Security Analysis & Portfolio

Management
BBA – Semester V
By CA. Palak Somani
Investment
•Employment of Funds on Assets

•Earning Income

•Capital Appreciation
 Characteristics of
Investment

Sacrifice of
Return Risk
Time Horizon Present
Expectation Involvement
Consumption
Income Actual Return vs
Capital Future-oriented Benefits in
(Interest/ Expected Return
Gain Decision Future
Dividend)
 Return

Safety Risk
Investment
Objectives

Hedge
Against Liquidity
Inflation
1. Return
• Regular Income & Capital Appreciation
• Rate of Return is the total income the investor receives during the
holding period stated as a percentage of the purchasing price at the
beginning of the holding period.
Return = End period value – Beginning period value + Dividend
x 100
Beginning period value

or Return = Capital appreciation + Dividend

x 100
Purchase price
2. Risk
• Variability of Return (i.e. Actual Return < Expected Return)
or
• Probability of Loss

Objective is to Hedge Risk

How?
By Diversification or Investing in Safe Assets
3. Liquidity
• Conversion into Cash without much loss of time.

• Marketability of the investment provides liquidity to the investment.

• Liquidity depends on Marketing & Trading Facility.

4. Hedge Against Inflation
• The rate of return should ensure a cover against inflation.

• The return rate should be higher than the rate of inflation, otherwise
the investor will bear loss in real terms.
5. Safety
• Fundamental Objective – Safety of the Capital Invested.

• The selected investment avenue should be under the Legal &

Regulatory Framework.

• Investments done with Government assure more safety than Private

Party.
Investment, Speculation & Gambling
Speculation
• Involves buying & selling of securities
• with expectation of earning short-term profits
• due to price fluctuations
 Short-term
focus

No Intent High Risk –

of Speculation High
Ownership Return

Dependence
on Market
Trends
Investment vs. Speculation
Basis Investment Speculation
Objective Long-term wealth creation Quick profits from price changes
Time Horizon Long-term (years) Short-term (days/weeks)
Risk Level Low to moderate High
Fundamental analysis (value, Market trends, price movements,
Decision Basis
earnings, potential growth) rumors, inside information
Return
Moderate and steady High but uncertain
Expectation
Capital Safety Relatively safe Highly uncertain
Borrowed funds to supplement
Funds Own funds, avoid borrowed funds
personal resources
Gambling

Risking money or On an event – Where chance or

something of with an uncertain luck plays
value outcome dominant role
Key Features of Gambling
• Time Horizon – Very short-term
• Based on Pure Chance – No role for skill or analysis.
• No Intrinsic Value – No asset is acquired.
• Zero-Sum or Negative-Sum Game – One person’s gain is another’s
loss.
• No Productive Contribution – It does not support capital formation or
economic growth.
Investment vs Speculation vs Gambling
Basis Investment Speculation Gambling
Buying assets to earn returns over Buying/selling assets for short- Betting money on uncertain
Definition
time through income or growth term profit from price changes outcomes based on chance
Long-term wealth creation and Quick profits from market price
Objective Instant gain through luck
income fluctuations
Very short-term or immediate
Time Horizon Long-term (years) Short-term (days/weeks/months)
outcome
Risk Level Low to moderate High Very high
Return Highly uncertain and based on
Steady and moderate High and uncertain
Expectation odds
Basis of Fundamental and/or technical
Market trends, news, rumors Pure chance or luck
Decision analysis
Asset Yes – ownership of real assets Usually yes, sometimes derivative
No asset ownership
Ownership (shares, bonds, property, etc.) contracts

Productive – promotes capital Semi-productive – adds liquidity to Non-productive – purely

Economic Role
formation and economic growth markets entertainment or risk-taking

Buying shares for dividends and Trading stocks or currencies for Lottery, horse betting, casino
Examples
growth, investing in mutual funds short-term gains games
Investment Process
 Investment
Process

Investment Portfolio Portfolio

Analysis Valuation
Policy Construction Evaluation

Investible Fund Market Diversification

Intrinsic Value Appraisal
Objective Industry Selection &
Future Value Revision
Knowledge Company Allocation
1. Investment Policy Formulation
• Investible Funds -

Savings
Careful – Selection
Investible Funds of Investment
Alternatives
Borrowings
Returns > Interest
Paid
1. Investment Policy Formulation
• Objective –
Rate of Return Regular Income

Risk Perception Liquidity

Risk taker – high return (capital

appreciation)
Risk averse – safety of principal
1. Investment Policy Formulation
• Knowledge - Investment Alternatives & Markets

• Wide range – security to real estate

• Risk & Return – differ in different alternatives

• Equity investment – high yielding but high risk
• Fixed income security – fixed return & lower risk
• Tax sheltered schemes – tax benefits

• Stock market structure, function of brokers

2. Security Analysis

Market Analysis

Industry Analysis

Company Analysis
3. Valuation
• Valuation – helps determine the risk & return from an
investment based on value & not speculation.
• Intrinsic Value – book value of share and price earning ratio
• Discounting models like dividend discount model
• Future value – trend analysis
4. Portfolio Construction
• Combination of securities to meet the investment objectives.
• Attain maximum return with minimum risk.
• Key considerations:
• Diversification – reduction of risk by spreading investment into multiple
investment alternatives
• Debt & Equity Diversification: Debt instrument – assured returns with limited capital
appreciation. Equity – Income & capital gain with uncertainty. Combined to complement.
• Industry Diversification: Industries’ growth & reaction to govt policies.
• Company Diversification: Fundamental Analysis & Technical Analysis.

• Selection & Allocation – securities selected basis the level of diversification,

industry & company analysis and funds allocated to construct the portfolio.
5. Portfolio Evaluation
• Variability in returns – measured & compared
• Development in economy, industry &
Appraisal companies

• Depends on result of appraisal

• Low yielding securities with high risk – replace
Revision with high yielding securities with low risk
• Periodical revision to keep return at level.
 Factors Affecting
Investment Decision
Factors Affecting Investment Decision
Objective: To understand the critical factors influencing effective
investment choices.

Importance:

• Achieving financial goals (retirement, house, education).

• Wealth creation and preservation.
• Mitigating financial risks.
• Navigating complex financial markets.
What is a "Sound Investment Decision"?
• Definition: An investment decision that aligns with an investor's
financial goals, risk tolerance, and time horizon, while considering
market conditions and fundamental analysis.

• Not just high returns: It's about risk-adjusted returns and

sustainability.

• Holistic Approach: Considers both quantitative and qualitative factors.

Category 1: Financial Goals & Time Horizon
• Financial Goals:
• Short-term: (e.g., buying a car in 2 years) - Focus on liquidity, lower risk.
• Medium-term: (e.g., child's education in 5-10 years) - Balanced
approach.
• Long-term: (e.g., retirement in 20+ years) - Higher risk tolerance, growth
oriented.
• Time Horizon:
• Longer horizon allows for recovery from market fluctuations.
• Shorter horizon demands more conservative strategies.
Category 2: Risk Tolerance
• Definition: An investor's willingness and ability to take on financial
risk.
• Factors Influencing Risk Tolerance:
• Age (younger often higher tolerance).
• Income stability and job security.
• Existing assets and liabilities.
• Personality and psychological makeup.
• Investment knowledge and experience.
• Risk vs. Return Trade-off: Higher potential returns often come with
higher risk.
Category 3: Investment Knowledge & Research
• Understanding Investment Vehicles:
• Stocks, Bonds, Mutual Funds, ETFs, Real Estate, Commodities.
• Their characteristics, risks, and potential returns.

• Fundamental Analysis:
• Company financials (P/E ratio, EPS, revenue, profit margins).
• Industry trends and competitive landscape.
• Management quality.

• Technical Analysis: Chart patterns, trading volumes

• Importance of Due Diligence: Don't invest in what you don't understand.

Category 4: Economic Factors
• Inflation: Erodes purchasing power; impacts real returns.
• Interest Rates: Influences bond prices, borrowing costs, and company
profitability.
• GDP Growth: Indicates overall economic health; affects corporate
earnings.
• Unemployment Rates: Reflects consumer spending and economic
stability.
• Government Policies: Fiscal (taxation, spending) and Monetary (central
bank actions) policies.
• Global Economic Events: Geopolitical risks, international trade.
Category 5: Diversification & Asset Allocation
• Diversification: "Don't put all your eggs in one basket." Spreading
investments across different asset classes, industries, and
geographies.
• Benefits: Reduces unsystematic risk.
• Asset Allocation: Deciding how to distribute investments among
various asset classes (e.g., 60% stocks, 30% bonds, 10% real estate).
• Strategic vs. Tactical Asset Allocation: Long-term plan vs. short-term
adjustments.
• Rebalancing: Periodically adjusting portfolio to maintain desired asset
allocation.
Category 6: Professional Advice & Continuous
Learning
• Financial Advisors:
• Help define goals, assess risk, create a plan.
• Provide market insights and portfolio management.

• Continuous Learning:
• Stay updated on market trends, economic news, and new investment products.
• Read financial publications, attend webinars, take courses.

• Self-Discipline: Sticking to the investment plan, avoiding impulsive

decisions.
• Case Study 1: The Conservative Retiree - "Preserving the Nest Egg"
• Scenario: Mrs. Sharma, a 68-year-old retired government employee,
receives a fixed pension of ₹30,000 per month. She recently received
a lump sum of ₹10 lakhs from a matured fixed deposit. Her primary
goal is to generate additional, stable income to cover rising living
expenses without jeopardizing her principal. She vividly remembers
the 2008 financial crisis where her friends lost significant portions of
their savings, making her extremely risk-averse.
• Case Study 2: Priya's New Job Savings
• Scenario: Priya, 23, just started her first job and has ₹20,000 to
invest. She wants to save for a down payment on a small apartment in
5 years. She's excited about the stock market but doesn't know much
about it.
• Case Study 3: Mr. Kumar's Retirement Fund
• Scenario: Mr. Kumar, 58, is retiring in 2 years. He has a significant
amount in his provident fund and wants to invest it to get a steady
income during retirement. He's very worried about losing money.
• Case Study 4: The Sudden Market Drop
• Scenario: Anjali, 30, has been investing in a diversified equity mutual
fund for 3 years for her long-term goal of buying a house in 10 years.
Suddenly, the stock market drops by 20% due to global economic
concerns. Her friends are panicking and selling all their investments.
Anjali is worried too.
 Investor Biasness
Understanding Psychological Influences on
Investment Decisions
Introduction - Why Study Investor Biasness?
• Objective: To understand how psychological biases affect investment
decisions and how to mitigate their negative impact.

• Importance:
• Humans are not always rational; emotions and cognitive shortcuts influence
choices.
• Biases can lead to suboptimal investment outcomes (e.g., lower returns, higher
risk).
• Understanding biases helps in making more disciplined and logical investment
decisions.
• Crucial for both individual investors and financial professionals.
Investor Biasness – Definition & Categories

• Definition: Systematic deviations from rational judgment in decision-

making, often leading to irrational financial choices. These are mental
shortcuts (heuristics) or emotional responses that can distort our
perception of risk and reward.

• Two Main Categories:

• Cognitive Biases: Stem from errors in information processing or memory.
• Emotional Biases: Stem from feelings, impulses, or intuition.
Cognitive Bias 1: Confirmation Bias
• The tendency to seek out, interpret, and remember information
• that supports or confirms one's existing beliefs,
• while ignoring or downplaying contradictory evidence.

Impact on Investing: Ignoring risks or alternate views

• Investors might only read positive news about a stock they own.
• Ignoring warning signs about a failing investment.

Mitigation:
• Actively seek out diverse viewpoints and contradictory information.
• Use a checklist for investment analysis.
•.

Cognitive Bias 2: Anchoring Bias

The tendency to rely too heavily on the first piece of information offered (the "anchor")
when making decisions, even if that information is irrelevant.

Impact on Investing: Poor response to new data

• Fixating on a stock's purchase price, even if its fundamentals have changed.
• Judging a company's value based on its historical high price.

Mitigation:
• Always re-evaluate an investment based on current information and fundamentals.
• Set clear price targets (buy/sell) independent of the purchase price.
• Consider the intrinsic value of an asset, not just its past price
Cognitive Bias 3: Availability Heuristic
The tendency to overestimate the likelihood or frequency of events that are easily
recalled or vivid in memory.

Impact on Investing:
• Investing in a stock because a friend recently made a huge profit on it.
• Overreacting to recent market news (e.g., a sudden crash or boom).

Mitigation:
• Base decisions on data and statistical probabilities, not just recent anecdotes.
• Maintain a long-term perspective.
• Avoid reacting impulsively to sensational news.
Cognitive Bias 4: Framing Effect
The tendency for decisions to be influenced by how information is presented or
"framed," rather than by the objective facts.

Impact on Investing:
• An investment described as having a "90% chance of success" sounds better than
"10% chance of failure."
• Focusing on potential gains while ignoring potential losses, or vice versa.

Mitigation:
• Reframe information in different ways to gain a balanced perspective.
• Focus on the underlying facts and probabilities, not just the marketing language.
• Consider both the upside and downside scenarios equally.
Emotional Bias 1: Overconfidence Bias
The tendency to overestimate one's own abilities, knowledge, or the accuracy of
one's forecasts.

Impact on Investing:
• Excessive trading (leading to higher transaction costs and lower net returns).
• Taking on too much risk without adequate diversification.
• Underestimating the probability of negative events.

Mitigation:
• Keep a detailed investment journal to track actual performance vs. predicted.
• Adhere to a disciplined investment process.
Emotional Bias 1: Overconfidence Bias
The tendency to overestimate one's own abilities, knowledge, or the accuracy of
one's forecasts.

Impact on Investing:
• Excessive trading (leading to higher transaction costs and lower net returns).
• Taking on too much risk without adequate diversification.
• Underestimating the probability of negative events.

Mitigation:
• Keep a detailed investment journal to track actual performance vs. predicted.
• Adhere to a disciplined investment process.
Emotional Bias 2: Loss Aversion
The tendency to prefer avoiding losses over acquiring equivalent gains. The pain of a loss is
psychologically more powerful than the pleasure of an equivalent gain.

Impact on Investing:
• Holding onto losing investments too long, hoping they will recover (fear of realizing a
loss).
• Selling winning investments too early (fear of losing paper gains).

Mitigation:
• Set stop-loss orders to limit potential downside.
• Focus on long-term goals and overall portfolio performance, not individual stock
fluctuations.
• Regularly rebalance the portfolio based on pre-defined rules, not emotions.
 Emotional Bias 3: Regret Aversion
The tendency to avoid making decisions that might lead to regret, either from taking
action (commission) or from not taking action (omission).

Impact on Investing:
• Not investing in a promising but volatile asset for fear of regretting a potential loss.
• Following the crowd to avoid the regret of missing out (FOMO - Fear Of Missing Out).

Mitigation:
• Focus on the decision-making process, not just the outcome.
• Understand that some losses are inevitable in investing.
• Develop a clear investment strategy and stick to it, regardless of what others are doing.
 Emotional Bias 4: Herd Mentality
The tendency of individuals to mimic the actions of a larger group, even if those actions contradict their own
information or beliefs. It's often driven by a desire to conform or a belief that the crowd possesses superior
information.

Impact on Investing:
• Market Bubbles: Everyone buys a "hot" asset, driving its price far above its intrinsic value.
• Panic Selling: Widespread fear leads to mass selling, causing market crashes or sharp declines.
• Ignoring fundamental analysis in favor of following popular trends.

Mitigation:
• Independent Research: Always conduct your own thorough analysis before investing.
• Contrarian Thinking: Be skeptical of popular trends; sometimes the best opportunities are found by going
against the crowd.
• Disciplined Strategy: Stick to your pre-defined investment plan and asset allocation, rather than reacting to
short-term market movements driven by herd behavior.
 Impact of Biases on Investment Decisions
• Suboptimal Portfolio Construction: Lack of diversification, concentrated bets.

• Poor Timing Decisions: Buying high (due to greed/herd mentality), selling low (due to
fear).

• Excessive Trading: Driven by overconfidence, leading to higher costs.

• Ignoring Fundamental Analysis: Relying on gut feelings or limited information.

• Underperformance: Ultimately, biases can lead to lower risk-adjusted returns compared

to a rational approach.
Strategies to Mitigate Biases

• Self-Awareness: Recognize that everyone has biases.

• Disciplined Investment Process:
• Develop a clear investment plan (goals, risk tolerance, asset allocation).
• Stick to the plan, even during market volatility.
• Use checklists for decision-making.
• Diversification & Asset Allocation: Reduces the impact of individual poor decisions.
• Seek Independent Advice: A financial advisor can provide an objective perspective.
• Continuous Learning: Improve financial literacy and understanding of behavioral finance.
• Automate Investments: Use SIPs (Systematic Investment Plans) to remove emotional
timing.
• Case Study 1: The "Hot Stock" Chaser
• Scenario: Rohan, a BBA student, sees news reports and social media
posts about "GreenEnergy Inc." stock soaring by 50% in a month.
Everyone he knows is talking about how much money they're making.
Rohan feels he's "missing out" and decides to invest a large portion of
his savings in GreenEnergy Inc. without researching the company's
financials or long-term prospects.
• Case Study 2: The "Bounce Back" Hope
• Scenario: Ms. Singh invested in "TextileCo" stock at ₹200. Due to a
change in government policy, the stock price dropped to ₹100.
Despite new reports suggesting the policy will negatively impact
TextileCo's profits for years, Ms. Singh refuses to sell, saying, "I'll wait
until it gets back to ₹200. I can't take such a big loss."
• Case Study 3: The "Expert" Investor
• Scenario: Mr. Das, a successful entrepreneur, believes his business
acumen makes him an expert investor. He rarely reads financial news
or analyst reports, preferring to rely on his "gut feeling" and a few
quick internet searches. He frequently trades stocks, convinced he
can consistently pick winners and time the market.
Investment Alternatives
Investment Alternatives
• The broad spectrum of financial and physical assets where capital can
be deployed for expected returns.
• Objective: To provide a comprehensive understanding of various
investment alternatives, their characteristics, risks, and returns,
enabling informed decision-making.
• A diversified portfolio built from a deep understanding of various
investment alternatives is essential for long-term financial success.
 Investment
Avenues

Postal
Securities Deposits Insurance Real Assets
Schemes

Monthly
Stocks
Income Scheme
Bonds/Debentures
(MIS)
Govt. Securities Life Insurance Real estate
Bank Deposits National Saving
Money Market Policies Precious Metals
NBFC Deposits Scheme (NSC)
Instruments ULIP Art & Antiques
Vikas Patras
Derivatives
Public Provident
Mutual Funds
Fund (PPF)
Categorization of Investment Alternatives
1. Negotiable Securities: Easily bought and sold on financial markets.
• Viable Securities (Equities/Stocks): Represent ownership in a company. Their value is "viable" or
variable, reflecting the company's performance and market sentiment.
• Fixed Income Securities (Bonds & Others): Represent a loan made to a borrower (government or
corporation) that pays fixed or predictable returns.

2. Collective Investment Vehicles (Mutual Funds): These pool money from multiple investors to invest
in a diversified portfolio of securities. They offer professional management and diversification.

3. Non-Negotiable Instruments: Typically held until maturity, not easily transferable or traded on
secondary markets. Usually represent a direct contract between the investor and the issuer (e.g., a
bank or government entity).
• Examples: Bank Deposits, Provident Funds, Life Insurance.

4. Real Assets: Tangible physical assets that derive their value from their substance, utility, or scarcity.
They often serve as a hedge against inflation.
• Examples: Real Estate, Gold, Commodities, Art.
Category 1.1: Negotiable Securities - Stocks
• Stocks, commonly known as shares, represent ownership units in a company. When
an investor buys a stock, they become a part-owner (shareholder) of that company,
gaining a proportional claim on its assets and earnings.

Stocks

Preferred Stocks
Common Stocks
(Preference
(Equity Shares)
Shares)
1.1.1 Common Stock (Equity Shares)
Most prevalent and basic form of ownership in a corporation.
Common stockholders are the true owners of the company.

Ownership/ High Growth Variable

Voting Rights
Residual Claim Potential Dividends
• If liquidation, • Highest • Dividends - not • Right to vote
paid last, after potential for fixed. Declared on corporate
all creditors & capital based on policies &
preferred appreciation as profitability. If election of
shareholders. the company poor board of
grows and its performance, directors. Thus,
profits dividends say in
increase. reduced or company's
skipped. management.
 Advantages & Disadvantages of Equity Shares

Advantages Disadvantages
High Growth Potential Market Volatility

Dividends Capital Loss Risk

Liquidity No Guaranteed Returns

Ownership & Influence Requires Research & Analysis

Key Takeaway: While offering significant upside, equities demand a higher risk
tolerance and a long-term investment horizon to ride out market fluctuations.
1.1.2 Preferred Stock (Preference Shares)
While technically representing ownership, preferred shares are often considered a
hybrid security because they share characteristics of both stocks and bonds.

Limited
Priority in Fixed No Voting
Less Volatile Growth
Payments Dividends Rights
Potential
• If liquidation, • Due to fixed • Fixed rate of • Most • Price
priority claim dividend dividend, preferred appreciation
on company's payments similar to shares do not often limited
assets over and priority, interest carry voting compared to
equity they are less payments on rights, thus, equity shares,
shareholders, volatile than bond. Paid no say in as value is
but after equity shares. before company tied more to
bondholders. dividends are management. their fixed
distributed to dividend
common yield.
shareholders.
Category 1.2: Negotiable Securities – Fixed Income Securities

Loan

Repay Principal
By Investor
(Face Value) at
(Lender)
Maturity

To Borrower
Borrower pays
(Company, Govt.,
regular Interest
Public Entity)
Fixed Income Securities (Bonds & Others) - Characteristics
Valued for their stability, predictable income, and capital preservation, making them a
cornerstone for conservative investors and a crucial component for portfolio diversification.

Fixed/
Debt Maturity Face Value Lower Risk
Predictable
Instrument Date (Par Value) (Generally)
Payments
• Investor is • Regular • Specified • Principal • As compared
Creditor, not interest maturity date, amount to to shares,
Owner. payments. at which point repay at lower risk,
Contractual Thus, stable the principal maturity. Can especially
right to and reliable amount is trade above those issued
receive income repaid to the (premium) or by
payments. stream. investor. below government.
(discount)
their face
value.
Types of Fixed Income Securities - Debentures

Debentures
Long-term debt instruments issued by companies to raise capital from investors.
They are essentially a promise by the company to pay interest and repay the
principal.
Debentures – issued by private sector companies
Bonds – issued by public sector companies & financial institutions

Risk: Varies significantly based on the issuing company's financial health and credit
rating (e.g., AAA-rated companies like Reliance or HDFC will have lower default risk
than a BB-rated smaller company).
Debenture - Characteristics

Form Interest Redemption Indenture

• Certificate of • Rate of interest • Redemption • Trust deed

indebtness by – fixed (coupon date – specified between
the company – rate) in issue. company and
date of • Paid as a % of • Period – debenture
redemption & par value of generally 5-10 trustee who
rate of interest. debenture years. represents
• Annually, semi- • May be debenture
annually or redeemed in holders.
quarterly instalments.
Types of Fixed Income Securities - Government Securities

Government Securities
Debt instruments issued by the Central or State Governments to finance their
expenditures. They are considered among the safest investments.
Rate of interest – relatively lower because of their high liquidity and safety.
Risk: Considered "risk-free" in terms of default risk, but they are exposed to
interest rate risk (their market price fluctuates with changes in prevailing interest
rates).
Treasury Bills (T-Bills): Short-term money market instruments with maturities of
less than one year (e.g., 91-day, 182-day, 364-day). They are zero-coupon
instruments, meaning they are issued at a discount and redeemed at face value,
with the difference being the investor's return.
Types of Fixed Income Securities - Money Market Instruments
Money Market Instruments
Short-term debt instruments with maturities typically less than one year. They are
highly liquid and generally considered very low risk. They form a crucial part of the
money market, where short-term funds are borrowed and lent.
Types:
• Commercial Paper (CP):
• Short-term, negotiable instrument with fixed maturity date.
• It is unsecured promissory notes issued by highly-rated corporations and
financial institutions to meet their short-term working capital needs.
• Maturity period – 7 days to 1 year.
• CPs are sold at a discount & redeemed at their face value.
• Denomination is high. Preferred by companies & institutional investors.
Types of Fixed Income Securities - Money Market Instruments
• Certificates of Deposit (CDs):
• Time deposits with banks,
• issued in dematerialized form,
• for a fixed period
• at a fixed interest rate.
• They are negotiable in the secondary market.
• Denomination is high. Preferred by companies & institutional investors.
• Minimum deposit from a single subscriber – 1 Lakh, and in multiples of 1 Lkah
thereafter.
• Fixed period – if issued by Bank – 7 days to 1 year.
• Fixed period – if issued by Financial Institutions – 1 year to 3 years

• Treasury Bills (T-Bills): (Already covered under G-Secs, but also a key money
market instrument).
Feature Equities (Stocks) Fixed Income (Bonds, Debentures, G-Secs,
Pref. Shares)
Nature Ownership stake in a company Debt instrument / Hybrid (loan to issuer)
Return Capital gains (price appreciation), Interest payments (fixed/variable), principal
dividends (variable) repayment, fixed dividends (for pref.
shares)
Risk Level Higher (market, company-specific, Lower (interest rate, credit/default,
business risk) reinvestment risk)
Volatility High (prices fluctuate significantly) Low to Moderate (more stable price
movements)
Priority in Last (residual claim, after all creditors First (bondholders), then preferred
Bankruptcy and preferred shareholders) shareholders (before common
shareholders)
Inflation Good (can grow faster than inflation Poor (fixed payments lose real value during
Hedge over long term) high inflation)
Liquidity Generally high (easily traded on Varies (G-Secs high, some corporate bonds
exchanges) lower)
Category 2: Collective Investment Vehicles - Mutual Funds
Mutual Funds are financial instruments that pool money from a large number of investors to
collectively invest in a diversified portfolio of securities (like stocks, bonds, money market
instruments, gold, etc.). The pooled money is managed by professional fund managers.

How They Work:

• Pooling: Many investors contribute money to a fund.
• Professional Management: A dedicated fund manager, along with a team of analysts,
researches and selects securities for the fund's portfolio based on its stated investment
objective.
• Diversification: The pooled money is invested across a wide range of securities, industries,
and asset classes, inherently providing diversification.
• Returns: Investors earn returns through capital appreciation of the fund's underlying
investments, dividends/interest earned by the fund, and capital gains distributed by the fund.
• Units & NAV: Investors are allotted "units" of the mutual fund. The value of each
unit is called the Net Asset Value (NAV), which is calculated daily.

• NAV = Total Value of Fund’s Assets - Liabilities

Number of Outstanding Units
Category 2.1: Mutual Funds – Types - Based on Structure & Other
1. Open-ended Funds:
An open-ended mutual fund is a type of investment fund that is available for investors to buy into
and redeem their units at any time, based on the fund's net asset value (NAV).

Features:
• Continuous Creation and Redemption: Open-ended funds continuously create new units when
investors purchase them and redeem existing units when investors sell.
• NAV-Based Pricing: The price of units in an open-ended fund is directly linked to the fund's net
asset value (NAV), which is calculated daily.
• Ease of Investment and Withdrawal: Investors can typically buy or sell units of an open-ended
fund on any business day, subject to the fund's cut-off time.
• No Fixed Maturity Date: Unlike closed-ended funds, open-ended funds do not have a maturity
date, and investors can remain invested for as long as they choose
Category 2.1: Mutual Funds – Types - Based on Structure & Other
2. Closed-ended Funds: A close-ended mutual fund is a type of investment fund
• with fixed number of shares,
• typically offered during a New Fund Offer (NFO) period,
• and it is not redeemable before its maturity date.

Features:
• Fixed Maturity Date: These funds have a predetermined termination date, unlike open-
ended funds which can be redeemed at any time.
• Limited Shares: Once the NFO period ends, the fund stops issuing new units, and the
number of outstanding units remains constant.
• Trading on Exchanges: Investors can buy and sell units of a closed-end fund on the stock
exchange, but only after the initial NFO period.
• Potential for Premium or Discount: The market price of a closed-end fund’s units can
fluctuate based on supply and demand and may trade at a premium or discount to its Net
Asset Value (NAV).
Category 2.1: Mutual Funds – Types - Based on Structure &
Other
3. Interval Funds:
• Combine features of both open-ended and closed-ended funds.
• They are open for transactions (subscriptions and redemptions) only during pre-
specified intervals.
• They can be listed on the stock exchange.

Other Important Types:

• Index Funds: Passively managed funds that aim to replicate the performance of a
specific market index (e.g., Nifty 50, Sensex).
• Exchange Traded Funds (ETFs): Similar to open-ended funds but traded like stocks on
exchanges throughout the day.
• Fund of Funds (FoF): Invests in units of other mutual fund schemes.
Category 2.2: Mutual Funds – Types - Based on Asset Class
1. Equity Funds:
• Description: Primarily invest in stocks (equity shares) of companies. Aim for capital appreciation
over the long term.
• Sub-types: Large-cap, Mid-cap, Small-cap, Multi-cap, Flexi-cap, ELSS (Equity Linked Savings
Scheme - offers tax benefits with a 3-year lock-in).
• Risk-Return: High risk, high return potential.
• Example: An investor looking for long-term growth for retirement might invest in a large-cap
equity fund.

2. Debt Funds:
• Description: Primarily invest in fixed-income securities like government bonds, corporate bonds,
debentures, and money market instruments. Aim for stable income and capital preservation.
• Sub-types: Liquid Funds (very short-term), Ultra Short Duration, Short Duration, Gilt Funds,
Corporate Bond Funds, Credit Risk Funds.
• Risk-Return: Low to moderate risk, moderate returns.
• Example: A conservative investor seeking regular income might choose a corporate bond fund.
Category 2.2: Mutual Funds – Types - Based on Asset Class
3. Hybrid Funds (Balanced Funds):
• Description: Invest in a mix of both equity and debt instruments. Aim to provide a balance
between growth and stability.
• Sub-types: Conservative Hybrid (more debt), Aggressive Hybrid (more equity), Balanced
Advantage/Dynamic Asset Allocation (actively manage equity-debt mix).
• Risk-Return: Moderate risk, moderate to high returns.
• Example: An investor seeking a balanced approach for a medium-term goal might invest in an
aggressive hybrid fund.

4. Money Market Funds:

• Description: Invest in highly liquid, short-term money market instruments like Treasury Bills,
Commercial Paper, and Certificates of Deposit.
• Risk-Return: Very low risk, low returns, high liquidity.
• Example: Used for parking emergency funds or short-term cash surpluses.
Category 3: Non-Negotiable Instruments - Characteristics
• Limited Liquidity: This is their defining characteristic. Funds are often locked in for a
specific tenure, and early withdrawals may incur penalties or are simply not allowed.

• Fixed/Predictable Returns: Most non-negotiable instruments offer guaranteed interest

rates or pre-determined returns, providing certainty and stability of income.

• Safety: They are generally considered low-risk, especially those backed by the
government or regulated financial institutions, offering a high degree of capital
protection.

• Tax Benefits: Many instruments are designed with specific tax incentives, offering
deductions on investment or exemptions on maturity proceeds.

• Simplicity: They are relatively easy to understand and invest in, often requiring minimal
financial knowledge compared to market-linked securities.
Category 3.1: Non-Negotiable Instruments – Bank Deposits
Bank Deposits:
• Savings Accounts:
• Description: Basic deposit accounts for day-to-day transactions and holding easily
accessible funds. They are highly liquid.
• Features: High liquidity (funds can be withdrawn anytime), very low interest rates
(often barely beating inflation), no lock-in period.
• Use: Emergency fund, short-term cash management, holding funds for immediate
expenses.
• Example: Your personal savings account at any commercial bank like ICICI Bank or
HDFC Bank.
Category 3.1: Non-Negotiable Instruments – Bank Deposits
Bank Deposits:
• Fixed Deposits (FDs) / Term Deposits:
• Description: A lump sum of money invested with a bank for a fixed period (e.g., 7
days to 10 years) at a predetermined, fixed interest rate.
• Features: Offer higher interest rates than savings accounts, capital protection,
limited liquidity (premature withdrawals are usually allowed but incur a penalty,
such as a reduction in interest rate).
• Use: Short to medium-term savings goals (e.g., saving for a car, vacation),
conservative investment for predictable returns.
• Example: A 5-year FD with State Bank of India offering 7% interest, providing a
guaranteed return for the tenure.
Category 3.1: Non-Negotiable Instruments – Bank Deposits
Bank Deposits:
• Recurring Deposits (RDs):
• Description: Allows individuals to deposit a fixed amount (e.g., ₹1,000) every
month for a fixed tenure (e.g., 1 to 10 years), earning a fixed interest rate.
• Features: Encourages disciplined saving, fixed returns similar to FDs, suitable for
those who can save a small amount regularly.
• Use: Accumulating a corpus for a specific goal over a defined period (e.g., saving for
a child's school fees, buying an appliance).
• Example: Investing ₹5,000 per month in an RD for 3 years, accumulating a lump sum
at maturity.
Category 3.2: Non-Negotiable Instruments – Public Provident
Funds (PPF)
A long-term savings scheme offered by the Government of India, open to all Indian
citizens (including minors). It's a popular tax-saving investment.

• Features:
• Fixed, government-declared interest rate (reviewed quarterly),
• significant tax benefits (80C deduction for contributions, tax-free interest and
maturity amount),
• 15-year lock-in period (extendable in blocks of 5 years), partial withdrawals allowed
after 5 years.

• Use: Long-term wealth creation, retirement planning, tax saving.

• Example: Investing up to ₹1.5 lakhs annually in a PPF account to avail tax benefits and
build a tax-free corpus.
Category 3.3: Non-Negotiable Instruments – Life Insurance
Policies
• Life insurance is contract for
• payment of a sum of money to the person assured (or to the person entitled to
receive the same)
• On the happening of the event insured against
• Payment of amount on
• date of maturity or
• at specified dates at regular intervals or
• if death occurs.
• Payment of premium periodically to the corporation by the policyholders.
• Life insurance eliminates risk.
• Insurance = Investment + Assurance
Category 3.3: Non-Negotiable Instruments – Life Insurance
Policies
Endowment Plans:
• Description: Traditional life insurance policies that combine life insurance coverage with
a savings component. A lump sum (sum assured plus bonuses) is paid at maturity or to
nominees upon the policyholder's death, whichever is earlier.
• Features:
• Dual benefit (protection + savings),
• guaranteed maturity benefit (for traditional plans),
• certain portion of premium gets invested and generates return every year which is
declared as bonus,
• fixed tenure,
• tax benefits on premium and maturity.
• Use: Meeting long-term financial goals like child's education or marriage, while
providing financial protection to dependents.
Category 3.3: Non-Negotiable Instruments – Life Insurance
Policies
Unit Linked Insurance Plans (ULIPs):
• Description: A hybrid product combining life insurance with market-linked investment. A
portion of the premium goes towards life cover, and the remaining is invested in funds (equity,
debt, balanced) chosen by the policyholder.
• Features:
• Dual benefit (protection + market-linked growth),
• flexibility to switch between funds,
• 5-year lock-in period,
• tax benefits (80C and 10(10D)),
• partial withdrawals allowed after lock-in,
• top-up facility (additional contribution over regular premium).
• Use: Long-term wealth creation with insurance cover, suitable for investors with a medium to
high risk appetite who want market exposure.
Category 3.4: Non-Negotiable Instruments – Post Office
Savings Schemes
National Savings Certificates (NSC):
• Issued by the Department of Post, Government of India.
• A fixed-income investment scheme available through post offices, with a fixed tenure
and a fixed interest rate.
• Features:
• Government-backed (low risk),
• interest compounded annually (but paid at maturity),
• tax deduction under Section 80C for the investment amount.
• Use: Tax saving, guaranteed returns for medium-term goals.
• Example: Buying an NSC for a 5-year lock-in to save tax and earn fixed returns.
Category 3.4: Non-Negotiable Instruments – Post Office
Savings Schemes
Kisan Vikas Patra (KVP):
• Description: A small savings certificate scheme that guarantees to double the invested
amount in a specified period (e.g., 10 years 4 months at current interest rates).
• Features:
• Government-backed,
• fixed maturity period,
• no maximum investment limit,
• no tax benefits.
• Use: Long-term capital doubling, suitable for risk-averse investors seeking guaranteed
growth.
• Example: Investing ₹50,000 in KVP to get ₹100,000 after the maturity period.
Category 3.4: Non-Negotiable Instruments – Post Office
Savings Schemes
Monthly Income Scheme (MIS):
• Description: A scheme offered by post offices that provides a regular monthly income by
investing a lump sum.
• Features:
• Fixed monthly interest payouts,
• 5-year maturity,
• minimum amount – Rs. 1,000 & maximum amount – Rs. 9 lakhs (single), Rs. 15 lakhs
(joint)
• government-backed (low risk),
• suitable for monthly income-seeking individuals.
• Use: Regular income for retirees, housewives, or those needing a steady cash flow.
• Example: Investing ₹4.5 lakhs (maximum for single account) in MIS to receive a fixed
monthly interest payout.
Category 3.4: Non-Negotiable Instruments – Post Office
Savings Schemes
Senior Citizen Savings Scheme (SCSS):
• Description: A government-backed savings scheme specifically designed for Indian senior
citizens (60+ years). It aims to provide a regular and secure income post-retirement.
• Features:
• High, fixed interest rate (reviewed quarterly by government, but fixed for the investor
at time of investment),
• quarterly interest payouts,
• 5-year tenure (extendable by 3 years),
• tax benefits under Section 80C for investment (up to ₹1.5 lakhs). Interest income is
taxable.
• Use: Providing a steady and safe income stream for senior citizens, capital preservation.
• Example: A retired individual investing their retirement corpus (up to ₹30 lakhs) in SCSS
to receive regular quarterly interest payments.
 National Savings Kisan Vikas Patra Monthly Income Public Provident Fund Senior Citizen Savings
Feature
Certificate (NSC) (KVP) Scheme (MIS) (PPF) Scheme (SCSS)
Target Investor Small to mid-income, tax- Risk-averse, long-term Retirees, income- Long-term savings, Senior citizens (60+)
saving, low-risk capital doubling seekers, low-risk retirement, tax-saving
Min. Investment ₹1,000 ₹1,000 ₹1,000 (multiples of ₹500 per financial year ₹1,000 (multiples of
₹100) ₹1,000)
Max. Investment No upper limit (80C No upper limit Single: ₹9 Lakh; Joint: ₹1.5 Lakh per financial ₹30 Lakh (across all
benefit up to ₹1.5 Lakh) ₹15 Lakh year SCSS accounts)
Tenure/Lock-in 5 years Doubles in a specified 5 years 15 years (extendable 5 years (extendable by
period (e.g., 10 years 4 in 5-year blocks) 3 years)
months)
Interest Rate Fixed for tenure, Fixed for tenure, Fixed for tenure, paid Fixed (reviewed Fixed (reviewed
compounded annually, compounded annually, monthly quarterly), quarterly), paid
paid at maturity doubles investment compounded annually quarterly

Liquidity/Prematu Not allowed (except Allowed after 2.5 Allowed after 1 year Allowed after 5 years Allowed after 1 year
re Withdrawal death/court order) years (with penalty) (with penalty) (specific grounds only) (with penalty)
Tax Benefits Section 80C deduction (up No tax benefit No tax benefit Section 80C deduction Section 80C deduction
(Investment) to ₹1.5 Lakh) (up to ₹1.5 Lakh) (up to ₹1.5 Lakh)
Tax Benefits Interest taxable at Maturity taxable as Interest fully taxable Fully tax-exempt (EEE Interest fully taxable
(Maturity/Interes maturity (reinvested per slab, no TDS as per slab, no TDS status) as per slab, TDS
t) interest qualifies for 80C applicable if > ₹50,000
for initial 4 years)
Category 4: Real Assets
Real assets are tangible physical assets that derive their value from their substance, utility, or scarcity.
Unlike financial assets (stocks, bonds) which are claims on future cash flows, real assets have inherent
value.

Characteristics:
• Tangible: They have a physical presence and can be seen, touched, or used (e.g., land, a building, gold,
a barrel of oil).
• Inflation Hedge: Their value tends to rise with inflation, as the cost of producing or replacing them
increases. This helps protect purchasing power.
• Store of Value: They can preserve wealth over long periods, particularly during times of financial
instability or currency devaluation.
• Illiquid (generally): Most real assets are not as easily converted to cash as financial securities. Selling a
property or a large quantity of physical gold can take time and effort.
• Maintenance/Storage Costs: They may incur ongoing expenses for upkeep, property taxes, insurance,
security, or specialized storage.
• Income Generation: Some real assets (like rental properties) can generate regular income, while
others (like raw land or physical gold) do not.
Category 4.1: Real Assets - Types
1. Real Estate:
• Description: Investment in land and any permanent structures attached to it, including
residential, commercial, and industrial properties.
• Types:
• Residential Property: Homes, apartments, villas. Can be for self-use or rented out.
• Commercial Property: Office spaces, retail shops, shopping malls, hotels.
• Industrial Property: Warehouses, factories, industrial parks.
• Land: Undeveloped plots, agricultural land, often held for long-term appreciation.
• Returns:
• Rental Income: Regular income generated from tenants.
• Capital Appreciation: Increase in property value over time due to factors like economic
growth, infrastructure development, and demand.
• Example: Buying a residential apartment in a growing city for rental income and long-term capital
appreciation.
Category 4.1: Real Assets - Types
2. Gold & Silver:
• Description: Investment in precious metals, traditionally considered a safe haven asset, especially
during economic downturns or geopolitical instability.
• Forms:
• Physical Metal: Bars, coins, jewelry. This involves direct ownership and often requires secure
storage.
• (Note: While Gold ETFs and Sovereign Gold Bonds (SGBs) provide exposure to gold's price
movements, they are financial instruments (negotiable for ETFs, non-negotiable for SGBs)
rather than direct physical assets. This section focuses on the physical form.)
• Returns: Primarily through capital appreciation (price fluctuations) driven by global demand,
supply, interest rates, and currency movements.
Category 4.1: Real Assets - Types
3. Commodities:
• Description: Raw materials or primary agricultural products that are traded in bulk on commodity
exchanges.
• Examples: Energy (Crude oil, Natural Gas), Agriculture (Wheat, Corn, Sugar, Coffee), Industrial
Metals (Copper, Aluminum, Zinc).
• Investment: While physical delivery is possible for large players, most individual investors gain
exposure through financial instruments like commodity futures contracts (derivatives) or
commodity ETFs.
• Returns: Primarily through price appreciation driven by supply and demand dynamics, global
economic growth, and geopolitical events.
Category 4.1: Real Assets - Types
4. Art, Antiques, & Collectibles:
• Description: Investment in unique items with cultural, historical, aesthetic, or sentimental value
that are expected to appreciate over time due to rarity and demand.
• Examples: Paintings, sculptures, rare coins, stamps, vintage cars, rare books, limited-edition
luxury items.
• Returns: Primarily through capital appreciation. Income generation is rare (e.g., lending art for
exhibition).
• Features: Lacks liquidity, Extensive knowledge of quality & authenticity, no regulators like SEBI to
protect investments, understanding pricing process is complex, involves maintenance.
Skill Enhancement Activity
Conduct an interview with your parents/ relatives/
neighbours on their investment alternatives and make
a report mentioning best alternatives along with
results.