SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

UNIT-1

Introduction to Investments
Investment is an activity that is engaged in by people who have savings,ie.investments are made from savings,or in other words,people invest their savings.But all savers are not investors.Investment is an activity which is different from saving. Investment may be defined as a commitment of funds made in expectation of some positive rate of return.

FINANCIAL AND ECONOMIC MEANING OF INVESTMENT

In the financial sense,investment is the commitment of a persons funds to derive future income in the form of interest, dividend,premiums,pension benefits or appreciation in the value of their capital. Eg:- Shares,debentures,Post office savings certificates,Insurance policies etc. In the economic sense, investment means the net additions to the economys capital stock which consists of goods and services that are used in the production of other goods and services. Eg:-Plant and machinery,inventories etc.

Characteristics of Investment
All investments are characterised by certain features. Return Risk Safety Liquidity OBJECTIVES OF INVESTMENT 1. Maximisation of return 2. Minimisation of cost 3. Hedge against inflation

Investment vs Speculation
Speculation:- Speculation means taking up the business risk in the hope of getting short term gain.Speculation essentially involves buying and selling activities with the expectation of getting profit from the price fluctuations.Speculators investment are made for short term.Traditionally,investment is distinguished from speculation with respect to three factors, 1. Risk 2. Capital gain 3. Time period

Difference between the Investor and the Speculator

Investor Speculator

Time Horizon

Plans for a longer time Plans for a very short horizon.His holding period may be period.Holding period varies from one year to few years. from few days to months.
Assumes moderate risk. Willing to take high risks.

Risk Return

Likes to have moderate rate of Like to have high returns for return associated with limited risk. assuming high risk. Considers fundamental factors and evaluates the performance of the company regularly. Uses his own funds and avoids borrowed funds. Considers inside information ,heresays and market behaviour. Uses borrowed funds to supplement his personal resources.

Decision

Funds

Investment vs Gambling
A gamble is usually a very short term investment in a game or chance.The time horizon involved in gambling is shorter than speculation and investment.The results are determined by the roll of dice or the turn of a card.Secondly,people gamble as a way to entertain themselves,earning incomes would be the secondary factor.Thirdly,the risk in gambling is different from the risk of the investment.Gambling involves artificial risks whereas commercial risks are present in the investment activity.

Investment Avenues
The investment avenues can be broadly categorised under the following heads: 1. Corporate Securities 2. Deposits in banks and non-banking companies 3. UTI and other mutual funds schemes 4. Post office deposits and certificates 5. Life insurance policies 6. Provident fund schemes 7. Government and semi-government securities.

Investment Process Investment Process

Investment Policy

Analysis

Valuation

Portfolio Construction

Portfolio Evaluation

Investible fund Objectives

Market Industry Company

Intrinsic value Future value

Diversification Selection and allocation

Appraisal Revision

Knowledge

Investment Alternatives Investment Alternatives

Negotiable securities
Non negotiable securities

Mutual fund

Real Assets

Variable income securities

Fixed income securities

Preference shares Debentures Bonds IVPsand KVPs Government securities Money market securities

Equity shares

Deposits PF NSS NSC LIC

Open ended schemes Closed ended schemes

Gold Silver Real estate Art Antiques

Government Securities
Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities.
Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of maturity is specified in the securities, these are known as dated Government Securities, e.g. 8.24% GOI 2018 is a Central Government Security maturing in 2018, which carries a coupon of 8.24% payable half yearly.

Features of Government Securities

Issued at face value 2. No default risk as the securities carry sovereign guarantee. 3. Ample liquidity as the investor can sell the security in the secondary market 4. Interest payment on a half yearly basis on face value 5. No tax deducted at source 6. Can be held in D-mat form. 7. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs). 8. Redeemed at face value on maturity 9. Maturity ranges from of 2-30 years. 10. Securities qualify as SLR investments (unless otherwise stated).
1.

The dated Government securities market in India has two segments: Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors.

Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates and Individuals can invest in Government Securities. The eligibility criteria is specified in the relative Government notification.

Equity Bonds
Equity bonds are bonds which guarantee a certain amount of repayment over the original investment amount when the bond reaches maturity. For this reason they are often referred to as guaranteed equity bonds or simple GEBs. A typical bond is purchased of its face value or current market value if it has already been issued previously. The amount to be gained by the investor in these types of bonds is received from both the payback of the face value of the bond and also the coupon amount, or interest rate. The key difference in guaranteed equity bonds is that the issuer does not pay interest on the equity bonds, but rather allows an amount to be added maturity date payout should the market perform well. If the market underperforms, you will still receive your original investment amount, but no interest on it. In this way it is advertised as a guaranteed equity bond, meaning at a minimum you will always get back your invested amount.

Money market instruments

Money market is a market for dealing with financial assets and securities which have a maturity period of upto one year.It is a market for purely short term funds.The money market may be subdivided into four. They are:
1.
2. 3. 4.

Call money market

Commercial bills market Treasury bills market Short -term loan market

Common money market instruments

Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit unions. Repurchase agreements - Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States. Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, theFederal Home Loan Banks and the Federal National Mortgage Association.

Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate. Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.

Mutual Funds
Mutual funds are financial intermediaries which collects funds from the public and invest them in a diversified portfolio of securities including equity bonds,debentures and other instruments issued by business or government undertakings.It help small investors to participate in securities market indirectly and thus help in spreading and reducing risk. Mutual Funds in India:Unit Trust of India is the close associate of mutual funds in India,was established in 1964.Till 1986 there was only one Mutual Fund as UTI. State Bank of India Mutual Fund and Canara bank Mutual Fund make the entry in 1987.

Classification of Mutual Funds

1. 2. 3.

Public Sector Mutual fund Private Sector Mutual fund Money Market Mutual fund

Public Sector Mutual fund UTI was first MF to be established in india in public sector.Later 7 follows:1.

UTI

2.
3. 4. 5.

SBI
Bank of India Indian Bank Canara Bank

6.
7. 8.

Punjab National Bank

LIC MF General Insurance Corporation MF

Private sector Mutual fund

Till 1991, 8 MFs had the monopoly.But new economic policy of liberalisation encouraged the entry of many private sectors.It make competitive edge and wide scope of options to the investors. SEBI permitted a number of players in private sector to sponsor MFs. Money Market Mutual fund(MMMFs) RBI proposed to set up MMMFs in order to make available the benefits of investing in money market to small investors.If make very high quality and very short maturities.MMMFs can be set up only by commercial banks and Public Financial Institutions.

Derivatives
Derivatives are instruments which make payments calculated using price of interest rates derived from on balance sheet or cash instruments,but do not actually employ tose cash instruments to fund payments. KINDS OF FINANCIAL DERIVATIVES The important financial derivatives are the following: 1. Forwards 2. Futures 3. Options 4. Swaps

Forwards: Forwards are the oldest of all the derivatives.A forward contract refers to an agreement between two parties to exchange an agreed quantity of an asset for cash at a certain date in future at a predetermined price specified in that agreement.The promised asset may be currency,commodity,instrument etc. 2. Futures: A futures contract is one where there is an agreement between two parties to exchange any asset or currency or commodity for cash at a certain future date,at an agreed price.Both the parties to the contract must have mutual trust in each other.I takes place only in organised future markets and according to well established standards. Types of Futures a. Commodity futures b. Financial futures
1.

1.

Commodity Futures:- A commodity future is a futures contract in commodities like agricultural products,metals and minerals etc.In organised commodity future markets,contracts are standardised with standard quantities.

Types of Commodities Futures Metals Major metals traded with futures contracts include copper, gold, platinum, palladium and silver, which are listed on the New York Mercantile Exchange which has merged with the Chicago Mercantile Exchange. Energy The most popular energy futures contracts are crude oil, crude palm oil, heating oil and natural gas. They have become an important indicator of world economic and political developments and are very much influenced by producing nations such as Malaysia. Grains & Oil Seeds Grains such as soybeans and oil seeds are essential to food and feed supplies, and prices are sensitive to the weather conditions, and also to economic conditions that affect demand. Because corn is integral to the increasing popularity of ethanol fuel, the grain markets also are affected by the energy markets and the demand for fuel. Livestock Commodity futures on live cattle, feeder cattle, lean hogs and pork bellies are commodities traded at CME Group Inc and prices are affected by consumer demand, competing protein sources, price of feed, and factors that influence the number of animals born and sent to market, such as disease and weather. Food and Fiber The food and fiber category for futures trading includes cocoa, coffee, cotton and sugar. In addition to consumer demand globally, factors such as disease, insect's infestation and drought affect prices of these commodities.

Financial Futures:- Financail futures refer to futures contract in foreign exchange or financial instruments like treasury bill,commercial paper,stock market index or interest rate. Types of Financial Futures Eurodollar Futures Eurodollar futures are U.S. dollars that are deposited outside the country in commercial banks mainly in Europe which are known to settle international transactions. They are not guaranteed by any government but only by the obligation of the bank that is holding them. U.S. Treasury Futures Because U.S. Dollars is the reserved currency for most countries, the stability of the dollars allows for treasury futures market and instruments such as treasury bonds and treasury bills. Foreign Government Debt Futures Most government issue debt that are corresponded to the futures markets that are listed around the world. Swap Futures This is generally agreements that are between two parties to exchange periodic interest payments. Forex Futures This type of futures is to manage the risks and take advantage of related forex exchange rate fluctuations. Single Stock Futures Most popular futures contracts are related to the equity markets, they are also known as security futures. Index Futures Futures that are based on the stock index.
2.

Swap Futures Swaps are generally defined as agreements between two parties to exchange periodic interest payments. They have become an interest rate benchmark and are an innovative means for those seeking ways to transfer financial risk. Swap futures are traded at the CME Group and are designed to provide investors involved in U.S. dollar-denominated swaps with new trading and hedging opportunities. Investors can trade five-year, seven-year, 10-year, and 30-year swap futures contracts. Forex Futures When it comes to international investing, investment managers, corporations and private investors trade currency futures, also known as foreign exchange, forex or simply FX, to manage the risks and capture potential opportunities associated with forex rate fluctuations.

Stock Futures Some of the most popular futures contracts are related to the equity markets. Most major economies with a vibrant stock market also have a futures contract on a stock index that represents that particular economy. Fundamental factors influencing stock markets encompass factors affecting companies' earnings potential, such as news about the global and domestic economy, inflation, currency values, politics and interest rates. Index Futures:A stock index is an indicator of the general level of stock prices.It is calculated by taking into consideration the prices of a representative group of stocks traded in the stock market.Such a stock market index can be used as an underlying asset to create a futures contract known as Index Futures.Investors use index futures for hedging their risk,while speculators may use them for gains from the movement of the underlying stock indices.

Options
An option contract gives the buyer an option to buy or sell an underlying asset(stock,bond,currency,commodity etc) at a predetermined price on or before a specified date in future.The price so predetermined is called the strike price or excercise price.

Types of Options:a. b. c.

Call Option Put Option Double Option

Call Option:- An call option is one which gives the option holder the right to buy an underlying asset(foreign exchange,stock,commodity etc) at a predetermined price called excercise price or strike price on or before a specified date in future. Put Option:- An put option is one which gives the option holder the right to sell an underlying asset at a predetermined price on or before a specified date in future. Double Option:- A double option is one which gives the option holder both the rights-either to buy or to sell an underlying asset at a predetermined price on or before a specified date in future.

Swaps
Swap is yet another exciting trading instrument.Infact it is a combination of forwardsby two counterparties.It is arranged to reap the benefits arising from the fluctuations in the market. Kinds of Swap:- A swap can be arranged for the exchange of currencies,interest rates etc. A swap in which two currencies are exchanged is called cross-currency swap. A swap in which a fixed rate of interest is exchanged for a floating rate is called interest rate swap.This interest rate swap can also be arranged in multi-currencies. A swap in which one stream of floating interest rate is exchanged for another stream of floating interest rate is called Basis Swap.

Hedge Fund

A hedge fund is a private, actively managed investment fund that utilizes sophisticated strategies in international and/or domestic markets designed to offset losses during a market downturn and/or generate returns higher than traditional stock and bond investments. The first hedge fund began in 1949 and was designed solely to neutralize the effects of a bear market on an investmentportfolio. However in modern times many hedge funds have become aggressively managed and may speculate in volatile assets such as foreign currencies and commodities, and aspire to accumulate capital gains based on future price movements. Hedge funds are privately managed, loosely regulated, utilize advanced investment strategies, have high management fees and are open only to qualified private investors or institutions. The hedge fund industry has grown rapidly in the past decades and is estimated to have $1.9 trillion in assets under management. Hedge funds utilize a wide array of investment strategies according to the goals of their managers and clients. Some investment strategies include: Global macro, directional, event-driven, relative value (economics) and many others. Hedge funds are generally unsupervised by national regulatory agencies and, on occasion, have been accused of destabilizing various financial markets.

Asset Allocation
Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolioaccording to the investors risk tolerance, goals and investment time frame. Many financial experts say that asset allocation is an important factor in determining returns for an investment portfolio. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions. There are many types of assets that may or may not be included in an asset allocation strategy: cash and cash equivalents (e.g., certificate of deposit, money market funds) fixed interest securities such as Bonds: investment-grade or junk (highyield); government or corporate; short-term, intermediate, long-term; domestic, foreign,emerging markets; or Convertible security stocks: value, dividend, growth, sector specific or preferred (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap;public equities versus private equities, domestic, foreign (developed), emerging or frontier markets

commercial or residential real estate. natural resources: agriculture, forestry and livestock; energy or oil and gas distribution; carbon or water precious metals industrial metals and infrastructure collectibles such as art, coins, or stamps insurance products (annuity, life settlements, catastrophe bonds, personal life insurance products, etc.) derivatives such as long-short or market neutral strategies, options, collateralized debt and futures foreign currency venture capital, leveraged buyout, merger arbitrage or distressed securities

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite. Strategic Asset Allocation the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon. Tactical Asset Allocation method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains. Core-Satellite Asset Allocation is more or less a hybrid of both the strategic and tactical allocations mentioned above. Systematic Asset Allocation is another approach which depends on three assumptions. These are

The markets provide explicit information about the available returns. The relative expected returns reflect consensus. Expected returns provide clues to actual returns.

Security Selection
The process by which one chooses the securities, derivatives, and other assets to include in a portfolio. In making securities selections, one considers the risk, the return, the ethical implications, and other factors affecting both of the individual securities and the portfolio as a whole. Process used to determine which securities will be included in a particular portfolio. Certain factors, such as risk and return, are taken into consideration when selecting the security. The goal of security selection is to increase one's chances of making a profit on all investments in the portfolio and tohedge against losses.

Impact of Monetary and Fiscal Policy on Investment Products

Monetary Policy:- Monetary policy is essentially a program of action undertaken by the monetary authorities generally the central bank,to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals. Impact of Monetary policy:i.

One of the major challenges relates to managing the transition of Indian Economy to high growth trajectory accompanied by a low and stable inflation and well anchored inflation expectations.

ii.
iii. iv.

A situation in which the aggregate supply is evidently less elastic domestically imposes an additional burden on monetary policy.
The impact of monetary policy actions on the structure of interest rates. Monetary policy has to contend with large fiscal deficits and high levels of public debt by international standards.

Fiscal Policy
Fiscal policy is defined as the government program of taxation,expenditure and other financial operations to achieve certain national goals. Objectives of Fiscal policy:-Economic growth,promotion of employment, economic stability, economic justice or equity. Impact of Fiscal Policy:1. Cost inflation:-If the economy is overheating and inflation is rising government may raise taxes.This will lower aggregate demand, a rise in expenditure taxes and corporation taxes will usually cause rise in higher prices to customers. 2. Welfare and distributive justice:-The use of fiscal policy may conflict with the various social programmes.The government may want to introduce cuts in public expenditure in order to reduce inflation. 3. Incentives:-The extend to which fiscal policy has undesirable side effects such as higher taxes reducing incentives. 4. The extend to which changes in govt: expenditure and taxation will affect total injections and withdrawals.The extend to which changes in injections and withdrawals affect national income. 5. The extend to which changes in aggregate demand will have the desired effects on output,employment,inflation and the balance of payments. 6. Deflation:- Increasing lower,basic or higher rates of tax. Reducing the level of personal allowances. Reducing the level of govt: expenditure.

Investment decisions
Investment decisions are made by investors and investment managers. Investors commonly perform investment analysis by making use of fundamental analysis, technical analysis, screeners and gut feel. Investment decisions are often supported by decision tools. The portfolio theory is often applied to help the investor achieve a satisfactory return compared to the risk taken.

Capital investment decisions

Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria.
(1)

Corporate management seeks to maximize the value of the firm by investing inprojects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. These projects must also be financed appropriately.

(2) (3)

If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends).

Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

The investment decision

Management must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting. Making this investment, or capital allocation, decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows. The financing decision Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. The sources of financing are, generically, capital selfgenerated by the firm as well as debt and equity financing, sourced form outside investors. The dividend decision Whether to issue dividends and what amount, is calculated mainly on the basis of the company's unappropriated profit and its earning prospects for the coming year. The amount is also often calculated based on expected free cash flows i.e. cash remaining after all business expenses, and capital investment needs have been met.

Nature and Scope of Investment Decision To understand various investment decision rules. To know what are the good investments decisions rules. To know the category of investment decision rules. You can take investment decision only after analyzing entire process of investment that starts with funds contribution and ends with getting expectations fulfilled.

Investment policy
An investment policy is any government regulation or law that encourages or discourages foreign investment in the local economy, e.g. currency exchange limits.

Explanation

As globalization integrates the economies of neighboring and of trading states, they are typically forced to trade off such rules as part of a common tax, tariff and trade regime, e.g. as defined by a free trade pact. Investment policy favoring local investors over global ones is typically discouraged in such pacts, and the idea of a separate investment policy rapidly becomes a fiction or fantasy, as real decisions reflect the real need for nations to compete for investment, even from their own local investors. A strong and central criticism of the new global rules, made by many in the antiglobalization movement, is that guarantees are often available to foreign investors that are not available to local small investors, and that capital flight is encouraged by such free trade pacts.

Policy drivers
Investment policy in many nations is tied to immigration policy, either due to a desire to prevent human capital flight by forcing investors to keep local assets in local investments, or by a desire to attract immigrants by offering passports in a safe havennation, e.g. Canada, in exchange for a substantial investment in a business that will create jobs there. A frequent criticism of such joint immigration-investment policy is that they encourage organized crime by providing incentive for money-laundering and safe places for "bosses" to move to when the heat rises in their home country.

How to create an investment policy statement?

The policy statement should have the following information: Purpose: What is the money intended for? Retirement? New house fund? Childrens education? Investment time horizon: When will the money be needed? Asset allocation: Will the portfolio be all stocks or all certificates of deposits or some combination? Rebalancing: How often will you rebalance? Return expectation: This section is optional but if you have an idea of what kind of return you are expecting then write it down. Investments: This section should outline what type of investments are eligible for your portfolio ie large cap stocks on the S&P 500, index funds, etfs. Benchmarks: Another optional section If you are an active investor then you might choose to measure your portfolio against an appropriate set of stock and bond indexes.

Investment Policy Statement

An Investment Policy Statement ("IPS") is a document, generally between an investor and the assisting investment manager, recording the agreements the two parties come to with regards to issues relating to how the investor's money is to be managed. In other cases, an IPS may also be created by an investment committee (e.g., those charged with making investment decisions for an endowment or pension plan) to help establish and record its own policies in order to assist in future decision-making or to help maintain consistency of its policies by future committee members or to clarify expectations for prospective money managers who may be hired by the committee.

Investment planning
7 steps to better investment planning! Managing your investments becomes easy when you make it a habit to save, even if its very little money. You need to keep a meticulous account of personal income versus expenditure on a monthly basis before you start investing. Here are some steps you can follow: Step 1: Create a budget and track your expenses A budget helps you identify problem spending areas and also helps regulate your cash flow. Tracking your expenses against the budget helps you control spending and free up cash to clear existing debt and save for retirement or your childs education. For example, your budget allocation includes a certain amount for groceries for a week. You discover on comparing that amount against actual expenses that you have overspent on buying additional items that you did not really need. This will caution you against making similar expenditure next week and at the end of the month, you will end up saving money!

Step 2: Pay off your existing credit card debts Are you surprised that paying off credit card debt is a step towards investments? Credit cards charge a high amount of interest along with the principal repayments. When you clear this amount, youll be glad to realize that all the interest amounts and late fees you paid to credit cards can be utilized for your savings and investment program.
Step 3: Save effectively for a rainy day Emergencies often arrive unannounced. Ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be invested or set aside in instruments that can be readily accessed should you need cash. For example, keep these funds in a savings account in a bank or invest in a money-market mutual fund.

Step 4: Design a disciplined savings program You can open a recurring deposit account. In this case a particular amount from your income gets deposited every month for a fixed tenure. You can also invest in a series of fixed deposits (FDs). For example, if your cash reserve is USD 24,000, this amount can be divided into six FDs of equal amounts, each with a 6month maturity. At the end of 6 months, youll have a fixed deposit maturing every month. You can continue to roll them over to create a source of regular income and minimize risk. Step 5: Invest in education, pension, and retirement insurance plans You can get life cover, education cover and save for retirement when you invest in insurance. Besides this, you get tax exemptions to reduce your current tax payout. For example, you can invest in the insurance plans which offer not only life insurance, but riders for investment of the premium amount so that you get good returns when you retire.

Step 6: Buy yourself your dream home Investing in a house is one of the best investments you can make. First, your payments towards interest and real estate taxes are tax deductible. Second, your property increases in value over time. Step 7: Invest in a diversified investment program or systematic investment plan Your risk tolerance level goes a long way in defining your investment approach. If youre not averse to taking risks, then you may want to invest in an equity based mutual fund. Else, you may want to invest in a plan that involves bonds and other safe securities. Also, ensure that you keep in mind your investment objectives before you subscribe to an investment plan.

Comparison of Investment Products

Investment products Bank Fixed Deposit Shares Return Low High Risk Nil High Liquidity High Medium Safety High Low

Mutual funds
NSC Public PF Money Mkt Gold Cardomom

Medium
Medium Medium Low Low Low

Medium
Nil Nil Low Low Low

Medium
Nil Nil Medium High Very High

Medium
High High Medium High Very High

Risk and Return

Return:All investments are characterised by the expectation of a return.The return may be received in the form of yield plus capital appreciation.The difference between the sale price and the purchase price is called capital appreciation.The dividend or interest received from the investment is the yield. The expected return is the uncertain future return that an investor expects to get from his investment. The realised return,on the contrary,is the certain return that an investor has actually obtained from his investment at the end of the holding period. Risk:- Risk is the potential for variability in returns.The elements of risk may be broadly classified into two groups. 1. Systematic Risk 2. Unsystematic Risk

Systematic Risk:- They are external to a company and affect a large number of securities simultaneously.These are mostly uncontrollable in nature.Eg:-Economic and Political instability. Systematic Risk is further subdivided into a) Interest Rate Risk:- is a type of systematic risk that particularly affects debt securities like bonds and debentures.The variation in bond prices caused due to the variations in interest rates is known as interest rate risks. b) Market Risks:-The variations in returns caused by the volatility of the stock market is referred to as the market risk. c) Purchasing Power Risk:- It refers to the variation in investor returns caused by inflation.

Unsystematic Risk:- They are internal to companies and affect only those particular companies.These are controllable to a great extend.Eg:-raw material scarcity,labour strike,management inefficiency etc.The unsystematic risk or unique risk affecting specific securities arises from two sources: a. The operating environment of the company(business risk). b. The financing pattern adopted by the company(financial risk). Business Risk:- is a function of the operating conditions faced by a company and is the variability in operating income caused by the operating conditions of the company. Financial Risk:- Variability in EPS due to the presence of debt in the capital structure of a company is referred to as financial risk.

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