Investment

Analysis and
Portfolio
Management
Module One

What is investment????
An investment is the current commitment of

money for a period of time in order to derive

future payments that will compensate the
investor for
(1) the time the funds are committed
(2) the expected rate of inflation
(3) the uncertainty of the future payments.

The investor is trading a known dollar amount

today for some expected future stream of

payments that will be greater than the current
outlay.
INVESTOR
Individuals, Government,
Pension Fund, Corporation

INVESTEMENTS
Plan and machinery, Stocks,
Bonds, Commodity,
Equipments or Real Estate.

Investment Speculation and

Gambling

Types of Investors

Types of Investors

Conservative investor
Allocates their capital to very conservative

investment instruments.
Refuses to accept fluctuations in the value of
their investment and prefer a stable income.
The investment horizon of this investor
ranges from several months to several years.
The investor puts strong emphasis on liquidity
of their investment.
Savings and Time Accounts: 50 %
Guaranteed and bond funds:50 %

Balanced investor
The main part of the portfolio is comprised of conservative

investment instruments with fixed income (bonds).

A marginal part of the portfolio is made up of riskier
investments (up to 20%), which increase the growth
potential of the portfolio.
The investment horizon of this investor ranges from
several months to several years.
The investor requires that at least one-third of their
portfolio be liquid.
Savings and Time Accounts:30 %
Guaranteed and bond funds:50 %
Mixed and equity funds:20 %

Growth investor

The portfolio is equally divided into all classes of assets.

The main part of the portfolio is comprised of

conservative investment instruments.

The portfolio is supplemented with riskier instruments,
which increase the growth potential of the portfolio.
The share of riskier investments is around 40%.
The investment horizon of this investor is usually
relatively long.
The investor requires that at least one-fifth of their
portfolio be liquid.
Savings and Time Accounts:20 %
Guaranteed and bond funds:40 %
Mixed and equity funds:40 %

Dynamic investor
The portfolio is dominated by investments with higher

potential, i.e. dynamic funds.

This component usually accounts for 60% of the portfolio.
The remaining part is allocated among conservative
investment instruments which reduce volatility of the
investment.
The investment horizon of this investor is long and may be
even longer than 5 years.
The investor requires that at least one-sixth of their portfolio
be liquid.
Savings and Time Accounts:20 %
Guaranteed and bond funds:20 %
Mixed and equity funds:60 %

Why do people
invest????
They invest to earn a return from savings due

to their deferred consumption.

They want a rate of return that compensates
them for
the time,
the expected rate of inflation,
the uncertainty of the return

The investors required rate of

return

Required rate of return =

the time value of money during the period of
investment + the expected rate of inflation
during the period + the risk involved.

TYPES OF INVESTMENT
Retail assets
Financial assets

Points to be considered for

investment
Extend of liability
Uncertainty
Impact of time and risk
Liquidity

Real Assets
Real assets are tangible assets that determine

the productive capacity of an economy, that

is, the goods and services its members can
create.
Land, buildings, machines, and knowledge
that can be used to produce goods and
services.
Other common examples of investments in
Real Assets are paintings, antiques, precious
metals and stones, classic cars etc.

Real Assets
Assets that are used to produce a good

and/or service.
It can be touched, land, equipment, supplies,
etc.
A real asset is a tangible asset like gold or real
estate.
It has intrinsic value in and of itself.
Assets used to produce goods and services .
Examples: factories, land, building, machinery
etc.

Financial assets
Financial

Assets, or more commonly known

asSecurities, include stocks, bonds, unit trusts
etc.
It represent legal claim on future financial
benefits.
These are no more than sheets of paper and do
not contribute directly to the productive capacity
of the economy.
They are the means by which individuals hold
their claims on real assets and the income
generated by these real assets.

An asset that derives value because of a contractual claim is called

financial asset.
Investopedia Says: Unlike land and property--which are tangible,
physical assets--financial assets do not necessarily have physical worth.
or Financial assets are non-physical assets those can be readily
converted into cash like Bank balance, Shares, short-term investments,
Treasury bills, commercial papers, bill receivables etc.
Or
Claims on real assets such as stocks and bonds etc are called financial
assets.
Or
A financial asset is not tangible. Instead, its existence is "represented
by evidence of its existence such as a paper certificate, like money, a
savings passbook, a stock certificate, or a bond. The paper in money has
no intrinsic value. Its value is derived by virtue of what it represents.
Pieces of paper evidencing a claim on some issuer are called financial

assets.
Or
A paper (or electronic) claim on some issuer is called financial assets.

Criteria for Investment

Liquidity
Age
Need for regular Income
Time Horizon
Risk Tolerance
Tax Liability

What are Securities????

Securities are legal representation of right to

receive prospective future benefits under

stated condition
Term security is a generic term used generally
for those documents evidencing liabilities that
are negotiable that can be brought or sold in
the market
Types
Marketable
Not marketable

What Does Marketable securities

Mean?
Financial assets that are easily traded in organized

market are called marketable securities.

Very liquid securities that can be converted into cash
quickly at a reasonable price are called marketable
securities.
Readily tradable equity or debt security with quoted
prices, are called marketable securities.
Examples of marketable securities include commercial
paper, banker's acceptances, Treasury bills and other
money market instruments.
It is a near-cash asset and is classified under current
assets.

Security forms of investments (Marketable Securities)

Gilt Edged Securities
Treasury bills, no interest paid, maturity period 91 days
Dated government securities, fixed interest payable semi annually,

maturity period usually over one year

Semi government dated securities

Corporate Debentures
Straight and mortgage debenture
Registered or bearer Debenture
Convertible or Non convertible Debenture
Zero Coupon Bonds
Preference shares
Equity share (Blue chip, growth stock income stock etc)
Mutual Funds (SIP units)

Non Marketable
Investment
They are not securities
They are not negotiable
The ownership and maturity is fixed
Non Securities Investment
Stable Return with Low /No Risk
Examples
Bank Deposit
Post Office Schemes/Deposits
Company Provident Fund
Insurance

Investment Environment
What to do for investment analysis?????
Risk , Return and Diversification
THE FUNDAMENTAL PRINCIPAL
Combining security in a Portfolio
Result in low levels of risk
Than a simple average of risk of each

Investment Analysis = Risk and Return

Portfolio Management = Diversification