Analysis of

RISK MANAGEMENT
Concerning
SAMPADHA(Strategies for financial growth),
HYDERABAD
A Project Report Submitted in Partial Fulfillment of the Requirement for the Award of the Degree of

Bachelors Of Commerce
(Accounting Auditing Taxation)

Submitted by
Keerthika Veluri
Reg. No. VU21MGMT0800053
2021-2024
Under the guidance of
Dr. Rashmi Ranjan Panigrahi

GITAM School of Business

GITAM (DEEMED TO BE) UNIVERSITY
Visakhapatnam-530043.

1
 DECLARATION

I Keerthika Veluri, VU21MGMT0800053, student of Bachelor of Commerce, Gitam

Institute of Management hereby declare that the summer project work/Internship report

entitled “Risk management” is an original report submitted by me for the partial

fulfilment of the award of the degree Bachelor of commerce, GITAM Deemed to be

University, Visakhapatnam and it is not submitted anywhere either in part or in full for

degree or post-graduation of any university.

Place: Visakhapatnam KEERTHIKA VELURI

Date: VU21MGMT0800053

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3
 CERTIFICATE

This is to certify that the project report titled “A STUDY ON RISK MANAGEMENT with
reference to SAMPADHA (Financial services organization)” is an original work carried out
by KEERTHIKA VELURI, VU21MGMT0800053 under my guidance and supervision, in
partial fulfilment for the award of the degree of Bachelor of Commerce by GITAM School of
Business, Visakhapatnam during the academic years 2021-2024.

Date: Dr. Rashmi Ranjan Panigrahi

(Assistant Professor, GSB)
Place: Visakhapatnam

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 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Prof. Amit Bhadra, Dean of Gitam School of
Business, Visakhapatnam, for his encouragement and support throughout the academic
period.

I take this opportunity to record my everlasting thanks and hearty feelings of gratitude to my
project guide, Dr . Rashmi Ranjan Panigrahi and Dr . P. Giri Babu, program coordinator (B.
Com Aat) for constant encouragement and guidance for the successful completion of the
project work.

I extend my deepest gratitude to you for providing me with this exceptional internship
opportunity. It has been an enriching journey, and I am confident that the skills and
knowledge I have gained will serve me well in my future endeavours.

Keerthika Veluri
VU21MGMT0800053

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 CONTENTS

S.No TOPIC
1 Chapter – I
Introduction
2 Chapter – II :
Need for the study
Objective
Scope of the study
Research Methodology
Limitations of the study
3 Chapter – III
Types of risks faced by an organization
4 Chapter – IV
Security Analysis & Risk Management in Portfolio of Securities
5 Chapter-V

Analysis
6 Chapter- VI

Suggestions

7 Chapter-VII

Conclusion

8 Bibliography

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 CHAPTER I

(INTRODUCTION)

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 INTRODUCTION

Risk Management in the financial sector is a vital concept and any individual before
investing in the stock markets should be aware of all the risks involved in the dynamic
business environment and the ways to mitigate the risks to be in a comfortable
position although market underperforms.

Risk management is a critical process that individuals, businesses, and organizations

of all types use to identify, assess, and mitigate potential risks and uncertainties. It
involves a systematic approach to understanding and addressing the factors that could
impact the achievement of goals and objectives. Effective risk management helps
minimize the negative impact of unexpected events while also maximizing
opportunities.

Benefits of Risk Management:

Protection: It helps protect assets, investments, and the reputation of an organization.

Opportunity Identification: Risk management isn't just about avoiding negative

outcomes; it can also uncover opportunities that might otherwise be missed.

Stakeholder Confidence: Stakeholders, including customers, investors, and

employees, are more likely to have confidence in an organization that demonstrates
effective risk management.

Cost Savings: Preventing or mitigating risks can save an organization money in the
long run by avoiding costly incidents.

Strategic Decision-Making: A robust risk management process allows organizations

to make more informed strategic decisions.

Sustainability: It can contribute to the long-term sustainability of an organization by

reducing the impact of adverse events.

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Key Concepts in Risk Management:

Risk: Risk refers to the uncertainty or variability of outcomes, where there is a

possibility of both positive and negative results. Risks can stem from various sources,
including financial, operational, strategic, compliance, and environmental factors.

Risk Assessment: This step involves identifying, analyzing, and evaluating potential
risks. Risk assessment helps in understanding the likelihood and severity of each risk
and its potential impact on the organization.

Risk Mitigation: Once risks are identified and assessed, strategies are put in place to
reduce or eliminate them. This can involve risk avoidance, risk reduction, risk
transfer, or risk acceptance, depending on the nature of the risk and the organization's
tolerance.

Risk Monitoring and Control: Risk management is an ongoing process. Monitoring

and controlling risks ensure that the risk management strategies are effective and can
be adjusted if new risks arise or existing ones change.

Risk Appetite: This is the level of risk an organization is willing to accept to achieve
its goals. It varies from one organization to another and depends on factors such as
industry, financial health, and corporate culture.

Risk Register: A risk register is a tool used to document and track identified risks. It
typically includes information about the risk, its potential impact, the probability of
occurrence, and the steps taken for mitigation.

Risk Response Planning: Developing a plan for how to respond to specific risks is a
crucial aspect of risk management. This can include contingency plans, crisis
management, and business continuity plans.

Insurance and Risk Transfer: In some cases, organizations may transfer risk to
insurance companies. This is a form of risk management where the financial impact of
certain risks is shifted to an insurer in exchange for premiums.

Compliance and Regulations: Many industries and organizations are subject to

regulations that require specific risk management practices. It's essential to ensure that
risk management activities align with legal and regulatory requirements.

Risk management from an investor's perspective is a critical aspect of financial

decision-making. Investors aim to maximize returns on their investments while
minimizing the potential for financial losses.

Managing risk is essential for investors to make sound financial decisions, safeguard
their investments, and work toward achieving their financial objectives while staying
within their risk tolerance. Balancing risk and return is the core of successful
investing.

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All the analysis required for taking investment decisions has been covered in further
parts of the study.

CHAPTER II

(METHODOLOGY)

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 NEED FOR THE STUDY

It is highly important to have knowledge about the financial markets and the
techniques of investment. Savings and investment are a part and parcel of
everybody’s life and the need to invest and make returns from the financial markets
has become a need for what was considered a luxury.

To attain better returns, financial literacy and understanding about the markets is
inevitable and requires time and experience and is not an overnight task. Hence,
understanding the theoretical framework is the base and combined with practical
experience leads to optimum decision-making.

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 OBJECTIVE OF THE STUDY

The main intent of doing this project is to analyze the various risks encountered in the
businesses from an investor perspective, i.e., delving into the factors which a rational investor
generally goes through before investing in the share of any company.

This study has been conducted with reference to the portfolio of few clients of Samapadha
and this contains the factors Sampadha analyses on behalf of it’s clients before taking any
informed decision either to buy/ sell any share or while analyzing the risk and return factors
or any security or portfolio.

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 SCOPE OF THE STUDY

The scope of the study includes the following:

1. Analysis of various types of risk

2. Security analysis which includes fundamental and technical analysis
3. Portfolio management
4. Actualities of how fundamentals of companies are analysed by quoting real
scenarios.

However, fundamental and technical analysis and portfolio analysis are vast
concepts and an overview of these concepts are covered which gives a reasonable
level of understanding about how investors should act while investing.

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 RESEARCH METHOLOGY

Fundamental Analysis:
Company Analysis: Analyzing the financial health and performance of individual companies
in a mutual fund's portfolio.
Industry Analysis: Evaluating the prospects of the industries in which the fund's holdings
operate.
Macroeconomic Analysis: Considering broader economic factors that can impact investment
decisions.

Technical Analysis:
Chart Analysis: Using price charts and technical indicators to identify patterns and
trends in asset prices.
Moving Averages: Utilizing moving averages to identify potential buying or selling
signals.
Relative Strength Analysis: Comparing the strength of one asset or mutual fund
relative to others.

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 LIMITATIONS OF THE STUDY

The analysis of markets although is highly essential for investing, it comes with
a catch and the following are the practical limitations for the entire study of
markets:

1. Information inadequacy – Information is neither freely available nor rapidly

transmitted to all participants in the stock market. There is a calculated attempt by
many companies to circulate misinformation.

2. Limited information processing capabilities – Human information processing

capabilities are sharply limited. According to Herbert Simon, every human
organism lives in an environment which generates millions of new bits of
information every second, but the bottlenecks of the perceptual apparatus does not
admit more than thousand bits per seconds and possibly much less.
David Dreman maintained that under conditions of anxiety and uncertainty, with a
vast interacting information grid, the market can become a giant.

3. Irrational Behaviour – It is generally believed that investors’ rationality will

ensure a close correspondence between market prices and intrinsic values. But in
practice this is not true. J. M. Keynes argued that all sorts of consideration enter
into the market valuation which is in no way relevant to the prospective yield.
This was confirmed by L. C. Gupta who found that the market evaluation
processes work haphazardly almost like a blind man firing a gun. The market
seems to function largely on hit or miss tactics rather than on the basis of
informed beliefs about the long-term prospects of individual enterprises.

4. Monopolistic Influence – A market is regarded as highly competitive. No single

buyer or seller is supposed to have undue influence over prices. In practice,
powerful institutions and big operators wield great influence over the market. The
monopolistic power enjoyed by them diminishes the competitiveness of the
market.

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Hence it is important to put these limitations in mind as nothing can be regarded
highly perfect within an ever changing environment which is influenced by several
internal and external factors.

CHAPTER III

(TYPES OF RISKS FACED BY AN ORGANISATION)

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TYPES OF RISKS FACED BY AN ORGANISATION

RISK
Risk has a generic definition i.e., uncertainty about the effect/ implications of an activity and
any individual before investing stake in any organization should know what type of risks
business organizations generally have. Important among them are discussed below:

TYPES OF RISKS
 Strategic Risk
 Compliance Risk
 Operational Risk
 Financial risk
(i) Counter Party risk
(ii) Political risk
(iii) Interest rate risk
(iv) Currency risk
(v) Liquidity risk

Certainly, here's an explanation of each of the mentioned risks:

Strategic Risk
A successful business always needs a comprehensive and detailed business plan. Everyone
knows that a successful business needs a comprehensive, well-thought-out business plan but
it’s also a fact of life that, if things change, even the best-laid plans can become outdated if it
cannot keep pace with the latest trends. This is what is called as strategic risk. It could be due
to technological changes, a new competitor entering the market, shifts in customer demand,
an increase in the costs of raw materials, or any number of other large-scale changes.

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We can take the example of Kodak which was able to develop a digital camera by 1975 but it
considered this innovation as a threat to its core business model and failed to develop it.
However, when digital camera was ultimately discovered by other companies, it failed to
develop it and was left behind.

Compliance risk
Every business needs to comply with rules and regulations. For example with the advent of
Companies Act, 2013, and continuous updating of SEBI guidelines, each business
organization has to comply with plethora of rules, regulations and guidelines. Non-
compliance leads to penalties in the form of fine and imprisonment.
However, when a company ventures into a new business line or a new geographical area, the
real problem then occurs. For example, a company pursuing cement business likely to
venture into sugar business in a different state but laws applicable to the sugar mills in that
state are different. So, that poses a compliance risk. If the company fails to comply with laws
related to a new area or industry or sector, it will pose a serious threat to its survival.

Operational risk
This type of risk relates to internal risk. It also relates to failure on the part of the company to
cope with day-to-day operational problems. Operational risk relates to ‘people’ as well as
‘process’. We will take an example to illustrate this. For example, an employee paying out
Rs. 1,00,000 from the account of the company instead of Rs. 10,000.
This is a people as well as a process risk. An organization can employ another person to
check the work of that person who has mistakenly paid Rs. 1,00,000 or it can install an
electronic system that can flag off an unusual amount.

Financial risk
Financial risk is referred to as the unexpected changes in financial conditions such as prices,
exchange rate, Credit rating, and interest rate etc. Though political risk is not a financial risk
in the direct sense but same can be included as any unexpected political change in any foreign
country may lead to country risk which may ultimately result in financial loss.
Financial Risk can be divided into following categories:

(i) Counter Party risk: This risk occurs due to non-honouring of obligations by the
counter party which can be failure to deliver the goods for the payment already
made or vice-versa or repayment of borrowings and interest etc. Thus, this risk
also covers the credit risk i.e. default by the counter party.

(ii) Political risk: Generally this type of risk is faced by and overseas investors, as the
adverse action by the government of host country may lead to huge loses. This can
be in any of the following form:

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 (a) Confiscation or destruction of overseas properties.
(b) Rationing of remittance to home country.
(c) Restriction on conversion of local currency of host country into foreign
currency.
(d) Restriction as to borrowings.
(e) Invalidation of Patents
(f) Price control of products

(iii) Interest rate risk: This risk occurs due to a change in interest rate resulting in a
change in asset and liabilities. This risk is more important for banking companies
as their balance sheet items are more interest sensitive and their base of earnings is
spread between borrowing and lending rates.
As we know, the interest rates are of two types i.e. fixed and floating. The risk in
both types is inherent. If any company has borrowed money at floating rate, then
with increase in floating the liability under fixed rate shall remain the same. This
fixed rate, with the falling floating rate the liability of company to pay interest
under fixed rate shall comparatively be higher.

(iv) Currency risk: This risk mainly affects the organization dealing with foreign
exchange as their cash flows changes with the movement in the currency
exchange rates. This risk can affect cash flow both adversely or favorably. For
example, if rupee depreciates vis-à-vis US$ receivables will stand to gain vis-à-vis
to the importer who has the liability to pay bill in US$. The best case we can quote
Infosys (Exporter) and Indian Oil Corporation Ltd. (Importer).

(v) Liquidity risk: Broadly liquidity risk can be defined as inability of organization to
meet it liabilities whenever they become due.
This risk mainly arises when organization is unable to generate adequate cash or
there may be some mismatch in period of cash flow generation.
This type of risk is more prevalent in banking business where there may be
mismatch in maturities and receiving fresh deposits pattern.

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 CHAPTER IV

(SECURITY ANALYSIS RISK MANAGEMENT IN PORTFOLIO OF

SECURITIES)

20
SECURITY ANALYSIS RISK MANAGEMENT IN PORTFOLIO OF
SECURITIES

After knowing the type of risks organisations work in, it’s highly important to do a systematic
analysis of the risk return profiles of securities of various companies to estimate a value for a
company from all the price sensitive information/data so that one can make purchases when
the market underprices some of them and thereby ensuring a reasonable rate of return.
Two approaches viz. fundamental analysis and technical analysis are in vogue for carrying
out Security Analysis. In fundamental analysis, factors affecting risk-return characteristics of
securities are looked into while in technical analysis, demand/ supply position of the
securities along with prevalent share price trends are examined.

FUNDAMENTAL ANALYSIS:
Fundamental Analysis is based on the assumption that the share prices depend upon the future
dividends expected by the shareholders. The present value of the future dividends can be
calculated by discounting the cash flows at an appropriate discount rate and is known as the
'intrinsic value of the share'. The intrinsic value of a share, according to a fundamental
analyst, depicts the true value of a share. A share that is priced below the intrinsic value must
be bought, while a share quoting above the intrinsic value must be sold.
Thus, it can be said that the price the shareholders are prepared to pay for a share is nothing
but the present value of the dividends they expect to receive on the share, and this is the price
at which they expect to sell it in the future.
Within an industry, the prospects of a specific company depend not only on the prospects of
the industry to which it belongs, but also on its operating and competitive position within that
industry. The key variables that an investor must monitor in order to carry out his
fundamental analysis are economy wide factors, industry wide factors and company specific
factors. In other words, fundamental analysis encompasses economic, industrial and company
analyses. They are depicted by three concentric circles and constitute the different stages in
an investment decision making process as presented below:

Economy Analysis
Industry Analysis
Company Analysis

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ECONOMY ANALYSIS
Macro-economic factors e.g. historical performance of the economy in the past/ present and
expectations in future, growth of different sectors of the economy in future with signs of
stagnation/degradation at present to be assessed while analyzing the overall economy. Trends
in peoples’ income and expenditure reflect the growth of a particular industry/company in
future. Consumption affects corporate profits, dividends and share prices in the market.

Factors Affecting Economic Analysis

Some of the economy wide factors are discussed as under:
(a) Growth Rates of National Income and Related Measures: For most
purposes, what is important is the difference between the nominal growth rate
quoted by GDP and the ‘real’ growth after taking inflation into account. The
estimated growth rate of the economy would be a pointer to the prospects for
the industrial sector, and therefore to the returns investors can expect from
investment in shares.
(b) Growth Rates of Industrial Sector: This can be further broken down into
growth rates of various industries or groups of industries if required. The
growth rates in various industries are estimated based on the estimated
demand for its products.
(c) Inflation: Inflation is measured in terms of either wholesale prices (the
Wholesale Price Index or WPI) or retail prices (Consumer Price Index or CPI).
The demand in some industries, particularly the consumer products industries,
is significantly influenced by the inflation rate. Therefore, firms in these
industries make continuous assessment about inflation rates likely to prevail in
the near future so as to fine-tune their pricing, distribution and promotion
policies to the anticipated impact of inflation on demand for their products.
(d) Monsoon: Because of the strong forward and backward linkages, monsoon is
of great concern to investors in the stock market too.

INDUSTRY ANALYSIS
When an economy grows, it is very unlikely that all industries in the economy would grow at
the same rate. So it is necessary to examine industry specific factors, in addition to economy-
wide factors.
First of all, an assessment has to be made regarding all the conditions and factors relating to
demand of the particular product, cost structure of the industry and other economic and
Government constraints on the same. Since the basic profitability of any company depends
upon the economic prospects of the industry to which it belongs, an appraisal of the particular
industry's prospects is essential.

Factors Affecting Industry Analysis

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The following factors may particularly be kept in mind while assessing the factors relating to
an industry.

 Product Life-Cycle: An industry usually exhibits high profitability in the

initial and growth stages, medium but steady profitability in the maturity
stage and a sharp decline in profitability in the last stage of growth.
 Demand Supply Gap: Excess supply reduces the profitability of the
industry because of the decline in the unit price realization, while
insufficient supply tends to improve the profitability because of higher
unit price realization.

 Barriers to Entry: Any industry with high profitability would attract

fresh investments. The potential entrants to the industry, however, face
different types of barriers to entry. Some of these barriers are innate to
the product and the technology of production, while other barriers are
created by existing firms in the industry.

 Government Attitude: The attitude of the government towards an

industry is a crucial determinant of its prospects.

 State of Competition in the Industry: Factors to be noted are- firms with

leadership capability and the nature of competition amongst them in
foreign and domestic market, type of products manufactured viz.
homogeneous or highly differentiated, demand prospects through
classification viz customer-wise/area-wise, changes in demand patterns
in the long/immediate/ short run, type of industry the firm is placed viz.
growth, cyclical, defensive or decline.
 Cost Conditions and Profitability: The price of a share
depends on its return, which in turn depends on
profitability of the firm. Profitability depends on the state
of competition in the industry, cost control measures
adopted by its units and growth in demand for its
products.
Factors to be considered are:
(i) Cost allocation among various heads e.g. raw
material, labours and overheads and their
controllability. Overhead cost for some may be
higher while for others labour may be so. Labour
cost which depends on wage level and productivity
needs close scrutiny.
(ii) Product price.
(iii) Production capacity in terms of installation, idle and operating.
(iv) Level of capital expenditure required for
maintenance / increase in productive efficiency.

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 Investors are required to make a thorough analysis of
profitability. This is carried out by the study of certain
ratios such as G.P. Ratio, Operating Profit Margin Ratio,
R.O.E., Return on Total Capital etc.

 Technology and Research: They play a vital role in the

growth and survival of a particular industry. Technology
is subject to change very fast leading to obsolescence.
Industries which update themselves have a competitive
advantage over others in terms of quality, price etc.
Things to be probed in this regard are:
(i) Nature and type of technology used.
(ii) Expected changes in technology for new products leading to
increase in sales.
(iii) Relationship of capital expenditure and sales over
time. More capital expenditure means increase in
sales.
(iv) Money spent in research and development.
Whether this amount relates to redundancy or not?
(v) Assessment of industry in terms of sales and profitability in short,
immediate and long run.

COMPANY ANALYSIS
Economic and industry framework provides the investor with proper background against
which shares of a particular company are purchased. This requires careful examination of the
company's quantitative and qualitative fundamentals.
(a) Net Worth and Book Value: Net Worth is sum of equity share capital, preference
share capital and free reserves less intangible assets and any carry forward of losses.
The total net worth divided by the number of shares is the much talked about book
value of a share. Though the book value is often seen as an indication of the intrinsic
worth of the share, this may not be so for two major reasons. First, the market price of
the share reflects the future earnings potential of the firm which may have no
relationship with the value of its assets. Second, the book value is based upon the
historical costs of the assets of the firm and these may be gross underestimates of the
cost of the replacement or resale values of these assets.
(b) Sources and Uses of Funds: The identification of sources and uses of funds is known
as Funds Flow Analysis. One of the major uses of funds flow analysis is to find out
whether the firm has used short-term sources of funds to finance long-term
investments. Such methods of financing increases the risk of liquidity crunch for the
firm, as long-term investments, because of the gestation period involved may not
generate enough surpluses in time to meet the short-term liabilities incurred by the
firm. Many a firm has come to grief because of this mismatch between the maturity
periods of sources and uses of funds.

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 (c) Cross-Sectional and Time Series Analysis: One of the main purposes of examining
financial statements is to compare two firms, compare a firm against some benchmark
figures for its industry and to analyze the performance of a firm over time. The
techniques that are used to do such proper comparative analysis are: common-sized
statement, and financial ratio analysis.

(d) Size and Ranking: A rough idea regarding the size and ranking of the company
within the economy, in general, and the industry, in particular, would help the
investment manager in assessing the risk associated with the company. In this regard
the net capital employed, the net profits, the return on investment and the sales figures
of the company under consideration may be compared with similar data of other
companies in the same industry group. It may also be useful to assess the position of
the company in terms of technical know-how, research and development activity and
price leadership.

(e) Growth Record: The growth in sales, net income, net capital
employed and earnings per share of the company in the past few years
should be examined. The following three growth indicators may be
particularly looked into: (a) Price earnings ratio, (b) Percentage growth
rate of earnings per annum, and (c) Percentage growth rate of net
block.
The price earnings ratio is an important indicator for the investment manager
since it shows the number of times the earnings per share are covered by the
market price of a share. Theoretically, this ratio should be the same for two
companies with similar features. However, this is not so in practice due to
many factors. Hence, by a comparison of this ratio pertaining to different
companies the investment manager can have an idea about the image of the
company and can determine whether the share is under-priced or over-priced.

Consider the following example:

Company A Company B
(a) Market price of share of 100 150 250
(b) Earnings per share 25 25
(c) Price earnings ratio [ (a) ÷ (b) ] 6 10
It is obvious that the purchaser of company A's shares pays 6 times its annual
earnings while the purchaser of company B's shares pays 10 times. If other
factors (intrinsic value of share, growth potential, etc.) are quite similar, it is
obvious that the shares of company A are preferable. In practice, however, the
other factors are never similar in the case of two companies. The investment
manager must try to ascertain why the EPS in company B is comparatively
low – may be some factors are not apparent. EPS calculation cannot be the
sole basis of deciding about an investment. Yet it is one of the most important
factors on the basis of which the investment manager takes a decision to

25
purchase the shares. This is because it relates the market price of the shares
and the earnings per share.
The percentage growth rate of net blocks shows how the company has been
developing its capacity levels. Obviously, a dynamic company will keep on
expanding its capacities and diversify its business. This will enable it to enter
new and profitable lines and avoid stagnation in its growth.
In this context, an evaluation of future growth prospects of the company
should be carefully made. This requires an analysis of existing capacities and
their utilisation, proposed expansion and diversification plans and the nature
of the company's technology. The existing capacity utilisation levels can be
known from the quantitative information given in the published profit and loss
accounts of the company. The plans of the company, in terms of expansion or
diversification, can be known from the Directors’ Reports, the Chairman’s
statements and from the future capital commitments as shown by way of notes
in the balance sheets. The nature of technology of a company should be seen
with reference to technological developments in the concerned fields, the
possibility of its product being superseded or the possibility of emergence of a
more effective method of manufacturing.

TECHNICAL ANALYSIS

Technical Analysis is a method of share price movements based on a study of price graphs or
charts on the assumption that share price trends are repetitive, that since investor psychology
follows a certain pattern, what is seen to have happened before is likely to be repeated. The
technical analyst is concerned with the fundamental strength or weakness of a company or an
industry; he studies investor and price behavior.
A technical analyst attempts to answer two basic questions:
(i) Is there a discernible trend in the prices?
(ii) If there is, then are there indications that the trend would reverse?
The methods used to answer these questions are visual and statistical. The visual methods are
based on examination of a variety of charts to make out patterns, while the statistical
procedures analyse price and return data to make trading decisions.

Assumptions:
Technical Analysis is based on the following assumptions:
(i) The market value of stock depends on the supply and demand for a
security.
(ii) The supply and demand are actually governed by several factors which
can be rational or irrational. For instance, recent initiatives taken by the
Government to reduce the Non- Performing Assets (NPA) burden of
banks may result in the demand for banking stocks.
(iii) Stock prices generally move in trends which continue for a substantial
period of time. Therefore, if there is a bull market going on, there is
every possibility that there will soon be a substantial correction which
will provide an opportunity to the investors to buy shares at that time.

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 (iv) Technical analysis relies upon chart analysis which shows the past
trends in stock prices rather than the information in the financial
statements like balance sheet or profit and loss account.

Principles of Technical analysis:

a. The market discounts everything.

b. Price moves in trends.
c. History tends to repeat itself.

(a) The Market Discounts Everything: Although many experts criticize technical
analysis because it only considers price movements and ignores fundamental
factors but the Efficient Market Hypothesis (discussed later in detail) contradicts it
according to which a company’s share price already reflects everything that has or
could affect a company and it includes fundamental factors. So, technical analysts
generally have the view that a company’s share price includes everything
including the fundamentals of a company.

(b) Price Moves in Trends: Technical analysts believe that prices move in trends. In
other words, a stock price is more likely to continue a past trend than move in a
different direction.

(c) History Tends to Repeat Itself: Technical analysts believe that history tends to
repeat itself. Technical analysis uses chart patterns to analyze subsequent market
movements to understand trends. While many form of technical analysis have
been used for many years, they are still considered to be significant because they
illustrate patterns in price movements that often repeat themselves.

CHARTING TECHNIQUES

Broadly technical analysts use four types of charts for analyzing data. They are as follows:

(i) Line Chart: In a line chart, lines are used to connect successive day’s prices.
The closing price for each period is plotted as a point. These points are joined
by a line to form the chart. The period may be a day, a week or a month.

27
 (ii) Bar Chart: In a bar chart, a vertical line (Bar) represents the lowest to the
highest price, with a short horizontal line protruding from the bar representing
both the opening and closing prices for the period. For example, the prices of
share of A Ltd. for 6 days are as follows:

Days Opening Price ( ) High Price ( ) Low Price ( ) Closing Price( )

01-Jan 58 72 52 68
02-Jan 71 73 58 64.30
03-Jan 66 67 56 57
04-Jan 58.50 75.50 55 72
05-Jan 73.50 75 58 71
06-Jan 74.50 76 55 74.50

The above-mentioned prices shall be depicted in Bar Chart as follows:

(iii) Japanese Candlestick Chat: Like Bar chart this chart also shows the same
information i.e. Opening, Closing, Highest and Lowest prices of any stock on
any day but this chart more visualizes the trend as change in the opening and
closing prices is indicated by the color of the candlestick.
While Black candlestick indicates closing price is lower than the opening price the white
candlestick indicates its opposite i.e. closing price is higher than the opening price. Another
possibility of no change in opening and closing prices or very near is shown by ‘Doji
Candlestick’.
Thus, a white Candlestick indicates a Bullish trend and a black Candlestick indicates a
bearish trend.
The lowest and highest prices are indicated by vertical bar and opening and closing prices
are shown in the form of rectangular (as per above-mentioned color scheme) placed in
between this bar. In case of Doji Candlestick it is indicated by a simple bar.
Continuing the above example the prices of share of A Ltd. as per Candlestick chart is shown
below:

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 (iv) Point and Figure Chart: Point and Figure charts are more complex than line
or bar charts. They are used to detect reversals in a trend. For plotting a point
and figure chart, we have to first decide the box size and the reversal criterion.
The box size is the value of each box on the chart, for example each box could
be 1, 2 or 0.50. The smaller the box size, the more sensitive would the chart
be to price change. The reversal criterion is the number of boxes required to be
retraced to record prices in the next column in the opposite direction.

Period Price
1 24 30
2 26 29
X
3 27 28
X
4 26
27
X
5 28
26
X O
6 27
25 X O
7 26 24
O
8 25 23
9 26
22
10 23

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For a portfolio analysis, an investor first needs to specify the list of securities eligible for
selection or inclusion in the portfolio. Then he has to generate the risk-return expectations for
these securities. The expected return for the portfolio is expressed as the mean of its rates of
return over the time horizon under consideration and risk for the portfolio is the variance or
standard deviation of these rates of return around the mean return.

The expected return of a portfolio of assets is simply the weighted average of the returns of
the individual securities constituting the portfolio. The weights to be applied for calculation
of the portfolio return are the fractions of the portfolio invested in such securities.
Let us consider a portfolio of two equity shares A and B with expected returns of 16 per cent
and 22 per cent respectively.

The formula for the calculation of expected portfolio return may be expressed as shown
below:

r p = Expected return of the portfolio.

Xi = Proportion of funds invested in security i
r i = Expected return of security i.
n = Number of securities in the portfolio.

If 40 per cent of the total funds is invested in share A and the remaining 60 per cent in share
B, then the expected portfolio return will be:
Return on the portfolio = (0.40 x 16) + (0.60 x 22) = 19.6 per cent

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The variance of return and standard deviation of return are statistical measures that are used
for measuring risk in investment. The variance of a portfolio can be written down as the sum
of 2 terms, one containing the aggregate of the weighted variances of the constituent
securities and the other containing the weighted co-variances among different pairs of
securities.

Covariance (a statistical measure) between two securities or two portfolios or a security and
a portfolio indicates how the rates of return for the two concerned entities behave relative to
each other.
The covariance between two securities A and B may be calculated using the following
formula:

Using these parameters, Standard deviation can be calculated, also known as risk of the
portfolio.

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The return and risk of a portfolio depends on following two sets of factors:
(a) Returns and risks of individual securities and the covariance between
securities forming the portfolio
(b) Proportion of investment in each of securities.

As the first set of factors is parametric in nature for the investor in the sense that he has no
control over the returns, risks and co-variances of individual securities. The second set of
factors is choice factor or variable for the investors in the sense that they can choose the
proportions of each security in the portfolio.

With the help of risk and return of the portfolio, investor takes appropriate decisions
whether to rebalance the portfolio to either reduce or dilute the portfolio risk through
adding safe haven assets to the portfolio so that net risk to the investor is mitigated.

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CHAPTER V

(ANALYSIS)

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ANALYSIS
At Samapdha, there is a huge clientele and based on the vagaries of the financial goals of the
clients, financial planning is done and to generalise:
1. For a risk averse investor, low risk assets combined with safe haven assets are
analysed and suggested where the return is low and the risk is also very low and the
CAGR ranges from 8-10% on an average.

2. For a risk taking investor, small cap, mid cap and even option strategies are suggested
basis the risk appetite of the investor/ trader and hence the CAGR ranges from 18-
25%.

Findings of client 1:
In case of a client named Rahul Ravindra, who approached Samapadha for financial
planning, and has keen interest in Emami, fundamental and technical analysis was
performed and these are the few snapshots of the share price analysed and the candlestick
chart is attached below:

Using the price fluctuations, risk and returns were analysed and w.r.t the fundamentals, the
financials of Emami for the last 3 FY’s were examined and also the other metrics like Emami’s
PE ratio when compared to the PE(Market price/ Earnings per share) of other similar players
in the industry were analysed. A snapshot of few metrics which are available in public
domain are attached below:

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 1. The current P/E and the trend of P/E were taken into account while taking a decision
as to buy or sell as this gives a picture whether the stock is under-priced or over-
priced.

2. Revenue, Net Income and Profit Margin which are the 3 main metrics for analysing
the growth prospects and profitability are looked in tandem and some important
conclusions are derived regarding the long-term performance of the company.

Also few key facts are examined to have a complete understanding over the fundamentals
like:
1. Background of the promoters
2. Promoter holding
3. Employee base
4. Dividend yield, etc.

35
Closely held implies holding of the promoters and the free-floating shares imply no. of shares
which are readily available in the market.

Post analysing all these and by going through the share place fluctuations, Sampadha invested
a stretch of funds in tranches by keenly examining the market fluctuations, hence initially
fundamental analysis and from then onwards technical analyses helped in making better
decisions in the investment.

36
Findings of client 2:
In case of another client Anuradha, who has limited funds and was interested in small
contributions, SIP was suggested by Sampadha for Quant Small Cap Fund Direct Growth
Plan after going through the fundamentals and the performance of the fund over the years.
Few metrics which were followed before investing in a mutual fund:
The fund managers and their background – In this case, Hitendra Parekh and Nilesh
Shetty are the fund managers who are seasoned and have very deep understanding of
the markets.
Annualised returns achieved by the fund were analyzed as per below:

Many other metrics like the expense ratio, exit load, other pros and cons were observed
before taking the decision and these were compared to that of similar funds in the radar.

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CHAPTER VI

(SUGGESTIONS)

38
 SUGGESTIONS

At Sampadha, almost everything is taken care of and the analysis being done for almost every
client is in-depth, based on the inputs and the end-goal of the client.
The following are the suggestions basis the observations made at Sampadha:

 Stock markets are always volatile; hence I believe it’ll be better if each and every
investor even though he/she approached a financial consultant for planning, does their
own analysis and have some knowledge about the fundamentals of the companies so
that they can with their intuition try to judge the doings of the consultant.

 It’s important to have clarity about the end financial goal. Some people approach the
consultant without a proper thought of what they desire to achieve, this leads to a vision
share between the consultant and the investor and hence results in bad decision making.

 Every investor should have a risk appetite. Either one should be risk averse or a risk
taker. High risk although leads to high returns, it’s advisable to hedge the risk by taking
offsetting positions to be competitive although market performs adversely.

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CHAPTER VII

(CONCLUSION)

40
 CONCLUSION

Based on my experience at Sampadha, I can conclude that business organizations are

operating in a very dynamic and often hostile environment and before taking an investment
decision, I believe everyone should go through the fundamentals of the company, do some
pragmatic analysis over the share price fluctuations and should figure out the right time to
enter the stock market to remain profitable.

There are many sources which are available to know about the company, it’s promoters, it’s
objects infact in the most legitimate sources in the country i.e, in the MCA(Ministry of
Corporate Affairs) and before investing it’s highly essential to have an understanding over
the entire functioning of any company to leverage the financial risk.

At Sampadha, I have seen how empirically the financial market world runs, in a short span of
time and have garnered understanding beyond what I can present on paper and hope I carry
the knowledge with me and use it to promote financial literacy and awareness in my family
about investing and saving.

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 Bibliography

References:
 POWER, M. (2004), "The risk management of everything", Journal of Risk
Finance, Vol. 5 No. 3, pp. 58-65. https://doi.org/10.1108/eb023001

 Ahmed, A., Kayis, B. and Amornsawadwatana, S. (2007), "A review of

techniques for risk management in projects", Benchmarking: An
International Journal, Vol. 14 No. 1, pp. 22-
36. https://doi.org/10.1108/14635770710730919

Books:
 Fundamentals of Risk Management: Understanding, Evaluating and
Implementing .... By Paul Hopkin

 Fundamentals of Risk Analysis and Risk Management…. by Vlasta

Molak

Websites:

1. https://www.moneycontrol.com/

2. https://in.tradingview.com/

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