Chapter 1

Introduction to Investment analysis and Management

Meaning and Definition
The Art of Investment is to maximise the return with minimum degree of risk.
As per sharif “Investment is sacrifice in present value for some uncertainty of
future values”.

Objectives of Investment Management

capital growth
Risk minimisation.
Income generation.
Liquidity
Goal Achievement.
Capital growth: The investment mot consists of adopting assets that will
increase capital Value on over an extended time searching for opportunities with
high return.
Risk minimisation - Effectively managing Investment requires systematic risk
management with productivity measures so we can protect our investment funds
for future.
Liquidity: Maintaining liquidity enerire that funds are available when reeded
for emergency or other financial obligations
Goal Achievement: Through investment management, you can connect your
monetary resources to particular financial objectives like earning profit or
winning from lottery etc.....

Process of Investment Management-

Achieving financial objectives efficiently through a systematic investment
management approach consists of multiple planned steps Below outline of
investment management process are queen.
1) setting a goal-Identifying financial goal overtime and toluene for risk.
ii) Research and Analysis: Investors need to perform market research. followed
by study of different investment instruments.
iii) Asset Allocation: Funds among equity, bonds & real estate assets to reduce
investment, risks and maximise financial achievement maximize financial
achievement
iv)Portfolio Construction: Investors must develop portfolio that follow the
financial goals & risk capacity.
v)Performance Monitoring: sustained evolution of your portfolio effectiveness
worth its benchmark measurement and allocations.
vi)Rebalancing: The portfolio requires adjustment according to the changes in
market situations, financial targets and tolerances for risk.

Importance of Investment Management

→increased savings level
→Tax Initiatives associated with specific investment
→people's edge against Investments
→ Investments to generate income and capital appreciation.
→ Growing awareness and publicity about investment opportunities

Hedging in trading is a risk Management strategy used to offset potential losses

in an investment int by taking an opportunity or of fretting Positions in an
related asset. It acts like insurance, protecting a portfolio from advance pricing
fluctuations without requiring the investor to sell their, primary holdings.

Features of Good Investment:

Provides positive return.
Balance the expected returns and the level of risk involved
-liquidity and marketability aspects offer opportunities for diversification
consistent performance.
provides tax advantages.
Types of Investore
Individual Investors [ Retail Inverter)
Institutional Investors
Individual Inverters-
-Individual investors are in large noms
-Investable resources available within them are very low
lack of skills repaired to carry out extensive analysis and evaluation before
investing
- They may manage their own investments without investment managers
directly invested through brokerage accounts, bank savings accounts,
government saving bonds or certificates of deposits if they utilise investment
manager for investing in pooled investment vehicles such as mutual funds
They don't have enough time and res to engage in such alanyls to find out the
intrinsic worth of investment
They have difficult time while determine their portfolio
Investment Selection becomes almost a chit & drum Mechanism for them
They depend on other source of information within they advise at investment
decision.

Institutional Investors They are in the institutions or organisations with

surplus fund who include themselves in investment activities.
Mutual funds, Insurance companies, investment companies etc...
They are favous of numbers compared to individual investors
They Engage professional to carry out Critical Analysis and valuation of wide
Investment avenues available
→They carry out their investment activities on a realistic & systematic manner
They have great advantage over the average individual investors in managing
their investment portfolio

Types of Investment securities-

Meaning: Investment Securities are financial instruments that can be bought and
sold in financial markets to earn income (interest/ dividend) or capital
appreciation.
1. Equity Security: Equity security is a share that gives ownership rights in a
company and the opportunity to earn dividends and capital gains.

 common stock shares that give voting right and potential dividends value
depend on company performance & market conditions.
 Preferred stock usually no voting rights, but they will be having fixed
dividends before common Shareholders.
 Exchange Trade funds: Funds that trade on exchange. like stocks and
holds a basket of securities. (blend of stock & bonds)
 Mutual Funds Professionally managed investment funds pooling money
to invest in diversified Portfolios.
Features:
 Variables returns (Not Fixed) Returns.
 High Risk, Higher return.
 Share holders are owners.
 Returns come from dividends and capital gain.

2. Preference shares are a type of share that gives shareholders priority

over equity shareholders in receiving dividends and repayment of
capital at the time of liquidation.

o Fixed Dividend – Dividend rate is fixed (e.g., 8%, 10%).

o Priority in Dividend Payment – Paid before equity shareholders
o Priority in Capital Repayment – Get money back before equity
shareholders if company closes.
o Limited Voting Rights – Usually no voting rights except in
special cases.
 o Less Risk than Equity Shares – Because dividend is fixed.

3. Debt securities- (Fixed income securities)

Securities that represent loan given by investors to government or companies.
Features
1 Fixed interest income.
2 Lower risks than shares.
3 No ownership rights.
4 Repayment at maturity.
Types of Debt securities
Government bond: Issued by using on government Eg treasury bills generally
they have low risk rate.
Municipal Bonds: Issued by state or local government, often tax advantages.
Corporate bonds: in india SEBI regulate it, fixed income debt instruments
issued by public of private companies & NBFCs to rise capital for operations.
Treasury bills (T-billy): are fort short term zero Couponed debts issued by
government out of India via RBI. The Maturity tenure is 91 days, 182 day &
364 days.
Certificate of deposits CD's is a saving ac that holds fixed amount of money for
fixed period or time such as six months, 1 year/5-years and in exchange the
issuing of bank paying interest.
Hybrid securities (mix of equities & debit)
1. convertible bonds are hybrid fixed income Securities that pay a regular
interest but offer holders the option to convert the debts into a pre-
determined no. of common stock or shores

2. Convertible preferred shares are hybrid Securities that pay fixed

dividends and offers. the options to convert into pre-determined numbers
of common share after a set of period, the investors with low ask income
 & liquidation over common stock and the Participation Common stock,
and the potential to participate in stock price

4. Derivative Securities (value based on another asset] Types

Meaning: financial contracts whose value depends on an understanding asset(
shares, bonds, commodities etc)
Futures
A futures contract is an agreement to buy or sell an asset at a fixed price on a
future date.
✔ Standardized contracts
✔ Traded on stock exchanges
✔ Both buyer and seller have obligation
Options
An option contract gives the right, but not the obligation, to buy or sell an asset
at a fixed price before a specific date.
Types of Options:
 Call Option – Right to buy
 Put Option – Right to sell
Forwards
A forward contract is a customized agreement between two parties to buy or
sell an asset at a future date.
✔ Not traded on exchange
✔ Traded over-the-counter (OTC)
✔ Higher risk of default
Swaps: A swap is a contract where two parties exchange cash flows.
✔ Common example: Interest rate swap
✔ Usually traded in OTC market.
Characteries of Investment Securities
Investment. Securities are Financial instruments that investors purchase to earn
returns in the form of income. or Capital Appreciation. The main characterise

1. Return the income earned from the investment.

Interest (e.g. Bond, debentures)
Dividend [Eg: Equity share]
Capital Gain [e.g.: Increase in Market price]
2. Risk: The Possibility of losing of losing money of not getting Expected
return.
Types of Risk are , markets risk, credit rink, Interest Risk, Inflation Risk,
liquidity risk .
[Link]
>Ease with which a security Can be Converted into without significate loss.
> Share trade on Stock Exchanges is highly liquid.
>Government Bonds are generally more Liquid than Corporate Bonds
[Link] of Principal
>protection of invested Amount
> Government Securities are safer Compared to equity shares.
[Link]
>Ability to sell the security easily in the market.
>Listed securities are more markable.
>unlisted securities are less marketable.
[Link] period.
>The time offers which the principal Amount is repaid.
>Short <1 Medium 1to5, Long term 5> Equity shares and have generally have
no fixed period.
[Link] Benefits
>Govt Bonds have Certain mutual funds may offer tax exemption.
[Link]:
Easily transferable .
Some Security may have restriction
9. Stability of income
>fixed income stability.
> Equity share Provide variable income.
10. Growth potential.
>Potential for Capital appreciation
>Equity securities offer higher growth potential
> Debt security offer limited growth

FINANCIAL MARKETS:
Financial markets are the platforms where buyer and sellers trade Financial
securities such as shares, bonds, derivatives and currencies.
Types of financial markets.-
Capital market (long-term funds]
Money market [short term funds]
Primary market (IPOs)
→ secondary market (existing shares es securities)
→ Derivative market.-future & options
→Foreign exchange market
Efficiency of financial Markets.

prices reflets all available information making it impossible for invests to

consistently achieve about market returns without taking higher risk
Three forms of Effluences:
Risk and Return
Risk – Meaning
Risk is the possibility of loss or uncertainty in investment returns.
It means the chance that the actual return may be lower than expected.
Systematic Risk (Market Risk)
Systematic risk affects the entire market and cannot be controlled by
diversification.
Types of Systematic Risk:
a) Market Risk
Risk due to overall market movement (rise or fall in stock prices).
b) Interest Rate Risk
Risk arising from changes in interest rates.
c) Inflation Risk (Purchasing Power Risk)
Risk that inflation reduces the value of money.
d) Political Risk
Risk due to government policies, instability, or regulations
Unsystematic Risk (Specific Risk)
Unsystematic risk affects a particular company or industry and can be
reduced through diversification.
Types of Unsystematic Risk:
a) Business Risk
Risk due to poor management or low sales in a company like Infosys.
b) Financial Risk
Risk arising from high debt in a company.
c) Operational Risk
Risk due to internal failures like system breakdowns or fraud.
d) Liquidity Risk
Risk of not being able to sell investment quickly without loss.

Difference Between Investment and Gambling

Basis Investment Gambling

Investment is putting money into Gambling is staking money on

Meaning assets to earn future income or games of chance to win
profit. money.

Purpose To create wealth over time. To earn quick money by luck.

Very high and uncontrolled

Risk Level Calculated and managed risk.
risk.

Based on analysis and Based purely on luck or

Return
performance of asset. chance.

Time
Usually long-term. Mostly short-term.
Period

Decision Based on research and financial

Based on guessing or chance.
Making planning.

Buying shares of Reliance

Example Betting in a casino or lottery.
Industries.

Difference between systematic and unsystematic risk

Basis Systematic Risk Unsystematic Risk

Risk that affects the entire market Risk that affects a particular
Meaning
or economy. company or industry.

Cannot be reduced through Can be reduced by

Control
diversification. diversification.

Nature External factors. Internal factors.

Basis Systematic Risk Unsystematic Risk

Impacts all companies in the Impacts only specific

Impact
market. companies.

Inflation, interest rate changes, Business failure, strikes,

Examples
recession, political instability. management issues.

Market Risk / Non-diversifiable Specific Risk / Diversifiable

Also Called
Risk. Risk.

Return – Meaning
Return is the income or profit earned from an investment.
It may be in the form of interest, dividend, or capital gain.

Types of Return
Income Return
Return received regularly in the form of:
 Interest (from bonds, deposits)
 Dividend (from shares of companies like Infosys)

Capital Gain (Capital Appreciation)

 Profit earned when the selling price of an asset is higher than the
purchase price.

Total Return

 Total income from investment = Income Return + Capital Gain

Real Return

 Return after adjusting inflation.

Real Return = Nominal Return – Inflation Rate
CAPM – Capital Asset Pricing Model

 CAPM (Capital Asset Pricing Model) is a financial model that explains

the relationship between risk and expected return of an investment. It
helps investors calculate the required return on a security based on its
risk.

Definition
CAPM states that the expected return of a security is equal to the risk-free
return plus a risk premium for taking market risk.
Formula of CAPM
Expected Return (ER) = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓 )

Where:
 Rf = Risk-free rate (e.g., Government securities)
 β (Beta) = Measure of systematic risk
 Rm = Expected market return
 (Rm – Rf) = Market risk premium