Part 2 : Investment

Management
Chapter 1 : Basics of Investment Products
Chapter 2 : Investment Objectives and Risk Profiles
Chapter 3 : Capital Markets
Chapter 4 : Stock Selection and Stock Return - Risk
Part 2 : Investment
Management
Chapter 1 : Basics of
Investment Products
 Investment Portfolio Chart for Indian Investors
Investment Type Risk Level Expected Returns Liquidity Time Horizon Tax Implications
Interest taxable as per slab
Fixed Deposits (FDs) Low 5-7% High Short to Medium Term
rates.
Tax-free returns under Section
Public Provident Fund (PPF) Low 7-8% Low (15 years lock-in) Long Term
80C.
LTCG above ₹1 lakh taxed at
Equity Mutual Funds High 10-15% Moderate Medium to Long Term
10%; STCG at 15%.

LTCG taxed at 20% with

Debt Mutual Funds Moderate to Low 6-9% High Short to Medium Term
indexation; STCG at slab rates.

LTCG above ₹1 lakh taxed at

Stocks/Equities High 12-20% (variable) High Long Term
10%; STCG at 15%.

LTCG taxed at 20% with

Gold (ETFs, Bonds) Moderate 6-8% High Medium Term
indexation; STCG at slab rates.

LTCG taxed at 20% with

Real Estate Moderate to High 7-12% Low Long Term
indexation; STCG at slab rates.

Corporate Bonds/Debentures Moderate 8-10% Moderate Medium Term Interest taxed as per slab rates.

National Savings Certificate Interest taxable, but eligible for

Low 7-8% Low (5 years lock-in) Medium Term
(NSC) deduction under 80C.

Unit Linked Insurance Plans Tax benefits under Section 80C;

Moderate to High 8-12% Low (lock-in 5 years) Long Term
(ULIPs) maturity is tax-free.

Interest taxable, but capital

Sovereign Gold Bonds (SGBs) Low to Moderate 6-8% + price gains Low (8 years maturity) Medium to Long Term
gains exempt on maturity.
Taxed at 30% + 4% cess without
Cryptocurrency Very High Highly Volatile High Variable
deductions.
Government Bonds Low 6-8% Moderate Medium to Long Term Interest taxed as per slab rates.
Introduction
What is Investment??
Is it Same as Savings?
INVESTMENT
• Investment means putting your savings in an asset created to help you
grow your money.
• In other words, an investment is a financial asset that is bought with the
idea that it will provide you with higher returns in the future.
• You will sell it at an amount higher than the cost price and make a profit.
• Investment can generate income in two ways:
If you invest in Saleable asset, you may earn income by way of profit (when you sell
the asset)
If an investment is made in a return generating plan, then you will earn income via
the accumulation of gain
• Investments can be made in :
Physical assets – like gold, real estate etc
Financial assets – like stocks, bonds, mutual funds, retirement schemes etc.
Reasons for Investment
• To Keep Money Safe
• To Help Money Grow
• To Earn As Steady Stream Of Income
• To Minimize the Burden of Tax
• To Save up for Retirement
• To Meet your Financial Goals
Investment Goals
What are Investment Goals??
They take various forms, but they ought to be more concrete than generic notions.
For instance, even if you wanted your investment in stocks to generate profit, you
would benefit from addressing more specific questions, such as how much of a
return you wanted to see and how long you wanted to sustain it for.
Other important goals for investing might include:
Generating income that you can use to supplant your working lifestyle
 Preserving capital, or making safe decisions that maintain your net worth
 Maintaining liquidity, or ensuring that you can always move your money around
and have access to it
 Speculating, or making fast profits to build wealth without being overly
concerned about incurring losses.
------------------------------------------------------------------------------------------------
Time Frame
Short-term Investment Goals
Long-term Investment Goals
Various Investment Products
Bank Savings
Government Schemes
 Sukanya Samriddhi Scheme
 National Savings Certificate
 Pradhan Mantri Jan Dhan Yojana
 Prime Minister Vaya Vandana Yojana (10 y- max 15 Lakh)
 Sovereign Gold Bonds (min 1 gm, max 4 kg )
Retirement Savings
 Life Insurance
 PPF (15 yrs)
 National Pension Scheme (18-60 yrs) (80 C and 80 CCD)
 Atal Pension Yojana (unorganized sector)
Equity Instruments (Eq shares and Eq oriented Mutual Funds, Equity Derivatives)
Debt and Money Market Instruments
Mutual Funds and Exchange Trade Funds (ETFs)
Gold and Gold ETFs
Real Estate and REITs (Real Estate Investment Trusts)
 Part 1 : Investment
Management
Chapter 2 : Investment
Objectives and Risk Profiles
Introduction
• Now that you know where to invest, the next question is how do you choose the right
investment option. To do this, we need to understand a couple more concepts-
investment objectives and the associated risks.
• Every individual has different tastes, right Some of us might like to eat spicy food, while
some prefer non-spicy food.
• Some of our are adventurous and want to participate in extreme sports, like sky diving,
etc., whereas some of us are less adventurous and prefer to participate in non-risky
sport.
• Just like these differences, we tend to have a different risk appetite for investments as
well.
• This chapter will help you understand the various investment objectives and the risk
profiles. Every investment option exposes the investor to a certain degree of risk.
• So far we have learnt about the various investment products, the basics of financial
planning, need for investing, etc.
Portfolio Management
• Portfolio management is the art and science of selecting and overseeing a
group of investments that meet the long-term financial objectives and risk
tolerance of a client, a company, or an institution.
• Some individuals do their own investment portfolio management. That
requires a basic understanding of the key elements of portfolio building
and maintenance that make for success, including asset allocation,
diversification, and rebalancing.
• Portfolio management is the selection, prioritisation and control of an
organisation’s programmes and projects, in line with its strategic
objectives and capacity to deliver.
• The goal is to balance the implementation of change initiatives and the
maintenance of business-as-usual, while optimising return on investment.
 Renowned portfolio managers
Name Description

Often referred to as the "Warren Buffett of India," Rakesh Jhunjhunwala was a veteran investor
Rakesh Jhunjhunwala
known for his significant contributions to the Indian stock market.

Founder of DMart and a respected investor, Radhakishan Damani has made substantial investments
Radhakishan Damani
across various sectors.

Porinju Veliyath Known for his value investing approach, Porinju Veliyath is the founder of Equity Intelligence India.

A prominent investor, Dolly Khanna is known for her investments in lesser-known companies that
Dolly Khanna
yield high returns.

Often called the "Big Whale," Ashish Kacholia has a diversified portfolio with significant holdings in
Ashish Kacholia
mid and small-cap stocks.
Investment Objectives
• An investment objective is the role that an investment, or several
investments, plays to help you reach your financial goals.
• Once you know your objective, it can guide you toward certain asset
classes or securities.
• These help you build a portfolio that will reach your goals.
The three main types of investment objectives are:
i. Growth
ii. Income
iii. Hybrid (growth and income)
Investment Objectives

Investment Objectives

PRIMARY OBJECTIVES SECONDARY OBJECTIVES

Growth Liquidity
Income Tax Savings
Hybrid (growth and income)
Investment Objectives
GROWTH
Do you have a goal that is at least 10 years away? Are you willing to take risks when you invest?
Then a growth objective might be right for you. This gives you plenty of options to invest in.
You can look at stocks, mutual funds or stock exchange-traded funds (ETFs).
There are other objectives that are types of growth-
conservative growth, aggressive growth, trading, or speculation.
 Aggressive growth is when investors make a bold investment in stocks to make short and long-
term gains.
 Conservative growth is when investors build an investment portfolio that will generate wealth
over time.
 Speculation is when investors try to maximize returns by trading shares and securities through
the speculation of share prices.
Investment Objectives
INCOME
As the name suggests, the income investment objective means
investing to generate a source of income for yourself.
• This income comes in the form of dividends, interest, or yields.
• Conservative investors tend to include income objectives in their
portfolios due to their attractive returns and ability to keep up with
inflation.
• Income investors seek a maximum amount of income given their risk
tolerance and are willing to forgo capital appreciation and growth of
income in order to seek a higher level of current income.
Investment Objectives
HYBRID (Growth and Income)
• Designed as a longer-term accumulation account, "Income with
Capital Preservation" is generally considered the most conservative
investment objective.
• Its emphasis is on generating current income and a minimal risk of
capital loss.
• Lowering the risk generally means lowering the potential income and
overall return.
• Capital preservation is often thought of as being for retired or nearly
retired people who want to make sure they don't outlive their
money. For those people, safety is critical, even if it involves giving up
return potential for security.
Investment Objectives
• Younger investors can have a stock-dominated portfolio. That's
because they have many years to recover from any losses that may
occur due to market changes or downturns.
• That isn't the case for older people
• Investors who want capital preservation tend to invest in certificate
of deposits, treasury securities, and savings accounts. These vehicles
offer modest returns but pose much less risk than stocks,
Investment Objectives
Secondary objectives
While the above three are the primary objectives that can be
associated with investments, there are secondary objectives that are
also considered before deciding on the choice of investments. These
are:
• Liquidity
• Tax Savings
ASSESSING RISK PROFILES
• Before you consider investing in any financial instrument, you must know how
much risk you are ready to take.
• Investing in the financial market carries some inherent risk-which can be
classified under systematic and unsystematic risk.

Systematic Risk comes from the influence of external factors on an organisation

- those which are not under the control of the organisation. It includes risks such as
interest rate risk, foreign exchange risk that are at a macro level which the
organisation has no hold on.
Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,”
affects the overall market, not just a particular stock or industry.
Unsystematic Risk refers to the internal risks that an organisation is
exposed to which are usually within the control of the organisation.
These include business risk such as management decisions, financial
risk such as profits and losses and operational risk which pertains to
the manpower that a company employs.
While these are the overall risks that concern the financial markets,
you must, at an individual level recognize yours before you start
investing.
There are five types of unsystematic risk—business, financial,
operational, strategic, and legal/regulatory risk.
Risk Appetite
Risk Profiling Tools
• Some Asset Management Companies and securities research houses provide risk profiling tools
in their website.
• Some banks and other distributors have proprietary risk profilers.
• These typically revolve around investors answering a few questions (questionnaire), based on
which the risk appetite score gets generated.
• Some advanced risk profilers are built on the responses to different scenarios that are presented
before the investor.
• Service providers can assess risk profile based on actual transaction record of their regular
clients.
• While such tools are useful pointers, it is important to understand the
robustness of such tools before using them in the practical world.
• Some of the tools featured in websites have their limitations.
• The financial planner needs to use them judiciously.
• Some of these risk profile surveys/questionnaires suffer from the
investor trying to "guess" the right answer, when in fact there is no
right answer. Risk profiling is a tool that can help the investor, it loses
meaning if the investor is not truthful in his answers.
Need for Risk Profiling
• Various investment schemes have different levels of risk.
• Similarly, there are differences between investors with respect to the
levels of risk they are comfortable with (risk appetite).
• At times there are also differences between the level of risk the investors
think they are comfortable with, and the level of risk they ought to be
comfortable with.
Risk profiling is an approach to understand the risk appetite of investors -
an essential pre-requisite to advise investors on their investments.
The investment advice is dependent on understanding both aspects of risk:
Risk appetite of the investor
Risk level of the investment options being considered.
Factors influencing the Investor’s Risk Profile
Some of the factors and their influence on risk appetite are as follows:
Basis family information
Dependent Members - Risk appetite decreases as the number of dependent members
increases
Earning members - Risk appetite increases as the number of earning members increases.
Basis personal information
• Life expectancy - Risk appetite is higher when life expectancy is longer
• Age-Lower the age, higher the risk that can be taken
• Employability - Well qualified and multi-skilled professionals can afford to take more risk
• Nature of job- Those with steady jobs are better positioned to take risk
• Psyche - Daring and adventurous people are better positioned mentally, to accept the
downsides that come with•
Factors influencing the Investor’s Risk Profile
Basis financial information
• Capital base -Higher the capital base, better the ability to financially
take the downsides that come with risk
• Regularity of Income - People earning regular income can take more
risk than those with unpredictable income streams
More such factors can be added. The financial planner needs to judge
the investor based on such factors, rather than just ask a question
"How much risk are you prepared to take?“
Thus, someone with a stable job may be considered to have higher risk
appetite than someone struggling to get a job.
Factors influencing the Investor’s Risk Profile
Some of the popular risk profiles are given below:
• Conservative - Investor's top priority is safety of capital and he/she is willing to accept
minimal risks and hence, receive minimum or low returns.
• Moderately Conservative -Investor is willing to accept small level of risk in exchange for
some potential returns over the medium to long term.
• Aggressive -Investor is willing to accept significant risks to maximize potential returns
over the long term and is aware that he/she may lose a significant part of capital.
• Moderately Aggressive - Investor is keen to accept high risk in order to maximize
potential returns over the medium to long term
• Moderate - Investor can tolerate moderate level of risk in exchange for relatively higher
potential returns over the medium to long term.
DIVERSIFICATION AND ASSET ALLOCATION
• Diversification in investing reflects the amount of same
asset class holdings in your portfolio.
• Asset allocation is the way in which assets are
distributed within your portfolio to align with your
goals and objectives.
Diversification
Don't put all your eggs in one basket' is a popular phrase applied to
investments.
One way to balance risk and reward in your investment portfolio is
to diversify your assets.
This strategy has many complex iterations, but at its root is the
simple idea of spreading your portfolio across several asset classes.
Diversification is the practice of spreading your investments around
so that your exposure to any one type of asset is limited.
This practice is designed to help reduce the volatility of your portfolio
over time.
One of the keys to successful investing is learning how to balance your
comfort level with risk against your time horizon.
Invest your retirement nest egg too conservatively at a young age, and you
run the risk that the growth rate of your investments won't keep pace with
inflation.
Conversely, if you invest too aggressively when you're older, you could
leave your savings exposed to market volatility, which could erode the
value of your assets at an age when you have fewer opportunities to
recoup your losses.
Diversification can help mitigate the risk and volatility in your portfolio,
potentially reducing the number and severity of stomach-churning ups and
downs.
Remember, diversification does not ensure a profit or guarantee against
loss
 Aspect Diversification Asset Allocation

Definition Spreading investments across Deciding how to distribute

different assets to reduce risk investments among different asset
classes

Purpose To minimize risk by not relying on a To balance risk and return according
single investment to financial goals

Focus Spreading investments within an asset Determining the proportion of funds

class or across multiple asset classes allocated to different asset classes

Example Investing in different stocks across Allocating 60% to stocks, 30% to

various industries (tech, healthcare, bonds, and 10% to real estate
finance, etc.)

Risk Management Reduces the impact of poor Helps align investments with risk
performance from a single investment tolerance and financial goals
Some tips for successful diversification are listed below:
Assess the qualitative aspects of the investment instruments before
investing
Ensure to have some of your portfolio with money market
instruments are short-term emergencies/liquidity
Ensure to invest in bonds/fixed income securities that offer
systematic cash flows.
Since part of the portfolio will be for long term, you should follow a
buy-hold strategy on some of the investments.
One needs to understand factors that impact the financial markets
(cues on key commodities, geo-political, etc)
Throw in an element of systematic investment plan. This would bring
in the much needed discipline towards investments.
One must keep themselves abreast of the latest happening in the
global financial markets. Even though one does not directly
investment in global markets, there are always some spill-over effects
of other markets on to our market, and hence the need to know the
latest happening.
Periodic review of your diversified portfolio is an absolute necessity
Part of your diversified portfolio much include insurance related
plans
The critical factor for a successful diversification is to be aware of
one's financial biases
Asset Allocation
Different economic conditions may impact the performance of different
asset classes differently.
For example, during the recessionary situation in 2007-09, equity markets
in many countries fared poorly, but gold prices went up.
Thus, an investor who had invested in both gold and equity, earned better
returns than an investor who invested in only equities.
The distribution of an investor's portfolio between different asset classes
is called asset allocation.
Some international researches suggest that asset allocation and
investment policy can better explain portfolio performance, as compared
to selection of securities within an asset class (stock selection) and
investment timing.
Asset Allocation Types
At an individual level, difference is made between Strategic and Tactical Asset Allocation.

Strategic Asset Allocation comes out of the risk profile of the individual, the return
requirement to meet the goals and the investment horizon.
 Risk profiling is key to deciding on the strategic asset allocation.
 The allocation to the various asset classes is not driven by their expected performance.
 The most simplistic risk profiling thumb rule is to have as much debt in the portfolio, as the
number of years of age.
 As the person grows older, the debt component of the portfolio keeps increasing.
 This is an example of strategic asset allocation.
 As part of the financial planning process, it is essential to decide on the strategic, asset allocation
that is advisable for the investor. The asset allocation will change if there is a change in the risk
and return preferences of the investor.
Asset Allocation Types
Tactical Asset Allocation is the decision that comes out of calls
on the likely behaviour of the market.
An investor who decides to go overweight on equities i.e. take higher
exposure to equities, because of expectations of resistance in
industry and share markets, is taking a tactical asset allocation call.
Tactical asset allocation is suitable only for seasoned investors
operating with large investible surpluses.
Even such investors might like to set a limit to the size of the
portfolio on which they would take frequent tactical asset allocation
calls.
The last step in the process of portfolio construction would be
selection of schemes within the agreed asset allocation.
 Factors to Consider When Buying Mutual Funds
Factor Description Ideal Benchmark
Compounded Annual Growth Rate (CAGR) Measures the average annual growth of an Higher than the benchmark index over 5+ years.
investment over a period of time.
Expense Ratio The annual fee charged by the mutual fund for Equity funds: <1.5%, Debt funds: <1%.
management and operational costs.
Sharpe Ratio Measures risk-adjusted returns, with higher values >1.0 is considered good.
indicating better performance.
Alpha Measures the fund's excess return over the Positive alpha indicates outperformance.
benchmark.
Beta Measures volatility compared to the market Low beta (<1) for stability, high beta (>1) for
(benchmark). aggressive growth.
Standard Deviation Measures fund volatility; higher values indicate Should align with risk appetite.
more fluctuations in returns.
Assets Under Management (AUM) Total value of assets managed by the fund. Large AUM for stability, moderate for mid/small-
cap funds.
Fund Manager’s Track Record Experience and past performance of the fund Look for consistent outperformance.
manager.
Portfolio Composition Sector and stock diversification to minimize risks. Well-diversified across sectors.

Exit Load Charges for redeeming investments before a Preferably low or no exit load.
specific period.
Tax Efficiency Impact of capital gains tax and dividend taxation. ELSS funds offer tax benefits under Sec 80C.

Consistency of Returns Long-term performance across different market Should outperform the benchmark over 3, 5, and
cycles. 10 years.
 Factors to Consider When Buying a Share
Factor Description Ideal Benchmark
Earnings Per Share (EPS) Net profit divided by total outstanding shares; Higher EPS is better.
indicates a company's profitability.
Price-to-Earnings Ratio (P/E Ratio) Market price per share divided by EPS; measures Lower than industry average for value investing.
stock valuation.
Price-to-Book Ratio (P/B Ratio) Compares market price to book value per share; <1 suggests an undervalued stock.
indicates undervaluation or overvaluation.

Dividend Yield Annual dividend paid per share as a percentage of Higher yield is good for income investors.
market price.
Return on Equity (ROE) Measures profitability by comparing net income to >15% is considered good.
shareholders' equity.
Debt-to-Equity Ratio Compares total debt to shareholders' equity; <1 is ideal for financial stability.
indicates financial leverage.
Market Capitalization Total value of a company's shares in the market. Large-cap for stability, mid/small-cap for growth.

Company's Revenue Growth Increase in sales over time, indicating business Consistent growth is a positive sign.
expansion.
Industry Trends & Economic Conditions Macroeconomic factors affecting the company's Favorable industry trends boost stock value.
growth potential.
Promoter Holding & Institutional Investors Ownership percentage held by promoters and large High promoter holding shows confidence.
investors.
Liquidity & Trading Volume Measures how easily shares can be bought/sold in Higher liquidity ensures easier trading.
the market.
Corporate Governance & Management Quality Ethical practices, transparency, and leadership of Strong governance reduces investment risk.
the company.
Recent News & Market Sentiment Impact of news, government policies, and global Positive sentiment and stable policies are
events. preferable.