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Transcript of Module 1
INVESTMENT ANALYSIS AND
MANAGEMENT
)
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Chief economic advisor Raghuram G Rajan has been
appointed as the next governor of the Reserve Bank of India
.
Rajan will replace D Subbarao, who completes his five-year
term on September 4, and will be the 23rd governor of the
central bank. As
the new RBI chief, Rajan will have a challenging time as he
will have to battle the declining rupee, sliding growth and
rising retail inflation, amid global economic uncertainty.
Rajan was acclaimed for predicting the 2008 global
financial crisis. In 2005, Rajan had delivered a lecture
severely critical of the financial sector and argued that a
financial disaster might be looming.
INVESTMENT ANALYSIS AND
MANAGEMENT
Why Do Individuals Invest ? By saving money (instead of spending it), individuals forego consumption today in return for a larger consumption tomorrow.
The final decisions to be made in investmentsWhat securities to be heldHow much should be allocated to each
Estimates are prepared of the risk and return associated with available securities
over a forward holding period - Security analysis
Security analysis is the process of analysing the individual security and the market as a whole and estimating the risk and return expected from each of the securities with a view to identifying under valued securities for buying and overvalued securities for selling.
Return-risk estimates must be compared in
order to decide how to allocate available funds among these securities on a continuing basis – portfolio analysis, selection and management
Portfolio
A combination of securities with different risk-return
characteristics constitute the portfolio of the investor.
Portfolio management is a process
encompassing activities aimed at optimising the
investment of one’s funds
Securities analysis
Portfolio analysis
Portfolio selection
Portfolio revision
Portfolio evaluation
INVESTMENT - INTRODUCTION
An investment is a commitment of
funds made in the expectation of some
positive rate of return.
INVESTMENT – INTRODUCTION Contd.
Investment is the process of
sacrificing something now for the
prospect of gaining something
later.
An investment is the current commitment of the rupees for a period of time in order to derive future payments that will compensate the investor for
1. The time the funds are committed2. The expected rate of inflation3. The uncertainty of future payments
MODULE:1 INVESTMENT – INTRODUCTION Contd.
ECONOMICS: Investment is the net addition made
to the nation’s capital stock comprising of goods & services used in the production process.
MODULE:1 INVESTMENT – INTRODUCTION Contd.
Finance: Investment is the allocation of money
to assets that are expected to yield gain
over a period of time.
-yield returns & capital growth.
MODULE:1 INVESTMENT – INTRODUCTION Contd.
Return commensurate with the risk the
investor assumes.
ARBITRAGESimultaneous purchase and sale of securitie/ assets in two different markets to take advantage of price differentials
SPECULATION Speculation involves buying and
selling securities in the hope of making profits from potential short term price changes
purchase of securities is motivated by greed and a fast buck
But, a speculator contributes to the vibrancy of the market due to his frequent trading
Adds to the markets liquidity and depth and frequently turning over-changing his portfolio
His presence provides market for securities—DEPTH and a wider distribution of ownership of securities ---BREADTH
Investment – Characteristics
Return Return = Capital appreciation+Dividend Purchase priceRiskSafetyLiquidity
Investment – Characteristics
Return
Return = Capital appreciation+Dividend Purchase price
Risk Inherent in any businessMay beLoss of capitalDelay in repayment of capitalNon – payment of interestVariability in returns
Depends onNature of the investment Equity DebenturesMaturity period longer the maturity period, higher the riskCredit worthiness of the borrower lower the creditworthiness, higher the risk vice
versaRelation with return higher the risk higher would be the return
Investment – Objectives Investors objectives are his investment goals
expressed in terms of both risk and returns. The relationship between risk and returns requires that goals not be expressed only on terms of returns.
Investment – ObjectivesMaximisation of Return A careful analysis of investors risk tolerance
should precede any discussion of return objectives.
- Capital preservation - Capital appreciation - Current incomeMinimisation of Risk probability that the actual returns realised
from an investment may vary from the expected return
Safety
Liquidity
Hedge against inflationRate of return to be higher than rate of inflation
INVESTMENT CONSTRAINTS
Constraints reduces the possibility of realizing the
investment objectives
INVESTMENT CONSTRAINTS
LiquidityTime horizonTax considerationsRiskLegal and regulatory factors may include
limits on the allocation to specific assets, the ability to access certain funds and even prohibitions on certain investments.
Unique circumstances may include social concerns and specific family needs.
SPECULATION
Speculation involves buying and selling activities with the expectation of getting profit from the price fluctuations.
Taking up risk in the hope of making short term gains.
Investment Vs. speculationTime horizonRiskReturn / Capital gainDecisionFunds
MODULE:1 INVESTMENT PROCESS …………………………………………Contd.
• Determining the investment objectives & policy
• Undertaking security analysis
• Constructing a portfolio
• Reviewing the portfolio
• Evaluating the performance of the portfolio
MODULE:1 INVESTMENT PROCESS……….. …………………………………………..Contd.
1. Determining the investment objective & policy
Investible funds Objectives Knowledge about investment alternatives Knowledge about the stock market
MODULE:1 INVESTMENT PROCESS……………. ……………………………………………Contd.
2. Undertaking security analysisEconomic / Market analysisIndustry analysisCompany analysis
3. Valuation
MODULE:1 INVESTMENT PROCESS…………… …………………………………………..Contd.
4. Portfolio Construction Addresses major aspectsSelectivityTimingDiversification Debt & equity diversification Industry diversification Company diversificationFinal selection
MODULE:1 INVESTMENT PROCESS…………… …………………………………………..Contd.
5 . Portfolio Performance EvaluationAppraisal
6 . Portfolio Revision
Security forms of InvestmentCorporate Bonds / Debentures -Convertible -Non-convertiblePublic sector Bonds - Taxable - Non Taxable
Preference sharesEquity shares - New issue - Right issue - Bonus issue
Non security forms of InvestmentNational Savings schemeNational Saving CertificatesProvident fundsCorporate Fixed DepositsInsuranceUnit SchemesPost Office savings