), and settlement costs (transfer cost).

Internet trading: linked 3-in-1 account (savings bank account,

depository account, and trading account)

https://www.nseindia.com/nse-clearing/clearing-banks
 Market timings:
Equity: 9 am to 9.15 am(Pre-market)/9.15 a.m-3.30 p.m. (Normal trading)/ 3.40-4 p.m.
(Post market).
Note: all new IPOs are listed on the exchange at 10 a.m. The pre-open session is from
9-10 a.m.

Currency: 9 a.m-5 p.m. (Normal trading & cross-currency)

Commodity: Internationally Referenceable Non-Agri Commodities- 9 a.m-11.30 p.m./

Internationally referenceable Agri Commodities (Cotton, crude palm oil & Sugar)- 9 to 9
p.m.

All other AGRI commodities- 9am to 5 p.m. (Soybeans, Rubber, & Cardamom)
 Insider trading
Considered as punishable offence, insider trading is prohibited under the
SEBI Regulations, 1992 (amended in 2003).

Price-sensitive information means any information that is related directly

or indirectly to a company, and which if published, is likely to affect
materially the price of the securities of a company. It includes
information such as the periodical financial results of the company; the
intended declaration of dividends, the issue of securities or the buy-back
of securities, any major expansion plans or the execution of new projects,
amalgamation & mergers, disposal of the whole or a substantial part of
the undertaking, and changes in the operations of the company etc.