MODULE 2: INVESTMENT MANAGEMENT

Investment Goals
Meaning of investment

An investment is an asset or property acquired to generate income or gain appreciation.

Appreciation is the increase in the value of an asset over time. It requires the outlay of a
resource today, like time, effort, and money, for a greater payoff in the future or for
generating a profit.

Features of investment

1. Risk and Return:

●​ Risk: This refers to the uncertainty associated with an investment's potential returns.
Higher risk generally means a greater possibility of losing money or experiencing
significant fluctuations in value. Different investments carry varying levels of risk. For
example, stocks of new or small companies tend to be riskier than government
bonds.

●​ Return: This is the profit or income generated by an investment over a period.

Returns can come in the form of capital appreciation (increase in the investment's
value), dividends (payments from stocks), or interest (payments from bonds).
Generally, higher potential returns are associated with higher levels of risk. This is
known as the risk-return spectrum.

2. Liquidity:

●​ Liquidity refers to how easily and quickly an investment can be converted into cash
without significantly affecting its 1 market price. Cash is the most liquid asset.

●​ Some investments, like stocks traded on major exchanges or money market funds,
are highly liquid. Others, such as real estate or certain private equity investments,
can be less liquid, meaning it might take longer to sell them, and you might not get
the price you want quickly.

3. Time Horizon:

●​ The time horizon is the length of time an investor plans to hold an investment before
needing access to the funds.

●​ Short-term investments (e.g., less than a year) often focus on capital preservation
and liquidity. Medium-term (1-5 years) and long-term (more than 5 years)
investments typically aim for growth and can tolerate more risk. The time horizon
significantly influences the types of investments that are suitable. For instance,
 long-term goals like retirement allow for investing in potentially higher-growth but
more volatile assets like stocks.

4. Diversification:

●​ Diversification is the strategy of spreading investments across different asset classes

(e.g., stocks, bonds, real estate), sectors (e.g., technology, healthcare), and
geographies.

●​ The goal of diversification is to reduce unsystematic risk (also known as specific risk),
which is the risk associated with a particular company or industry. By not putting all
your eggs in one basket, you can potentially cushion your portfolio against poor
performance in any single investment.

5. Inflation Protection:

●​ Inflation erodes the purchasing power of money over time. Some investments offer
better protection against inflation than others.

●​ For example, stocks and real estate have historically outpaced inflation over the long
term. Certain types of bonds, like Treasury Inflation-Protected Securities (TIPS), are
specifically designed to protect against inflation.

6. Tax Efficiency:

●​ The tax implications of an investment can significantly impact your overall returns.
Different types of investments and investment accounts are taxed differently.

●​ Some investments offer tax advantages, such as tax-deferred growth in retirement

accounts or tax-free interest from certain municipal bonds. Understanding the tax
efficiency of different investments is crucial for maximizing after-tax returns.

7. Volatility:

●​ Volatility refers to the degree and speed at which an investment's price fluctuates
over time. High volatility means the price can change dramatically in short periods,
while low volatility indicates more stable price movements.

●​ Risk and volatility are closely related, with higher volatility often indicating higher
risk. Investors with a shorter time horizon or lower risk tolerance generally prefer less
volatile investments.

8. Investment Goals:

●​ Your investment goals (e.g., retirement, buying a house, funding education) will
heavily influence the features you prioritize in your investments.
 ●​ For example, if your goal is long-term growth for retirement, you might be willing to
accept higher risk and lower liquidity in favor of potentially higher returns from
stocks.

9. Cost Efficiency:

●​ The costs associated with investing, such as brokerage fees, transaction costs, and
management expenses (in the case of mutual funds or ETFs), can reduce your overall
returns.

●​ Choosing low-cost investment options can significantly improve long-term

investment outcomes.

10. Income Generation:

●​ Some investments are specifically designed to generate a regular stream of income,

such as dividend-paying stocks, bonds that pay interest, or rental properties.

●​ This feature is particularly important for investors seeking regular cash flow, such as
retirees.

Investment Objectives

Investment objectives are the specific financial outcomes you aim to achieve with your
investment portfolio. They are more focused on the desired results of your investment
activity rather than the life events you are saving for.

Common investment objectives include:

1.​ Capital Preservation: The primary goal is to protect the invested capital from loss. This is
often a key objective for risk-averse investors or those nearing their financial goals.
2.​ Income Generation: The focus is on producing a steady stream of income from
investments, such as through dividends, interest, or rental income. This is often
important for retirees or those seeking supplemental income.
3.​ Capital Growth (or Capital Appreciation): The objective is to increase the value of the
investment over time. This typically involves investing in assets with higher growth
potential, like stocks or real estate.
4.​ Total Return: This objective seeks a combination of both capital growth and income.
Investors aim to achieve returns through both appreciation in asset value and regular
income payments.
5.​ Liquidity: The ability to easily and quickly convert investments into cash without
significant loss of value. This is important for meeting unexpected financial needs.
6.​ Tax Efficiency: Minimizing the tax impact on investment returns through strategic
investment choices and tax-advantaged accounts.
7.​ Beating Inflation: Aiming to achieve investment returns that outpace the rate of inflation
to maintain or increase the real purchasing power of your money.
8.​ Diversification: Spreading investments across different asset classes, sectors, and
geographies to reduce overall portfolio risk.

Investment goals
Investment goals are the specific financial targets you want to achieve through your
investments. They provide direction and purpose to your investment strategy. These goals
are often tied to significant life events or financial milestones.

Examples of investment goals include:

Retirement Planning: Saving and growing wealth to fund your life after you stop working.

Buying a Home: Accumulating funds for a down payment and associated costs.

Funding Education: Saving for your children's or your own future education expenses.

Starting a Business: Building capital to launch an entrepreneurial venture.

Achieving Financial Independence: Building enough wealth to live off your investment
returns.

Saving for a Specific Purchase: Such as a car, vacation, or other significant expenses.

Setting clear and measurable investment goals is the first step in creating an effective
investment plan. These goals help determine your investment timeline, risk tolerance, and
the types of investments you should consider.

Time Frame
It refers to the period over which you expect to hold your investments to achieve your
financial goals.

 Short-Term (Less than 1 year): This time frame is typically used for immediate needs or
goals, such as saving for a vacation, a car down payment soon, or an emergency fund.
Investments in this time frame often prioritise liquidity and capital preservation over high
growth. Examples might include money market accounts, short-term certificates of deposit
(CDs), or short-term government bonds. Risk tolerance is generally low.

 Medium-Term (1 to 5 years): This time frame is suitable for goals like saving for a down
payment on a house, funding a child's education in a few years, or other significant
purchases. Investors in this range might consider a slightly higher level of risk for potentially
better returns. A mix of lower-risk bonds and potentially some moderate-risk equities
(stocks) could be considered.

 Long-Term (More than 5 years, often 10+ years): This is the typical time frame for major
life goals like retirement, long-term wealth building, or funding future education far down
the line. With a longer time horizon, investors can typically afford to take on more risk in
pursuit of potentially higher growth over time. Equities (stocks), real estate, and diversified
portfolios tend to be more suitable for long-term investing. The power of compounding has
more time to work its magic over longer periods.

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 that
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.

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 recognise yours before you
start investing.

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:

Factors that Influence the Investor’s Risk Profile

Some of the factors and their influence on risk appetite are as follows:

Basis family information

• Earning members - Risk appetite increases as the number of earning members increases

• Dependent Members - Risk appetite decreases as the number of dependent members

increases

Risk Profiling Tools

Some AMCs 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.

VARIOUS INVESTMENT PRODUCTS

Bank savings

Savings account is a basic account type that lets you deposit money safely with a bank. It
ensures safety and access to your money whenever you need. You can withdraw your funds,
either digitally or in person, at any point in time. Having a savings account is a liquid
investment, so you have the ease of using your funds any time for transactions. A savings
account also earns decent returns. To understand the concept of savings account, imagine
you and your friend have ฀500 each. While your friend kept it with him, you deposited it in a
bank that offers an interest rate of 5% annually. Towards the end of the year, your friend
managed to not spend any money and save ฀500, whereas you grew it to ฀525 because you
decide to deposit it in the bank savings account. Govt. schemes

These are various schemes that are launched by the government to encourage people to
save money. The government runs these schemes through banks, financial institutions, and
post offices. People investing in these schemes can enjoy tax benefits under Sec 80C of the
Income Tax Act of 1961 and also earn returns at a fixed rate of interest as decided by the
government. These rates are usually more than the regular term deposits of banks.

Some of the key government savings schemes are as follows:

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana Scheme was launched with an aim to encourage the parents to
secure the future for their daughters. It was launched in the year 2015 by the Prime Minister
of India Narendra Modi under the ‘Beti Bachao, Beti Padhao’campaign. This scheme is
targeted towards the minor girl child. SSY account can be opened in the name of the girl
from her birth to any time before she turns 10 years old. The minimum investment amount
for this scheme is INR 1,000 to a maximum of INR 1.5 lakh per year. Sukanya Samriddhi
scheme is operative for 21 years from the date of opening.

National Savings Certificate (NSC)

National Saving Certificate was launched by the Government of India to promote the habit
of savings amongst the citizens. The minimum investment amount for this scheme is INR 100
and there is no maximum investment amount. The interest rate of NSC changes every year.
One can claim tax Deduction of INR 1.5 lakh under Section 80C of the Income Tax Act. Only
residents of India are eligible to invest in this scheme.

Pradhan Mantri Jan Dhan Yojana (PMJDY)

Pradhan Mantri Jan Dhan Yojana was launched to provide basic banking services like a
Savings Account, deposit account, insurance, pension and so on, to the Indian citizens. The
government of India aimed to provide easy access to financial services such as Savings and
Deposit Accounts, Remittance, Insurance, Credit, Pension to the poor and needy section of
our society. The minimum age limit in this scheme for a minor is 10 years. Otherwise, any
Indian resident over the age of 18 years is eligible to open this account. An individual can
only exit this scheme after reaching the age of 60 years.

PMVVY or Prime Minister Vaya Vandana Yojana

This investment scheme is meant for the senior citizens aged above 60 years of age. It is
known to offer them the guaranteed return of around 7.4 percent per annum. The scheme
offers access to pension scheme that is payable on a monthly, annually, and quarterly basis.
The minimum amount that is received in the form of pension is INR 1000.

Sovereign Gold Bonds

The Sovereign Gold Bonds were introduced by the Government of India in November 2015.
It aims at offering a lucrative alternative to own and save gold. Moreover, the scheme is
known to belong to the category of Debt fund. Sovereign Gold Bonds or SGBs not only help
in tracking the overall Import-export value of the given asset, but also helps in ensuring
transparency throughout.

SGBs refer to government-based securities. Therefore, these are regarded as completely

safe. The respective value gets denominated in multiple grams of gold. As it serves to be the
safest substitute for physical gold, SGBs have witnessed immense popularity amongst the
investors.

Retirement savings

A pension plan or retirement plan is designed to cater to your financial needs &
requirements post-retirement, including medical emergencies, household expenses, and
other living costs. Investing in the best retirement plans is essential to safeguard your golden
years. Retirement and pension plans are financial instruments that can shape your
hard-earned income into savings for your post-retirement life. It comes in various forms to
cater to a multitude of savings and investment goals, enabling a financially stable retired life.

Many funds and life insurance companies offer the following plans towards retirement
savings:

1. Deferred Annuity

2. Immediate Annuity

3. Annuity Certain

4. Life Annuity
5. Life insurance with investment lump-sum payout.

In addition to these, the government has also initiated some of the schemes towards
retirement savings & planning. Few of these

schemes are listed below:

National Pension Scheme (NPS)

National Pension Scheme or NPS is one of the famous schemes offered by the Government
of India. It is a retirement saving scheme open to all the Indians, but mandatory for all the
government employees. It aims to provide retirement Income to the citizens of India. Indian
citizens and NRIs in the age group of 18 to 60 can subscribe to this scheme. Under NPS
scheme, you can allocate your funds in equity, corporate Bonds and government securities.
Investments made up to INR 50,000 are liable for deductions under section 80 CCD (1B).
Additional investments up to INR 1,50,000 are tax Deductible under Section 80C of the
Income Tax Act.

Public Provident Fund (PPF)

PPF is also one of the oldest retirement schemes launched by the Government of India. The
amount invested, interest earned and the amount withdrawn are all exempt from tax. Thus,
the Public Provident Fund is not only safe, but can help you save Taxes at the same time. The
interest rate of the scheme (FY 2021-22) is 7.1% p.a. In PPF, one can claim tax deductions
upto INR 1,50,000 under section 80C of Income Tax Act.

The fund holds a longer tenure of 15 years, the overall influence of compounding interest
that is tax-free tends to be significant –especially during the later years. Moreover, as
interest gets earned and the invested principal gets backed by the respective sovereign
guarantee, it is known to make up for a safe investment. It is important to note that the
overall rate of

interest on PPF gets reviewed every quarter by the Indian Government.

Atal Pension Yojana (APY)

Atal Pension Yojana or APY is a social security scheme launched by the Government of India
for the workers in the unorganized sector. An Indian citizen in the age group of 18-40 years
with a valid Bank account is eligible to apply of the scheme. It is launched to encourage
individuals from the weaker section to opt for a pension, which would benefit them during
their old age. The scheme can also be taken by anyone who is self-employed. One can enrol
for APY with your bank or post office. However, the only condition in this scheme is that the
contribution must be made until the age of 60.

Equity investments
An equity investment is money that is invested in a company by purchasing shares of that
company in the stock market. These shares are typically traded on a stock exchange.

Equity investors purchase shares of a company with the expectation that they’ll rise in value
in the form of capital gains, and/or generate capital dividends. If an equity investment rises
in value, the investor would receive the monetary difference if they sold their shares, or if
the company’s assets are liquidated and all its obligations are met. Equities can strengthen a
portfolio’s asset allocation by adding diversification. For most retail investors, the two main
equity investment options are: equity shares and equity mutual funds.

Equity mutual fund is a type of mutual fund that buys shares of companies in the stock
market. The goal of an equity fund is to invest in businesses that will grow, hence increasing
the value of the fund over time.

Equity derivatives are another type of investment related to equities. Though these
investments are not directly made on the equity shares, these investments are made in
derivative products based on the underlying equity shares/indices. Mainly, there are two
types of equity derivative products –

Debt & Money market investments

When companies or government entities issuing debt instruments want to raise funds, they
‘borrow’ from investors. In return, they promise a steady and regular interest. This is how
debt instruments work in simple terms. Buying a debt instrument can be considered as
lending money to the entity issuing the instrument. Popular fixed-interest generating
securities are corporate bonds, government securities, treasury bills, commercial paper,
and other money market instruments. The issuers of debt instruments pre-decide the
interest rate you will receive as well as the maturity period. Hence, they are also known as
‘fixed-income’ securities.

In India, till recently, retail investors have not been very active in directly participating in
these debt instruments or government securities (G-Secs). Though RBI had decided to
permit retail investors to directly buy government securities to deepen the bond market, the
sheer lack of awareness about bonds or debt securities is the biggest hindrance. Historically,
India has had an equity culture and almost no direct exposure to bonds. Hence, banks
attract the lion’s share of retail savings through fixed deposits

However, debt investments are very popular through the Debt funds of Mutual Fund
houses. The fundamental reason for investing in debt funds is to earn a steady interest
income and capital appreciation. Debt funds invest in a variety of securities, based on their
credit ratings. Debt funds try to optimise returns by investing across all classes of securities.
This allows debt funds to earn decent returns. Money market investments are highly liquid
in nature comprising of Treasury bills, commercial paper, etc. Debt funds invests in these
money market instruments which provide for higher liquidity of the investments. The
short-term debt funds like liquid funds focus on investments in such money market
instruments.

Mutual Funds & ETFs

Mutual fund investments in India have been gaining popularity in the recent times. I’m sure
many of you might have heard the Ad “Mutual Funds Sahi hai”

Essentially, the money pooled in by a large number of people (or investors) is what makes up
a Mutual Fund. This fund is managed by a professional fund manager.

It is a trust that collects money from a number of investors who share a common investment
objective. Then, it invests the money in equities, bonds, money market instruments and/or
other securities. Each investor owns units, which represent a portion of the holdings of the
fund. The income/gains generated from this collective investment is distributed
proportionately amongst the investors after deducting certain expenses, by calculating a
scheme’s Net Asset Value or NAV.

Gold & Gold ETFs

Investments are often made in terms of Gold purchase. Due to some influencing factors such
as high liquidity and inflation-beating capacity, gold is one of the most preferred investments
in India. Gold investment can be done in many forms like buying jewellery, coins, bars, gold
exchange-traded funds, Gold funds, sovereign gold bond scheme, etc. In conventional form,
investment in gold was just buying physical gold in the forms of jewellery, coins, billions, or
artifacts. It always has a risk of theft and burglary involved if you are having physical gold
with you. The scenario has changed nowadays and investors have more options to invest
such as gold ETF and gold funds.

Gold ETFs (Exchanged Traded Funds) is similar to buying physical gold but the only difference
is you don’t actually buy the physical gold. You don’t have to go through the hassles of
storing the physical gold, instead, the gold bought is stored in Demat (paper) format. On the
other hand, gold funds deal with investing in gold mining companies.

INVESTOR PROTECTION AND GRIEVANCE REDRESSEL

Investor protection is a wide term, it encompasses all the measures designed to protect
investors from malpractices of brokers, company managers to issue, merchant bankers,
registrar to issue etc. The main complaints are against brokers of stock exchanges, against
listed companies and mutual funds.

USUAL GRIEVANCES OF INVESTORS

USUAL GRIEVANCES AGAINST COMPANIES

 •​ Delay in registering transfer of securities. Registration of transfers should be done by
the companies within 30 days of receipt of the share transfer instrument, but usually
it takes many months.

•​ Non-payment or delay in payment of dividend. Dividends should be distributed

within 30 days from the date of declaration but by manipulation of procedures
dividends may not be received for months.

•​ Non-repayment or delayed repayment of public deposits. Thousands of depositors

are involved in litigation to get back their deposits from companies.

•​ Non-receipt of rights issue offer. The letter of offer of rights shares should be sent to
all eligible shareholders by registered post and this fact should be prominently
advertised in at least two all India newspapers. Shareholders quite often are not
informed of rights issue.

•​ Non-receipt of duplicate share certificate. A company is bound to issue duplicate

share certificates if the shares are lost or misplaced by the shareholder, after
receiving a request along with the requisite fee and on completion of formalities.

USUAL GRIEVANCES AGAINST BROKERS

•​ Delay or default in payment of securities sold.A broker has to make payment to

client who has sold securities through him within in 48 hours of payout of funds by
clearing house of stock exchange or the Clearing Corporation. but brokers, as a rule,
retain the sale proceed as long as they can.

•​ Delay or default in delivery of purchased security to the client. A broker has to

deliver the purchased securities to his client within 48 hours of payout of securities
by the stock exchange. It never happens so, in practice.

•​ Non-Issue of contract note. Brokers have to issue a contract note in in prescribed

form to all their clients within 24 hours of the transaction but they avoid doing so to
earn secret profits.

•​ Charging excess brokerage from clients.

•​ Non-passing of corporate benefits. A broker is duty bound to pass all the corporate
benefits like rights shares, bonus shares, dividends etc. to the client he is dealing with
but, many a times brokers play tricks in this regard.

METHODS OF REDRESSAL OF INVESTORS GRIEVANCES

An investor can seek redressal of his grievances from, the following agencies:

•​ Grievance cells in stock exchanges

•​ SEBI
 •​ Company Law Board

•​ Courts

•​ Press

Introduction to the Indian Financial System

The financial system of a country is an important tool for its economic development, as it
helps create wealth by linking savings with investments. It facilitates the flow of funds from
households (savers) to business firms (investors) to aid in wealth creation and development
of both parties.

According to Robinson, the primary function of a financial system is “to provide a link
between savings and investment for the creation of wealth and to permit portfolio
adjustment in the composition of existing wealth”

​ Features of Financial System

A Financial System consists of various financial Institutions, Financial Markets, Financial

Transactions, rules and regulations, liabilities and claims etc.

•​ It plays a vital role in economic development of a country

•​ It encourages both savings and investment

 •​ It links savers and investors

•​ It helps in capital formation

•​ It helps in allocation of risk

•​ It facilitates expansion of financial markets

•​ It aids in Financial Deepening and Broadening

•​ (1) Financial Institutions –

Financial institutions are intermediaries of financial markets which facilitate financial

transactions between individuals and financial customers.

It simply refers to an organization (set-up for profit or not for profit) that collects money
from individuals and invests that money in financial assets such as stocks, bonds, bank
deposits, loans etc.

There can be two types of financial institutions:

• Banking Institutions or Depository institutions – These are banks and credit unions that
collect money from the public in return for interest on money deposits and use that money
to advance loans to financial customers.

•​ • Non- Banking Institutions or Non-Depository institutions – These are brokerage

firms, insurance and mutual funds companies that cannot collect money deposits
but can sell financial products to financial customers.

(2) Financial Markets –

•​ It refers to any marketplace where buyers and sellers participate in trading of assets
such as shares, bonds, currencies and other financial instruments. A financial market
may be further divided into capital market and money market. While the capital
market deals in long term securities having maturity period of more than one year,
the money market deals with short-term debt instruments having maturity period of
less than one year.

(3) Financial Assets/Instruments –

•​ Financial assets include cash deposits, checks, loans, accounts receivable, letter of
credit, bank notes and all other financial instruments that provide a claim against a
person/financial institution to pay either a specific amount on a certain future date
or to pay the principal amount along with interest.

(4) Financial Services –

Financial Services are concerned with the design and delivery of financial instruments and
advisory services to individuals and businesses within the area of banking and related
institutions, personal financial planning, leasing, investment, assets, insurance etc.

•​ It involves provision of a wide variety of fund/asset based and non-fund

based/advisory services and includes all kinds of institutions which provide
intermediate financial assistance and facilitate financial transactions between
individuals and corporate customers.

PRIMARY MARKET
It is the market where new securities are created. It is the market where the firms sell new
stocks and bonds to the public.Stocks, Bonds, Shares, notes and bills in the primary market.
The securities are purchased directly from the purchaser

SECONDARY MARKET
Secondary markets, referred to also as aftermarkets or follow-on public offerings, refer to
the market in which previously issued financial instruments, such as
stocks, bonds, options and futures, re traded. Securities that investors already own are
bought and sold in the secondary market. Although stocks are also sold on the primary
market when they are first issued, it is what most people think of as “the stock market.”
These exchanges, such as the NASDAQ and the New York Stock Exchange (NYSE), are
secondary markets.

DEMAT ACCOUNT

It is an account that helps investors to hold shares and securities in an electronic format.
This kind of account is called a Demat Account. It helps to keep a proper track of all the
investments an individual makes in shares, exchange-traded funds, bonds and mutual funds.

DEPOSITORY PARTICIPANT

A Depository Participant, commonly referred to as a DP, is the registered stockbroker of a

particular depository. A depository refers to the entity that retains the investor's securities,
going through the depository participant, aiding the investor to trade freely in these
securities. These securities are held in debentures, bonds, mutual funds, shares, and
securities, all in electronic formats. Put simply, a Depository Participant acts as an
intermediary between the company that issues the shares, and the shareholders, helping
investors set up and maintain their Demat accounts.

FUNCTIONS OF DP

•​ Help investors open accounts.

 •​ Facilitate the Demat process of converting physical certificates into electronically
backed securities.

•​ Facilitating the Remat process of converting electronically backed securities into

physical certificates.

•​ Enabling the transfer of securities.

•​ Enabling the pledging and unpledging of securities to grant loans against shares.

STOCK SELECTION
FUNDAMENTAL ANALYSIS

•​ Fundamental analysis is when an investor analyses a company’s future profitability

based on its business environment and financial performance. Both qualitative and
quantitative aspects of the company are considered. On the basis of these aspects,
you – the investor – decide whether or not to invest in the shares of the company.
The basic idea here is to assess general efficiency of a company’s operations, its
future growth and profit-making potential.

▪​ Economic Analysis relates to the analysis of the economy. This related to study about
the economy in details and analysis whether economic conditions are favourable for
the companies to prosper or not. Analysts always try to find out whether the
economic development is conducive for the growth of the company.

▪​ Industry analysis is a tool that gives investors an A to Z insight into any industry. This
encompasses insights about the level of competition in the industry, demand and
supply situation, how easily can new companies enter the industry etc.

▪​ Company analysis involves comparing a company's current financial statement to its

financial statements in previous years to give an investor a sense of whether the
company is growing, stable, or deteriorating.

TECHNICAL ANALYSIS

•​ The technical analysis method involves examining data generated through market
activities, such as volume and prices. Analysts following such a type of stock analysis
use technical indicators and tools like charts and oscillators to identify patterns that
can indicate future price trends or direction.

•​ Technical analysts examine the historical trading data of a security and estimate the
future move of the security. It is frequently used for forex and commodities. The
 •​ Candlestick charts: Candlestick charts to depict the opening, closing, low and high
price of a stock during a trading session but instead of a single vertical line they use
candlesticks to depict the same

•​ Oscillator: is a technical analysis tool that constructs high and low bands between
two extreme values, and then builds a trend indicator that fluctuates within these
bounds. Traders use the trend indicator to discover short-term overbought or
oversold conditions.

•​ Graphical Pattern: Patterns are the distinctive formations created by the movements
of security prices on a chart and are the foundation of technical analysis. A pattern is
identified by a line connecting common price points, such as closing prices or highs
or lows, during a specific period.

•​ Indicator: is a mathematical calculation based on historic price, volume, or (in the

case of futures contracts) open interest information that aims to forecast financial
market direction.

STOCK RETURN AND RISK

Risk
Risk is usually understood as “exposure to a danger or hazard”. In investment decisions, risk
is defined as the possibility that what is actually earned as return could be different from
what is expected to be earned. For example, consider an investor who buys equity shares
after hearing about the huge returns made by other investors. He expects to earn at least
50% return within 2 years. But if equity markets decline during that period, the investor
could end up with negative returns instead. This deviation between actual and expected
returns is the risk in his investment. If the return from an investment remains unchanged
over time, there would be no risk. But there is no investment of that kind in the real world.
Even returns on government saving products change. All investments are subject to risk, but
the type and extent of risk are different. Thus, it is important to understand the common
types of risk and evaluate investments with respect to them. Understanding the risk will help
an investor decide the impact it will have on their financial situation and how to deal with it.
The risk that an individual will be willing to take is specific to their situation in life. Some risks
will require strategic portfolio changes to be made, such as extent of diversification in the
portfolio. Other risks may be managed tactically, for example making temporary changes in
asset allocation to deal with a risk.

Return
Return on investment is a basic computation made to assess how an investment is
performing. Every investment can be represented as a set of inflows and outflows. Return is
the comparison of the inflow and outflow and therefore the benefit to the investor from
making the investment. Returns can be positive or negative. A negative return means that
the investment has yielded losses rather than benefits.

Risk Free Rate of Return

Risk-free rate is rate of return from a default-risk free government security. Government
bonds have less risk as interest rate is known and the risk of default is very less. An asset like
T-bills, money market funds or bank deposits is taken as the proxy for risk-free rate. Such
assets have very low or virtually negligible default risk and interest rate risk. On the other
hand one has to take more risk if he wants to invest in shares as return is not certain.
However one can expect lower return from Government bond and higher from shares.

Types of Investors According to ‘Risk-Return’ Perception

According to risk-return perception the investors may be classified in the following three
types:

Risk averse investors avoid risk, however, may be ready to take risk if the return available for
taking extra risk is commensurate or equal.

Risk Seeker investors are ready to take risk even if the return for taking that risk is not
sufficient enough.

Risk Neutral investors require just sufficient return for taking risk. They want neither extra
return for a given risk, nor ready to take extra risk for a given return.