AN INSIGHT INTO SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

8/14/2019 AN INSIGHT INTO SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

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AN INSIGHT INTO

SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT


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Learning Objectives

By the end of the course one should be able to: Explain the most important investment

alternatives available Describe the markets in which financial

securities are traded Differentiate between expected and

realized returns Analyze return and risk of both single

investment alternatives and portfolios.


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Practice bond and stock valuation based onfundamental and technical analysis.Describe the mechanics of trading, and the role

of financial institutions.Describe different investment strategies.Construct the portfolioRevise and re-construct optimal portfolio

(Efficient Frontier)

Evaluate the performance of the portfolioUse the key terms involved with financial

investments and interpret market researchinformation


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Investment Attributes

Commitment of funds

Definite time period

Cash inflows at defined intervals

Appreciation/depreciation

Risk

Marketability

Tax shelter

Convenience


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Investment Vs. Speculation

1. Planning horizon* Investor has a relatively longer period

* Speculator has a very short period

2. Risk disposition

* Investor assumes relatively moderatecalculated risk

* Speculator assumes high risk

3. Return expectations

* Investor seeks moderate return

* Speculator seeks a high rate of return


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Investment Vs. SpeculationContd..

4. Basis for decision* Investor attaches greater significance

to fundamental factors and attempts a

careful evaluation of the prospects ofthe firm

* Speculator relies more on hearsay,

technical charts and marketpsychology


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Investment Vs. SpeculationContd..

5. Leverage* Investor uses his own funds and

eschews borrowed funds

* Speculator resorts to borrowings verysubstantially to supplement his

personal resources


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Investment alternatives

Investment avenues

Non-marketable

financial assets

Bonds

Mutual funds

Real estates

Equity shares

Money market

instruments

Life insurance

policies

Precious objects

Financial

derivatives


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Securities market

Equity market

(Primary and

Secondary)

Debt marketDerivatives

market

G-securitiesCorporate debt

market

Money market

Options market Futures market

Structure of Securities Market


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Money Market

Purely for short-term funds not exceeding a year

Deals with highly liquid assets Transactions over telephone or online

No brokers

Commercial Banks would play vital role

Establish the link between RBI and other banks

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Money Market Instruments

Treasury Bills

Interbank Call Money Commercial Papers

Bills Discounted

Certificates of Deposit

Repurchase options (REPO)

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Capital Market

Meant for Long-term funds

Provides funds for CAPEX Divided into Primary and Secondary Markets

Secondary Market provides liquidity for Primary Market

The instruments would include

Debentures/Bonds Preferential Shares

Common Shares

As per RBI, household sectors savings are Rs. 7,97,117crore and 50% of this is invested in financial assets

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Suggested factors to be considered for investment

in Primary Markets

Promoters track record

Professional Management Objects of the issue

Project details including location and raw-material

Product portfolio and market conditions

Financial data Profitability projections

Issue pricing

Pending litigations

Risk factors Statutory requirements and clearances

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Individual Investor Life Cycle

Accumulation phase early to middleyears of working career

Consolidation phase past midpoint ofcareers. Earnings greater thanexpenses

Spending/Gifting phase begins afterretirement

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Individual Investor Life Cycle

25 35 45 55 65 75

Net Worth

Age

Accumulation Phase

Long-term:

Retirement

Childrens college

Short-term:

House

Car

Consolidation Phase

Long-term:

Retirement

Short-term:

Vacations

Childrens College

Spending Phase

Gifting Phase

Long-term:

Estate Planning

Short-term:

Lifestyle Needs

Gifts

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Life Cycle Investment Goals

Near-term, high-priority goals

Long-term, high-priority goals

Lower-priority goals

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Investment Profile of Indian Population

4.5 mn participate in equity markets

33% of earners own life insurance policies

20 mn will buy life insurance in 2008

11 mn plan to buy residential property soon

5.7 mn is the retail mutual fund base

18 mn individuals have some form of investments

6% of 321 mn working age Indians buy gold purely as an investment option

82% of all consumer loans are from money lenders and friends

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Investment Profile of Indian Population

$ 6.4 bn of retail savings in gold in 2006-2007

Rs. 57000 cr is the latest demand for voluntary retirement savings

79 mn are willing to join NPS on voluntary minimum SIP basis

144 mn has incomes, but no bank accounts

$ 35 bn is the annual savings potential of low income investors

Rs. 2268 cr is held as savings in Self Helf Groups (SHGs)

25% is the increase in aggregate earnings in the last three years

87% of the latent demand can be served through post offices and banks networks

By 2020 the private pension market is expected to grow to $ 300 bn

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Security defined

SCRA (1956) defined the security as

inclusive of shares, scrips, stocks, bonds,

debenture, marketable securities of a

company or body corporate or govt.

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Security Analysis defined

It is a process of examining and evaluating individualsecurities to estimate the results of investing in them.

It involves the projection of future earnings or dividends,forecasts of share price and intrinsic value of a security.

Develops and presents important facts regarding corporatestocks and bonds

Establishes the framework for risk return analysis

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Security Analysis as a discipline must

achieve

A true picture of a company as a going concern

A carefully prepared estimate of normal earning

power A projection of future profitability and growth

A translation of all conclusions into a valuation of

the company

Security Analysis is a tool for efficient portfolio

management

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The functions of Security Analysis

Descriptive functions

Analysing and interpreting and presenting thefacts and figures about an issue

A thorough probing of companies to understand

the causes of past and present profitability and to

interpret their relationship to future profitability.This would include:

Mergers and Acquisitions

Shifts in product mix

Expansion of market areas

Changes in the market share

Intensity of foreign competition

Capacity utilisation22


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Valuation Function

Developing value estimates for stocks andbonds

Express judgments on the relative investment

attractiveness of securities under review

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Corporate critic function

Providing insight into financial practices andpolicies and corporate governance

Assessing the impact of such practices and

governance on the objectives of an individual

investor

Commenting on the accounting methods and

disclosure practices

Assessing the impact of capital structure anddividend decisions on the value of equity

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AN INSIGHT INTO SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT