Mahindra Reddy (Investment Avenues)

8/17/2019 Mahindra Reddy (Investment Avenues)

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A project report

on

A study on investment avenues for the retail investors

at

Zen Securities

Submitted in partial fulfillment of theRequirements for the award of the Degree

of

MASTER OF !S"#ESS ADM"#"STRAT"O#

Submitted $

Mahindra Reddy

14BK1E00

!nder the %uidance of

Mr. K.V.R.Satya Kumar

!" # Assistant $rofessor

"E$AR%ME&% !' B(S)&ESS A"M)&)S%RA%)!&

S% $E%ERS E&*)&EER)&* +!,,E*E

&Affiliated to 'awaharlal #ehru Technological !ni(ersit$ )$derabad*)$derabad

+,-. / +,-0


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+A$%ER 1

)&%R!"(+%)!&

)&%R!"(+%)!& %! )&VES%ME&%

The mone$ one earns is partl$ spent and the rest is sa(ed for meeting future e1penses2

instead of 3eeping sa(ings idle one ma$ li3e to use sa(ings in order to get returns on it in the

future2 this is called as in(estment4 "n an economic sense2 an in(estment is the purchase of goods

that are not consumed toda$ but are used in the future to create wealth4 "n finance2 anin(estment is a monetar$ asset purchased with the idea that the asset will pro(ide income in the

future or appreciate and be sold at a higher price4 Mere earning will not help one to secure the

future2 so it becomes important to in(est4

One of the important reasons wh$ one needs to in(est wisel$ is to meet the cost of "nflation4

"nflation is the rate at which the cost of li(ing increases4 The cost of li(ing is simpl$ what it costs


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to bu$ the goods and ser(ices $ou need to li(e4 "nflation causes mone$ to lose (alue because it

will not bu$ the same amount of a good or a ser(ice in the future as it does now or did in the

past4 The sooner one starts in(esting the better4 $ in(esting earl$ one allow one5s in(estments

more time to grow2 whereb$ the concept of compounding increases one5s income2 b$

accumulating the principal and the interest or di(idend earned on it2 $ear after $ear4

The dictionar$ meaning of in(estment is to commit mone$ in order to earn a financial return

or to ma3e use of the mone$ for future benefits or ad(antages4 6eople commit mone$ to

in(estments with e1pectations to increase their future wealth b$ in(esting mone$ to spend in

future $ears4 For e1ample2 if $ou in(est Rs4 -,,, toda$ and earn -,7 o(er the ne1t $ear2 $ou

will ha(e Rs4--,, one $ear from toda$4

An in(estment can be described as perfect if it satisfies all the needs of all in(estors4 So2 the

starting point in searching for the perfect in(estment would be to e1amine in(estor needs4 "f all

those needs are met b$ the in(estment2 then that in(estment can be termed the perfect

in(estment4 Most in(estors and ad(isors spend a great deal of time understanding the merits of

the thousands of in(estments a(ailable in "ndia4 8ittle time2 howe(er2 is spent understanding the

needs of the in(estor and ensuring that the most appropriate in(estments are selected for him4

efore ma3ing an$ in(estment2 one must ensure to9

• Obtain written documents e1plaining the in(estment

• Read and understand such documents

• :erif$ the legitimac$ of the in(estment

• Find out the costs and benefits associated with the in(estment

• Assess the ris3;return profile of the in(estment

• ed intermediar$

• See3 all clarifications about the intermediar$ and the in(estment

• E1plore the options a(ailable to $ou if something were to go wrong2 and then2 if satisfied2 ma3e

the in(estment4

)&VES%ME&% &EE"S !' A& )&VES%!R

"n(esting mone$ is a stepping stone to manage spending habits and prepare for the future

e1penses4 Most people recogni>e the need to put their mone$ awa$ for e(ents or circumstances


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that ma$ occur in future4 6eople in(est mone$ to manage their personal finances some of them

in(est to plan for retirement2 while others in(est to accumulate wealth4 Each one has a different

need and each of them e1pect something from their mone$ in future4

$ and large2 most in(estors ha(e eight common needs from their in(estments9

i4 Securit$ of original capital

ii4 ?ealth accumulation

iii4 Ta1 Ad(antagesi(4 8ife co(er

(4 "ncome

8"TERAT!RE


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RE:"E?

REV)E- !' ,)%ERA%(RE

The literature re(iew section e1amines the importance of research studies2 compan$ data

or industr$ reports that ser(e as a foundation for the setup of stud$4 The research dimension of

the related literature and the rele(ant information begins from an e1planator$ perspecti(e2

approaching towards specific studies which do related to judge the limitations and informational

gaps in data from the secondar$ sources4 This anal$sis ma$ re(eal conclusions from past studies

to reali>e the reliabilit$ of the secondar$ sources and their credibilit$4 This in turn enables one to

rel$ on a comprehensi(e re(iew for the stud$4

8iterature suggests that major research in the area of in(estor5s beha(iour has been done

b$ beha(ioural scientists such as ?eber &-@@@*2 Shiller &+,,,* and Shefrin &+,,,*4 Shiller &+,,,*

who strongl$ ad(ocated that stoc3 mar3et is go(erned b$ the mar3et information which directl$

affects the beha(iour of the in(estors4 Se(eral studies ha(e brought out the relationship between

the demographics such as %ender2 Age and ris3 tolerance le(el of indi(iduals4 Of this the

relationship between Age and ris3 tolerance le(el has attracted much attention4


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)or(ath and uc3erman &-@@B* suggested that one5s biological2 demographic and

socioeconomic characteristicsC together with hisher ps$chological ma3eup affects one5s ris3

tolerance le(el4 Mal3iel &-@@0* suggested that an indi(idual5s ris3 tolerance is related to hisher

household situation2 lifec$cle stage and subjecti(e factors4 Mittra &-@@* discussed factors that

were related to indi(iduals ris3 tolerance2 which included $ears until retirement2 3nowledge

sophistication2 income and net worth4 %uiso2 'appelli and Terli>>ese &-@@0*2 ajtelsmit and

:enDerhei &-@@*2 6owell and Ansic &-@@*2 'iana3oplos and ernase3 &-@@G*2 )ariharan2

=hapman and Domain &+,,,*2 )artog2 Ferrer;";=arbonell and 'on3er &+,,+* concluded that

males are more ris3 tolerant than females4

?allach and

found e(idence of increasing ris3 a(ersion with age although the households appear to become

less ris3 a(erse as their wealth increases4 Hoo &-@@.* found that the change in the ris3$ asset

holdings were not uniform4 )e found indi(iduals to increase their in(estments in ris3$ assets

throughout their wor3ing life time2 and decrease their ris3 e1posure once the$ retire4 8ewellen

et4al while identif$ing the s$stematic patterns of in(estment beha(iour e1hibited b$ indi(iduals

found age and e1pressed ris3 ta3ing propensities to be in(ersel$ related with major shifts ta3ing

place at age and be$ond4 "ndian studies on indi(idual in(estor5s were mostl$ confined to

studies on share ownership2 e1cept a few4

The R"Is sur(e$ of ownership of shares and 84=4 %uptaIs enquir$ into the ownership

pattern of "ndustrial shares in "ndia were a few in this direction4 The #=AERIs studies brought

out the frequent form of sa(ings of indi(iduals and the components of financial in(estments of

rural households4

The "ndian Shareowners Sur(e$ brought out a (olle$ of information on shareowners4

Rajarajan : &-@@2 -@@G2 +,,, and +,,B* classified in(estors on the basis of their demographics4

)e has also brought out the in(estor5s characteristics on the basis of their in(estment si>e4 )e

found that the percentage of ris3$ assets to total financial in(estments had declined as the

in(estor mo(es up through (arious stages in life c$cle4 Also in(estor5s lifest$les based

characteristics has been identified4 The abo(e discussion presents a detailed picture about the


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(arious facets of ris3 studies that ha(e ta3en place in the past4 "n the present stud$2 the findings

of man$ of these studies are (erified and updated4

,atha Krishnan /00 e1plained as "n(estments come in man$ forms4 ?hile some

people consider hard assets such as land2 house2 gold and platinum as in(estments2 others loo3 to

monetar$ instruments such as stoc3s and bonds as wa$s to ma3e their mone$ grow4 A cautious or

conser(ati(e in(estor is unli3el$ to pla$ carelessl$ with his hard;earned mone$4 So he 3eeps to

safe in(estments that guarantee the return of his capital and still earn good returns in a stipulated

period if the product in which he in(ested gains in that period4 "n such an in(estment2 e(en if the

mar3ets go down and he does not gain much2 he also does not suffer a hea($ loss4

A wealth$ person with more mone$ to in(est can ta3e more ris3s and in(est in a (ariet$

of products that major financial pla$ers pro(ide4 A wealth of information on these as well as

comments and criticisms on their performances and profitabilit$ is readil$ a(ailable4

J6erception of in(estors towards capital mar3et instruments globall$K b$ 'ohn Marshall

and J"n(estment anal$sis and 6ortfolio management5K b$ 6unitha(ath$ 6andian4 'ohn Marshall5s

stud$ was at global scale and it e1plains the perception of people across globe towards capital

mar3et instruments and 6andian e1plains the theoretical aspects of capital mar3et instruments

and use of (arious in(estment a(enues to build a strong portfolio4

,)%ERA%(RE REV)E-

%2$ES !' )&VES%ME&% AVE&(ES


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'i

3ure 1.1 :arious in(estment alternati(es

Source "n(estment anal$sis and portfolio management

Author 6rasanna =handra

Figure -4- shows (arious in(estment alternati(es which are e1plained below4 One can

in(est mone$ in different t$pes of "n(estment instruments4 These instruments can be financial or

non;financial in nature4 There are man$ factors that affect one5s choice of in(estment4 Millions

of "ndians bu$ fi1ed deposits2 post office sa(ings certificates2 stoc3s2 bonds or mutual funds2

purchase gold2 sil(er2 or ma3e similar in(estments4 The$ all ha(e a reason for in(esting their

mone$4 Some people want to supplement their retirement income when the$ reach the age of 0,2

while others want to become millionaires before the age of .,4 ?e will loo3 at (arious factors

that affect our choice of an in(estment alternati(e2 let us first understand the basics of some of

the popular in(estment a(enues4

&on mar5eta6le 'inancial Assets9 A good portion of financial assets is represented b$

non;mar3etable financial assets4 These can be classified into the following broad categories9


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• Ban5 "e7osits %he simplest of in(estment a(enues2 b$ opening a ban3 account and depositing

mone$ in it one can ma3e a ban3 deposit4 There are (arious 3inds of ban3 accounts9 current

account2 sa(ings account and fi1ed deposit account4 The interest rate on fi1ed deposits (aries

with the term of the deposit4 "n general2 it is lower for fi1ed deposits of shorter term and higher

for fi1ed deposits of longer term4 an3 deposits enjo$ e1ceptionall$ high liquidit$4

• $ost !ffice Savin3s Account A post office sa(ings account is similar to a sa(ings ban3

account4 The interest rate is 0 percent per annum4

• $ost !ffice %ime "e7osits $!%"s Similar to fi1ed deposits of commercial ban3s2 6OTD can

be made in multiplies of , without an$ limit4 The interest rates on 6OTDs are2 in general2

slightl$ higher than those on ban3 deposits4 The interest is calculated half;$earl$ and paid

annuall$4

• Monthly )ncome Scheme of the $ost !ffice M)S$! A popular scheme of the post office2 the

M"S6O is meant to pro(ide regular monthl$ income to the depositors4 The term of the scheme is

0 $ears4 The minimum amount of in(estment is -2,,,4 The ma1imum in(estment can be B2

,,2,,, in a single account or 02 ,,2,,, in a joint account4 The interest rate is G4, percent per

annum2 pa$able monthl$4 A bonus of -, percent is pa$able on maturit$4

• Kisan Vi5as $atra KV$ A scheme of the post office2 for which the minimum amount of

in(estment is -2,,,4 There is no ma1imum limit4 The in(estment doubles in G $ears and

months4 )ence the compound interest rate wor3s out to G4. percent4 There is a withdrawal

facilit$ after + L $ears4• &ational Savin3s +ertificate "ssued at the post offices2 #ational Sa(ings =ertificate comes in

denominations of -,,2 ,,2 -2,,,2 2,,, and -,2,,,4 "t has a term of 0 $ears4 O(er this period

Rs4 -,, becomes Rs4 -0,4-4 )ence the compound rate of return wor3s out to G4-0 percent4

• +om7any "e7osits Man$ companies2 large and small2 solicit fi1ed deposits from the public4

Fi1ed deposits mobili>ed b$ manufacturing companies are regulated b$ the =ompan$ 8aw oard

and fi1ed deposits mobili>ed b$ finance compan$ &more precisel$ non;ban3ing finance

companies* are regulated b$ the Reser(e an3 of "ndia4 The interest rates on compan$ deposits

are higher than those on ban3 fi1ed deposits2 but so is ris34• Em7loyee $rovident 'und Scheme A major (ehicle of sa(ings for salaried emplo$ees2 where

each emplo$ee has a separate pro(ident fund account in which both the emplo$er and emplo$ee

are required to contribute a certain minimum amount on a monthl$ basis4

• $u6lic $rovident 'und Scheme One of the most attracti(e in(estment a(enues a(ailable in

"ndia4 "ndi(iduals and )!Fs can participate in this scheme4 A 66F account ma$ be opened at an$


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branch of State an3 of "ndia or its subsidiaries or at specified branches of the other public

sector ban3s4 The subscriber to a 66F account is required to ma3e a minimum deposit of -,, per

$ear4 The ma1imum permissible deposit per $ear is ,2,,,4 66F deposits currentl$ earn a

compound interest rate of G4, percent per annum2 which is totall$ e1empt from ta1es4

1.8./ Bonds onds are fi1ed income instruments which are issued for the purpose of raising

capital4 oth pri(ate entities2 such as companies2 financial institutions2 and the central or state

go(ernment and other go(ernment institutions use this instrument as a means of garnering funds4

onds issued b$ the %o(ernment carr$ the lowest le(el of ris3 but could deli(er fair returns4

Man$ people in(est in bonds with an objecti(e of earning certain amount of interest on their

deposits andor to sa(e ta14 onds are considered to be a less ris3$ in(estment option and are

generall$ preferred b$ ris3;a(erse in(estors4 ond prices are also subject to mar3et ris34 onds

ma$ be classified into the following categories9

• *overnment securities Debt securities issued b$ the central go(ernment state go(ernment and

quasi go(ernment agencies are referred as gilt edge securities4 "t has maturities ranging from B;

+, $ears and carr$ interest rate that usuall$ (ar$ between to -, percent4

• "e6entures of 7rivate sector com7anies Debentures are (iewed as a mi1ture of ha(ing a

shareholding and a fi1ed interest loan4 Debenture holders are normall$ entitled to a return

equi(alent to a fi1ed percentage of their initial in(estment4 The securit$ inherent

in debentures ma3es them a safer in(estment than shares4

• $reference shares "n(esting in shares is safer and di(idends are assured e(er$ $ear4

• Sa(ings bonds

1.8.8 Mutual funds A mutual fund allows a group of people to pool their mone$ together

and ha(e it professionall$ managed2 in 3eeping with a predetermined in(estment objecti(e4 This

in(estment a(enue is popular because of its cost;efficienc$2 ris3;di(ersification2 professional

management and sound regulation4 There are three broad t$pes of mutual fund schemesclassified on basis of in(estment objecti(e9

• E9uity schemes The aim of growth funds is to pro(ide capital appreciation o(er the medium to

long; term4 Such schemes normall$ in(est a major part of their corpus in equities4 Such funds

ha(e comparati(el$ high ris3s4 These schemes pro(ide different options to the in(estors li3e

di(idend option2 capital appreciation2 etc4 and the in(estors ma$ choose an option depending on


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their preferences4 %rowth schemes are good for in(estors ha(ing a long;term outloo3 see3ing

appreciation o(er a period of time4

• "e6t schemes The aim of income funds is to pro(ide regular and stead$ income to in(estors4

Such schemes generall$ in(est in fi1ed income securities such as bonds2 corporate debentures2

%o(ernment securities and mone$ mar3et instruments4 Such funds are less ris3$ compared to

equit$ schemes4 These funds are not affected because of fluctuations in equit$ mar3ets4 )owe(er2

opportunities of capital appreciation are also limited in such funds4 The #A:s of such funds are

affected because of change in interest rates in the countr$4 "f the interest rates fall2 #A:s of such

funds are li3el$ to increase in the short run and (ice (ersa4 )owe(er2 long term in(estors ma$ not

bother about these fluctuations4

•Balanced schemes The aim of balanced funds is to pro(ide both growth and regular income as

such schemes in(est both in equities and fi1ed income securities in the proportion indicated in

their offer documents4 These are appropriate for in(estors loo3ing for moderate growth4 The$

generall$ in(est .,;0,7 in equit$ and debt instruments4 These funds are also affected because of

fluctuations in share prices in the stoc3 mar3ets4 )owe(er2 #A:s of such funds are li3el$ to be

less (olatile compared to pure equit$ funds4

1.8.4 Real Estate Residential real estate is more than just an in(estment4 There are more

wa$s than e(er before to profit from real estate in(estment4 Real estate is a great in(estment

option4 "t can generate an ongoing income source4 "t can also rise in (alue o(ertime and pro(e a

good in(estment in the cash (alue of the home or land4 Man$ ad(isors warn against borrowing

mone$ to purchase in(estments4 The best wa$ to do this is to sa(e up and pa$ cash for the home4

One should be able to afford the pa$ments on the propert$ when the propert$ is (acant2 otherwise

the propert$ ma$ end up being a burden instead of helping to build wealth4

1.8.: E9uity Shares Equities are a t$pe of securit$ that represents the ownership in a

compan$4 Equities are traded &bought and sold* in stoc3 mar3ets4 Alternati(el$2 the$ can be

purchased (ia the "nitial 6ublic Offering &"6O* route2 i4e4 directl$ from the compan$4 "n(esting in

equities is a good long;term in(estment option as the returns on equities o(er a long time hori>on


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are generall$ higher than most other in(estment a(enues4 )owe(er2 along with the possibilit$ of

greater returns comes greater ris34

1.8. Money mar5et instruments The mone$ mar3et is the mar3et in which short term

funds are borrowed and lent4 These instruments can be broadl$ classified as9

• %reasury Bills These are the lowest ris3 categor$ instruments for the short term4 R" issues

treasur$ bills T;billsN at a prefi1ed da$ and for a fi1ed amount4 There are . t$pes of treasur$

bills9 -.;da$ T;bill2 @-;da$ T;bill2 -G+;da$ T;bill and B0.;da$ T;bill4

• +ertificates of "e7osits After treasur$ bills2 the ne1t lowest ris3 categor$ in(estment option is

certificate of deposit &=D* issued b$ ban3s and financial "nstitution &F"*4 A =D is a negotiable

promissor$ note2 secure and short term2 of up to a $ear2 in nature4 Although R" allows =Ds up

to one;$ear maturit$2 the maturit$ most quoted in the mar3et is for @, da$s4• +ommercial $a7ers9 =ommercial papers are negotiable short;term unsecured promissor$ notes

with fi1ed maturities2 issued b$ well;rated organi>ations4 These are generall$ sold on discount

basis4 Organi>ations can issue =6s either directl$ or through ban3s or merchant ban3s4 These

instruments are normall$ issued for B,.0,@,-+,-G,+,B0. da$s4

• +ommercial Bills9 ills of e1change are negotiable instruments drawn b$ the seller or drawer of

the goods on the bu$er or drawee of the good for the (alue of the goods deli(ered4 These are

called as trade bills and when the$ are accepted b$ commercial ban3s the$ are called as

commercial bills4 "f the bill is pa$able at a future date and the seller needs mone$ during the

currenc$ of the bill then the seller ma$ approach the ban3 for discounting the bill4

1.8.; ,ife insurance 7olicies "nsurance is a form of ris3 management that is primaril$

used to hedge the ris3 of a contingent loss4 "nsurance is defined as the equitable transfer of the

ris3 of a loss2 from one entit$ to another2 in e1change for a premium4 An insurer is a compan$

that sells insuranceC insured or the polic$holder is a person or entit$ bu$ing the insurance4 The

insurance rate is a factor that is used to determine the amount which is to be charged for a certain

amount of insurance co(erage2 and is called the premium4 "t can be classified as9

• Money


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• Endo=ment )nsurance These are term policies4 "n(estors ha(e to pa$ the premiums for a

particular term2 and at maturit$ the accrued bonus and other benefits are returned to the

polic$holder if he sur(i(es at maturit$4

1.8.> Bullion Mar5et 6recious metals li3e gold and sil(er had been a safe ha(en for "ndian

in(estors since ages4 esides jeweller$ these metals are used for in(estment purposes also4 Since

last - $ear2 both %old and Sil(er ha(e highl$ appreciated in (alue both in the domestic as well as

the international mar3ets4 "n addition to its attributes as a store of (alue2 the case for in(esting in

gold re(ol(es around the role it can pla$ as a portfolio di(ersifier4

1.8.? 'inancial "erivatives Deri(ati(es are contracts and can be used as an underl$ing

asset4 :arious t$pes of Deri(ati(es are9

• 'or=ards A forward contract is a customi>ed contract between two entities2 where settlement

ta3es place on a specific date in the future at toda$5s pre;agreed price4

• 'utures A futures contract is an agreement between two parties to bu$ or sell an asset at a

certain time in the future at a certain price4 Futures contracts are special t$pes of forward

contracts in the sense that the former are standardi>ed e1change traded contracts

• !7tions Options are of two t$pes ; calls and puts4 =alls gi(e the bu$er the right but not the

obligation to bu$ a gi(en quantit$ of the underl$ing asset2 at a gi(en price on or before a gi(en

future date4 6uts gi(e the bu$er the right2 but not the obligation to sell a gi(en quantit$ of the

underl$ing asset at a gi(en price on or before a gi(en date4

• S=a7s Swaps are pri(ate agreements between two parties to e1change cash flows in the future

according to a prearranged formula4 The$ can be regarded as portfolios of forward contracts4 E4g4

=urrenc$ swaps2 interest swaps4

1.4 EVA,(A%)!& !' VAR)!(S )&VES%ME&% AVE&(ES

%a6le 1.1 Summar$ e(aluation of (arious in(estment a(enues


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Source "n(estment anal$sis and portfolio management

Author 6rasanna =handra

Table -4- shows the e(aluation of (arious in(estment a(enues4 From this table we can sa$

that ris32 liquidit$ and return are the so called factors which are considered before ma3ing an

in(estment4 ut there is a trade off between ris3 and return4 )igher the ris3 higher is the return4

8ower the ris3 and lower is the return4 The decision of which mode of in(estment to choose

largel$ depends upon the in(estors necessit$ and the factors which according to him is the most

(ital one4

6eople with more securit$ concern choose fi1ed in(estment li3e ban3 deposits and

in(estments in go(ernment securities and (arious post office sa(ings4 The main reason for

choosing such an in(estment mode is that the amount in(ested in the abo(e stated securities


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seems to be (er$ secure and hence the$ seemed to be more preferred one where securit$ is the

prime concern4

6eople whom returns are most important are read$ to ta3e ris3 to earn fairer ris34 The

preferred mode of in(estment o(er here is equit$ shares and mutual fund4 The ris3 factor in these

modes of in(estment is basicall$ the returns are basicall$ performance based4 "f the compan$

performs well the in(estors can accept fairer returns but if the compan$ fails to perform then

there can be a threat to the in(ested amount4 )ence the returns are (er$ (olatile with the changes

in the mar3et conditions4

A%%R)B(%ES !' )&VES%ME&%

"n(estment can be said to be an art4 Man$ people in(est mone$ without 3nowing what

the$ are doing4 Onl$ a few people reall$ understand the art of in(esting mone$4 The$ in(est

according to certain principles4 There are also certain factors that affect the in(estment decisions4

All these are done mainl$ to increase the return on the in(estment and also to 3eep the ris3 to a

minimum4 The (arious factors that affect the in(estment decisions are gi(en below4

For e(aluating an in(estment a(enue2 the following attributes are rele(ant4

a* Rate of Return The rate of return on an in(estment for a period &which is usuall$ a period of

one $ear* is defined as follows9

Rate of return Annual income P &Ending price / eginning price*

eginning price

2ield Hield is the annual rate of return for an$ in(estment and is e1pressed as a percentage4

?ith stoc3s2 $ield can refer to the rate of income generated from a stoc3 in the form of regular

di(idends4 This is often represented in percentage form2 calculated as the annual di(idend

pa$ments di(ided b$ the stoc3Is current share price4

=urrent $ield Annual cash inflows

Mar3et price

+a7ital A77reciation "t5s the rise in the mar3et price of an asset4 =apital appreciation is one of

two major wa$s for in(estors to profit from an in(estment in a compan$4 The other is through

di(idend income4


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b* Ris5 The ris3 of in(estment refers to the (ariabilit$ of its rate of return4

A simple measure of dispersion is the range of (alues2 which is simpl$ the difference between the

highest and the lowest (alues4

'i3ure 1./ Relationship between E1pected Return and Ris3

Figure -4+ shows the relationship between e1pected return and ris34 From this figure it is clear

that with higher ris3 the returns also increases while it decrease as the ris3 decreases4 )igh

(ariance indicates high degree of ris3 and low (ariance indicates lesser ris34 E1pected returns

increases when in(estors is willing to ta3e ris34

Other measures commonl$ used in finance are as follows9

• Variance This is the mean of the squares of de(iations of indi(idual returns around their

a(erage (alues

Standard deviation9 This is the square root of (arianceBeta9 This reflects how (olatile the return from an in(estment is2 in response to mar3et swings4

• Ris5 Actual Return / E1pected Returns

"f2 Actual Return E1pected Return Ris3 Free "n(estment

"f2 Actual Return Q or E1pected Return is ris3$ in(estment

Mar5eta6ility An in(estment is highl$ mar3etable or liquid if9

• it can be transacted quic3l$

• the transaction cost is lowC and

• the price change between two successi(e transactions is negligible

The liquidit$ of a mar3et ma$ be judged in terms of its depth2 breadth2 and resilience4 Depth

refers to the e1istence of bu$ as well as sells orders around the current mar3et price4 readth

implies the presence of such orders in substantial (olume4 Resilience means that new orders

emerge in response to price changes4 %enerall$2 equit$ shares of well established companies

enjo$ high mar3etabilit$ and equit$ shares of small companies in their formati(e $ears ha(e low


17/29

mar3etabilit$4 )igh mar3etabilit$ is a desirable characteristic and low mar3etabilit$ is an

undesirable one4

c* %a@ Shelter Ta1 benefits are of the following three 3inds9

• "nitial Ta1 enefit9 An initial ta1 benefit refers to the ta1 relief enjo$ed at the time of ma3ing the

in(estment4

• =ontinuing Ta1 enefit9 A continuing ta1 benefits represent the ta1 shield associated with the

periodic returns from the in(estment4

• Terminal Ta1 enefits9 A terminal ta1 benefit refers to relief from ta1ation when an in(estment is

reali>ed or liquidated4

d* +onvenience =on(enience broadl$ refers to the ease with which the in(estment can be made

and loo3ed after4

The degree of con(enience associated with in(estments (aries widel$4 At one end of the

spectrum is the deposit in a sa(ings ban3 account that can be made readil$ and that does not

require an$ maintenance effort4 At the other end of the spectrum is the purchase of a propert$

that ma$ in(ol(ed a lot of procedural and legal hassles at the time of acquisitions and a great deal

of maintenance effort subsequentl$4

A$$R!A+ES %! )&VES%ME&% "E+)S)!& MAK)&*

The stoc3 mar3et is thronged b$ in(estors pursuing di(erse in(estment strategies which

ma$ be subsumed under four broad approaches9

i4 'undamental A77roach The basic tenets of the fundamental approach2 which is perhaps most

commonl$ ad(ocated b$ in(estment professionals2 are as follows9 There is an intrinsic (alue of a securit$2 which depends upon underl$ing economic &fundamental*

factors4 The intrinsic (alue can be established b$ a penetrating anal$sis of the fundamental

factors relating to the compan$2 industr$2 and econom$4 At an$ gi(en point of time2 there are some securities for which the e1isting mar3et price will

differ from the intrinsic (alue4 Sooner or later2 of course2 the mar3et price will fall in line with

the intrinsic (alue4 Superior returns can be earned b$ bu$ing under;(alued securities &securities whose intrinsic

(alue e1ceeds the mar3et price* and selling o(er;(alued securities &securities whose intrinsic

(alue is less than the mar3et price*4


18/29

ii4 $sycholo3ical A77roach The ps$chological approach is based on the premise that stoc3 prices

are guided b$ emotion rather than reason4 Stoc3 prices are belie(ed to be influenced b$ the

ps$chological mood of in(estors4 ?hen greed and euphoria sweep the mar3et2 prices rise to

di>>$ heights4 On the other hand2 when fear and despair en(elop the mar3et2 prices fall to

ab$small$ low le(els4

Since ps$chic (alues appear to be more important than intrinsic (alues2 the ps$chological

approach suggests that it is more profitable to anal$>e how in(estors tend to beha(e as the

mar3et is swept b$ wa(es of optimism and pessimism2 which seem to alternate4 The

ps$chological approach has been described (i(idl$ as the castles in the air5 theor$ urton %4

Mal3iel4

Those who subscribe to the ps$chological approach or the castles in the air5 theor$

generall$ use some form of technical anal$sis which is concerned with a stud$ of internal mar3et

data2 with a (iew to de(eloping trading rules aimed at profit ma3ing4 The basic premise of

technical anal$sis is that there are certain persistent and recurring patterns of price mo(ements2

which can be discerned b$ anal$>ing mar3et data4 Technical anal$sts use a (ariet$ of tools li3e

bar chart2 point and figure chart2 mo(ing a(erage anal$sis2 breadth of mar3et anal$sis2 etc4

iii4 Academic A77roach O(er the last fi(e decades or so2 the academic communit$ has studied

(arious aspects of the capital mar3et2 particularl$ in the ad(anced countries2 with the help of

fairl$ sophisticated methods of in(estigation4 Stoc3 mar3ets are reasonabl$ efficient in reacting quic3l$ and rationall$ to the flow of

information4 )ence2 stoc3 prices reflect intrinsic (alue fairl$ well4 6ut differentl$2 Mar3et price

"ntrinsic (alue Stoc3 price beha(iour corresponds to a random wal34 This means that successi(e price changes

are independent4 As a result2 past price beha(iour cannot be used to predict future price

beha(iour4

"n the capital mar3et2 there is a positi(e relationship between ris3 and return4 More specificall$2

the e1pected return from a securit$ is linearl$ related to its s$stematic ris3

i(4 Eclectic A77roach The eclectic approach draws on all the three different approaches discussed

abo(e4 The basic premises of the eclectic approach are as follows9 Fundamental anal$sis is helpful in establishing basic standards and benchmar3s4 )owe(er2 since

there are uncertainties associated with fundamental anal$sis2 e1clusi(e reliance on fundamental

anal$sis should be a(oided4 Equall$ important2 e1cessi(e refinement and comple1it$ in

fundamental anal$sis must be (iewed with caution4


19/29

Technical anal$sis is useful in broadl$ gauging the pre(ailing mood of in(estors and the relati(e

strengths of suppl$ and demand forces4 )owe(er2 since the mood of in(estors can (ar$

unpredictabl$ e1cessi(e reliance on technical indicators can be ha>ardous4 More important2

complicated technical s$stems should ordinaril$ be regarded as suspect because the$ often

represent figments of imagination rather than tools of pro(en usefulness4 The mar3et is neither as well;ordered as the academic approach suggest2 nor as speculati(e as the

ps$chological approach indicates4 ?hile it is characteri>ed b$ some inefficiencies and

imperfection2 it seems to react reasonabl$ efficientl$ and rationall$ to the flow of information4

8i3ewise2 despite man$ instances of mispriced securities2 there appears to be a fairl$ strong

correlation between ris3 and return4 8e(el of return often necessitates the assumption of a higher le(el of ris34

+!MM!& ERR!RS )& )&VES%ME&% MA&A*EME&%

"n(estments alwa$s do not generate wealth sometimes it fail do so because of some

conditions4 The reason for this failure is either the mar3et condition or some mista3es made b$

the in(estors4 ?e cannot control mar3et condition but errors made b$ in(estors could be a(oided4

"n(estors appear to be prone to the errors in managing their in(estments4 Some of the errors

made b$ in(estors are discussed below9

)nade9uate +om7rehension of Return and Ris5

Man$ in(estors ha(e unrealistic and e1aggerated e1pectations from in(estments2 in

particular from equit$ shares and con(ertible debentures4 One often comes across in(estors who

sa$ that the$ hope to earn a return of + to B, percent per $ear with (irtuall$ no ris3 e1posure or

e(en double their in(estment in a $ear or so4 The$ ha(e apparentl$ been misled b$ one or more

of the followingC &a* tall and unjustified claims made b$ people with (ested interestsC

&b* E1ceptional performance of some portfolio the$ ha(e seen or managed2 which ma$ be

attributable mostl$ to fortuitous factorsC and&c* 6romises made b$ tipsters2 operators2 and others4 "n most of the cases2 such e1pectations

reflect in(estor ine1perience and gullibilit$4

Va3uely 'ormulated )nvestment $olicy


20/29

Often in(estors do not clearl$ spell out their ris3 disposition and in(estment polic$4 This

tends to create confusion and impairs the qualit$ of in(estment decisions4 "ronicall$2 conser(ati(e

in(estors turn aggressi(e when the bull mar3et is near its pea3 in the hope of reaping a bonan>aC

li3ewise2 in the wa3e of sharp losses inflicted b$ a bear mar3et2 aggressi(e in(estors turn undul$

cautions and o(erloo3 opportunities before them4 Ragnar D4 #aess put it this wa$9 JThe fear of

losing capital when prices are low and declining2 and the greed for more capital gains when

prices are rising2 are probabl$2 more than an$ other factors2 responsible for poor performance4 Jif

$ou 3now what $our ris3 attitude is and wh$ $ou are in(esting2 $ou will learn how to in(est well4

A well articulated in(estment polic$2 adhered to consistentl$ o(er a period of time2 sa(es a great

deal of disappointment4

&aive E@tra7olation of the $ast

"n(estors generall$ belie(e in a simple e1trapolation of past trends and e(ents and do not

effecti(el$ incorporate changes into e1pectations4 As Arthur ei3el sa$s9

J6eople generall$2 and in(estors particularl$2 fail to appreciate the wor3ing of counter(ailing

forcesC change and momentum are largel$ misunderstood concepts4 Most in(estors tend to cling

to the course to which the$ are currentl$ committed2 especiall$ at turning point4K

The apparent comfort pro(ided b$ e1trapolating too far2 howe(er2 is dangerous4 As 6eter

ernstein sa$s9 JMomentum causes things to run further and longer than we anticipate4 The$(er$ familiarit$ of a force in motion reduces our abilit$ to see when it is losing its momentum4

"ndeed2 that is wh$ e1trapolating the present into the future so frequentl$ turns out to be the

genesis of an embarrassing forecast4K

+ursory "ecision Ma5in3

"n(estment decision ma3ing is characteri>ed b$ a great deal of cursoriness4 "n(estors tend

to9

• ase their decisions on partial e(idence2 unreliable hearsa$2 or casual tips gi(en b$ bro3ers2

friends2 and others4

• =a(alierl$ brush aside se(eral of in(estment ris3 &mar3et ris32 business ris32 and interest rate

ris3* as greed o(erpowers them4


21/29

• !ncriticall$ follow others because of the temptation to ride the bandwagon or lac3 of confidence

in their own judgment4

(ntimely entries and e@its

"n(estors tend to follow an irrational start and stop approach to the mar3et characteri>ed b$

untimel$ entries &after a mar3et ad(ance has long been underwa$* and e1it &after a long period of

stagnation and decline*4

i3h costs

"n(estors trade e1cessi(el$ and spend a lot on in(estment management4 A good

proportion of in(estors indulge in da$ trading in the hope of ma3ing quic3 profits4 )owe(er

more often transaction cost wipes out whate(er profits the$ ma$ generate from frequent trading4

!ver -ron3 Attitude to=ards ,osses and $rofits

An in(estor has an a(ersion to admit his mista3e and cut losses short4 "f the price falls2

contrar$ to his e1pectation at the time of purchase2 he somehow hopes that it will rebound and he

can brea3 e(en4 Surprisingl$2 such a belief persists e(en when the prospects loo3 dismal andthere ma$ be a greater possibilit$ of a further decline4 "f the price reco(ers due to fa(ourable

conditions2 there is a tendenc$ to dispose of the share when its price more or less equals the

original purchase price2 e(en though there ma$ be a fair chance of further increases4 The

ps$chological relief e1perienced b$ an in(estor from reco(ering losses seems to moti(ate such


22/29

beha(iour4 This means the tendenc$ is to let the losses run and cut profits short2 rather than to cut

the losses short and let the profits run4

R)SKS )& )&VES%ME&%

Ris3 is uncertaint$ of the income capital appreciation or loss or both4 E(er$ in(estment

&equit$2 debt2 propert$2 etc4* carries an element of ris3 that is unique to it4 Though ris3 cannot be

totall$ eliminated2 it can be managed b$ underta3ing effecti(e ris3 management4 To manage ris32

one first need to identif$ different 3inds of ris3s in(ol(ed in in(esting and then ta3e appropriate

steps to reduce it4

Ris3 and return share a direct relationship with one another4 Therefore2 an in(estment

which carries negligible ris32 will offer a low return &(i>4 bonds issued b$ the Reser(e an3 of

"ndia* while an in(estment which carries a higher ris32 also offers the potential of higher returns

&stoc3s*4All in(estments are a trade off5 between ris3 and returns4 8et us first discuss the t$pes

of ris3s4

%y7es of Ris5s

All in(estments carr$ their unique set of ris3s4 Though there are se(eral t$pes of ris3s2 the

important ones are ; mar3et ris32 credit ris32 interest rate ris32 inflation ris32 currenc$ ris3 and

liquidit$ ris34 These are briefl$ e1plained below9

a Mar5et Ris5 A share ma$ rise or fall depending on the fortunes of the compan$2 the industr$ it

is in2 or in response to in(estor sentiment4

6 +redit Ris5 This ris3 is attributed to debt in(estments wherein the borrower ma$ default on

interest andor principal repa$ment4

c )nterest Rate Ris5 ?hen interest rates rise2 fi1ed income in(estments lose (alue4 This is

because the in(estor will continue to earn the same &lower* interest rate until the in(estment

matures while mar3et interest rates ha(e alread$ gone up4 "n order to compensate for a lower

interest rate compared to the mar3et rate2 the fi1ed income in(estment will thus ha(e to be priced

at a lower rate4

d )nflation Ris5 Rising inflation will erode the (alue of $our income and asset4 Due to inflation2

the cost of products and ser(ices will rise and consequentl$2 $our future income and assets will

be worth less than what the$ are worth toda$4


23/29

e +urrency Ris5 =hanges in e1change rates between currencies could lead to decline in (alue of

$our in(estments4 ?ith "ndian in(estors now being allowed to in(est in other countries2 $ou will

now be e1posed to currenc$ ris3 i4e4 a fall in the (alue of the currenc$ in which $ou are in(esting

(is;U;(is $our home currenc$ i4e4 the Rupee4

f ,i9uidity Ris5 =ertain in(estments carr$ the ris3 of poor liquidit$ either due to the nature of

the asset or regulator$ reasons4 For e1ample2 propert$ is inherentl$ an illiquid in(estment as it

cannot be sold as simpl$ as selling stoc3s4 =ertain in(estments li3e the Reser(e an3 of "ndia

bonds are not transferable till maturit$4 "n(estments in Equit$ 8in3ed Sa(ings Schemes are

illiquid for a period of B $ears and in case $ou redeem from such schemes2 $our ta1 benefit is

withdrawn4

Ris5 Mana3ementOnce different 3inds of ris3s associated with in(estments are identified appropriate steps

can be ta3en to reduce these ris3s4 Some of these steps are9

a "iversification Most t$pes of ris3s can be managed b$ di(ersif$ing $our in(estments across

asset classes &stoc3s2 bonds2 properties etc4*2 industr$2 currencies etc4 Di(ersification spreads the

ris3 and reduces the ad(erse impact that an$ one in(estment might ha(e on a portfolio4

6 Research and Monitor Rigorous research and continuous monitoring will help in controlling

the mar3et and credit ris3 of $our in(estments4 This will caution beforehand to a(oid an

in(estment and alert in case the ris3 is increasing on an in(estment alread$ underta3en4

Ris5 %olerance ,evel Ris3 includes the possibilit$ of losing mone$4 )owe(er2 e1tra

considerations should be made in addition to the safet$ of the principal and the potential

for growth4 These considerations include the li3elihood of achie(ing the financial goals

$ou ha(e established4 Additionall$2 one should consider whether heshe is willing and able

to accept a higher le(el of ris3 in order to achie(e further rewards4

efore starting on the setting of the in(estment portfolio2 e(er$ in(estor should establish

hisher ris3 tolerance le(el4 Onl$ after this heshe is read$ to build strategies for the

accomplishment of hisher financial goals4 The higher the degree of ris3 in(ol(ed in the

in(estment portfolio the greater the chances of higher returns and failures4

The setting of the ris3 tolerance le(el is (er$ subjecti(e issue4 )owe(er2 $ounger

in(estors can afford more ris3 ta3ing since the$ ha(e more time to fi1 the losses4 On the other


24/29

hand older in(estors should appl$ more conser(ati(e approach since the$ ha(e less time in front

of them4 ut2 the$ should 3eep in mind that the$ greatl$ decrease their chances of faster

achie(ing their financial goals4

A portfolio that carries more bonds is considered more conser(ati(e and ris3 a(erse4

)owe(er2 the one that includes a greater percentage of stoc3s is more ris3 ta3ing with higher

potential of rewards4 Man$ financial e1perts recommend the di(ersification between in(estments

with different degrees of ris34 This is a good idea since $our portfolio will benefit from the rises

and falls of the different in(estments and will alle(iate the potential of losing mone$4

Ris5 $ersonalities ased on the ris3 capacit$ and ris3 tolerance2 ris3 appetite can be

decided4 This is the le(el of ris3 that one is read$ to bear4 roadl$ ris3 personalities can be

categorised at B le(els / =onser(ati(e2 alanced and Aggressi(e4 Each ris3 personalit$ has a

different objecti(e which it aims to achie(e through the in(estment portfolio4 These personalities

are e1plained below9

• +onservative 7ersonality For in(estors ha(ing this personalit$ preser(ation of the capital

in(ested is the ultimate goal2 e(en if it means compromising on the returns4

• Balanced 7ersonality 6eople with this t$pe of personalit$ wish to stri3e a balance between

high;ris3 and low;ris3 in(estments4

• A33ressive 7ersonality "n(estors with such personalit$ do not wish to compromise at all on the

returns2 e(en if their capital erodes4

RESEAR+ *A$

This stud$ on in(estor5s beha(iour is an attempt to 3now the profile and the

characteristics of the in(estors so as to understand their preference with respect to their

in(estments4 The main focus of the stud$ is to disco(er the influence of demographic factors li3e

gender and age on ris3 tolerance le(el of the in(estor4 The stud$ mainl$ concentrates on the

factors that influence an indi(idual in(estor before ma3ing an in(estment4 "t also studies the


25/29

(arious patterns in which in(estors li3e to in(est their mone$ based on their ris3 tolerance le(el

and other demographic factors li3e income le(el2 occupation etc4

&EE" '!R S%("2

"n(esting mone$ is a crucial and deciding the a(enues where to in(est needs a lot of

planning4 "n "ndia people are more conser(ati(e and hence prefer in(estments that are less ris3$4

Similarl$ there are other demographic factors li3e age2 income le(el2 gender which affect their

decision4 As the a(ailabilit$ of financial products increase2 perception of in(estors towards such

a(enues changes o(er a period of time4 "t becomes important for a mar3eter to understand the

perception of in(estors towards in(estment a(enues to successfull$ pitch the product4 Mar3eting

is 3nown as meeting needs profitabl$4 "f the mar3eter is able to understand the mindset of

in(estor towards a product then heshe will be in a position to mar3et the product4 This report

attempts to stud$ the beha(ior of "ndian in(estors while ma3ing an in(estment4 )ere we also

loo3 upon other factors that influence them while ma3ing in(estment decisions4 "nno(ations in

financial products li3e deri(ati(es2 unit lin3ed insurance products2 fund of funds li3ewise are not

easil$ understood b$ the in(estor4 )ence the need for this stud$ arises to understand what e1actl$

an "ndian in(estor thin3s before in(esting hisher mone$ and how much ris3 heshe is willing to

ta3e4 This report gi(es the mar3eter and other peers to successfull$ mar3et the financial products

which are more popular2 as it gi(es information regarding the perception of in(estors towards

in(estment a(enues in "ndia4

!BE+%)VES !' %E S%("2

$rimary !6ectives

• To stud$ the in(estment characteristics of in(estors

• To stud$ the objecti(es of in(estment plan of an in(estors

• To stud$ the demographic information of in(estors


26/29

Secondary !6ectives

• To 3now the preferred in(estment a(enues of in(estors

• To identif$ the preferred sources of information influencing in(estment decisions

• To understand the ris3 tolerance le(el of the in(estors and suggest a suitable portfolio

• To stud$ the dependenceindependences of the demographic factors &%ender2 Age2 income le(el*

of the in(estor and hisher ris3 tolerance le(el

2$!%ES)S

A h$pothesis describes the relationship between or among (ariables4 A good h$pothesis is

one that can e1plain what it claims to e1plain2 is testable and has greater range2 probabilit$ and

simplicit$ than its ri(als4 There are two approach of h$pothesis testing9

-* =lassical or sampling theor$ statistics and +* The a$esian approach

"n the present dissertation chi square test has been used to find out the

dependenceindependence of (arious factors that influence in(estment decision4

)$pothesis has been found between following factors9

• %ender and ris3 tolerance of respondents

• Age and preferred in(estment a(enues b$ the respondents

• "ncome and in(estment a(enues preferred b$ the respondents

• Age of respondents and time hori>on for in(estment

• Age and ris3 tolerance of the respondents


27/29

S+!$E !' S%("2ased on pre(ious research in related areas2 a questionnaire was constructed to measure the

in(estment pattern of indi(iduals on the basis of demographic characteristics and the ris3

tolerance of in(estors was also calculated4 "t helped us to understand how an "ndian in(estor

beha(es while in(esting4 This stud$ will be helpful to mutual fund companies and other

in(estment companies to understand indi(idual beha(iour of in(estors so that the$ could build

suitable in(estment options for them indi(iduall$4 Also this stud$ will help the in(estor to decide

the areas where the$ could in(est4

,)M)%A%)!&S !' S%("2

V Sample si>e is small because of the time constraint

V Respondent ma$ be hesitant to pro(ide their in(estment details

V eha(ior of in(estors doesn5t remain same for long time

V Time for the stud$ is limited


28/29

6ER"OD OF T)E ST!DH

The duration of the project is . da$s

RESEAR+ ME%!"!,!*2

RESEAR+ "ES)*&

Research methodolog$ is a wa$ to s$stematicall$ sol(e the research problem4 "t ma$ beunderstood as a science of stud$ing how research is done scientificall$4

Research t$pe

Man$ in(estors were reluctant to re(eal their in(estment details especiall$ the amount of

mone$ in(ested so2 referral sampling method is used for this stud$4

Sample description

The sample was drawn from the population of the potential in(estors from "ndia4 A sur(e$

was conducted to understand the in(estor5s beha(iour with the help of questionnaire4 "t was

carried out with a sample si>e of +, in(estors4

%!!,S !' "A%A +!,,E+%)!&


29/29

$rimary data The data has been collected directl$ from respondent with the help of structured

questionnaires4

Secondary data The secondar$ data has been collected from (arious maga>ines2 journals2

newspapers2 te1t boo3s and related websites4

ME%!" !' A&A,2S)S

Statistical techniques li3e =hi square test2 simple percentage method are used to anal$>e

and interpret raw data4 =hi square was used to show the dependenc$independenc$ of (arious

factors4

After collecting the data its (ariable ha(ing defined character2 it was tabulated and

anal$>ed with the help of charts and graphs in Microsoft E1cel +,,4

Documents

Mahindra Reddy (Investment Avenues)