Pawan JhabakM.Com, P.G.D.Ed.M.,

Ex. Vice-principal.,Rustomjee Business School,

Dahisar [West], Mumbai-400 068.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

First Edition : 2012Second Revised Edition : 2013

Third Revised Edition : 2015

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: himpub@vsnl.com; Website: www.himpub.com

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PREFACE

“Genius is the ability to reduce the complicated to the simple”… Albert Einstein

I earnestly hope that the book will make complicated Subject IAPM/SAPM/PMS, simple tounderstand and score high marks in exams.

I look forward for constructive suggestion from the readers.I am thankful to one and all who have contributed directly or indirectly to make this 3rd edition

possible.This book is user-friendly and different. As one goes through the book, one will feel the

difference, and this will help to master Portfolio Management in an enjoyable manner, with lifetimeutility.

This is ‘unique’ All in One Book which can be used by students of TYBMS/TYBBI/TYBCOM/TYBFM and other Professional Courses, for e.g., MMS/MBA. The book covers ‘Univer-sity’ Prescribed Syllabus with Practical Dimension!! Let's L-Earn!!

Best Wishes!!Million Thanks.

AuthorPAWAN JHABAK

M.Com, P.G.D.Ed.M.,Mobile: 9324343830

scorejhabak@gmail.comVisiting Faculty: S.K. SomaiyaEx. Visiting Faculty: Amity Business School Vivekanand Education Society Lala Lajpatrai College Rajiv Gandhi Institute of Technology Jaro Education Mumbai Education Trust Sydenhm Institute of Management Narsee Monjee College Usha Pravin Gandhi Bhavan’s College (Andheri) Rizvi College Akbar Peerbhoy Bhurani College Poddar College, etcEx.Vice-principal Rustomjee Business School.

BIBLIOGRAPHY AND ACKNOWLEDGEMENTS

I have benefited from scores of books and hundreds of articles. As it is impossible to list allof them, the overall reference book is mentioned:

Prasanna Chandra, IAPM, Tata McGraw-Hill, 2008. The Economist Pocket World in Figures, 2010.

I would like to express my gratitude to:

The Pioneers in the field of Portfolio Management (Prof. Ramnath Iyer, Rajiv Mishra,Prof. Navin Rastogi, Prof. Vishal Mehta, Prof. Mihir Mehta, Prof. P.K. Bandgar,Prof. Arun Pujari, Prof. Yogesh Prabhu, Prof. Mahalakshmi, Prof. Raj, Prof. Telang, Prof.Arvind Dhond, Prof. Subramaniam, and Prof. Dhimant Kapadia) who have shaped myunderstanding through their rich and varied contributions.

Students for providing the stimulus for writing this book. Deepak Himesh. My support staff and Staff of Himalaya Publishing House. My Grandmother Jhamkudevi, Wife Bharti, Daughter Param. My father in law Bhikamchand Gelra.

I wish you score the best in exams and reach highest level in Professional Career.

PAWAN JHABAKMobile: 9324343830

Ex. Vice PrincipalRustomjee Business School

Introduction Meaning of Investment – Investment Alternatives, Investment Avenues.· Meaning of Portfolio – What is Portfolio Management? – Objectives, Principles of

Portfolio Construction.

Investment Alternatives Non-marketable Financial Assets – Bonds or Fixed Income Securities – Equity Shares –

Mutual Funds – Schemes of Mutual Funds (Only Concept of Equity Scheme, HybridScheme, Debt Scheme).

Calculation of “Net Assets Value” (Only Basic Problem). Evaluation of Portfolio Performances.

Securities Market Primary Equity Market, IPO, Book Building Process, Red Herring Prospectus. Secondary Market – Stock Markets, Trading and Settlement

Debt Market Role of SEBI

Time Value of Money Present Value Future Value Present Value of Annuity Future Value of Annuity

(Compounding and Discounting Factors Concepts and Simple Problems Based on It)

Risk and Return Meaning and Types of Returns

Holding Period Return – Expected Return – Annualized Return – Measurement of Return. Risk – Types of Risk – Measurement of Risk.

Fundamental and Technical AnalysisEquity and Debenture Valuation Equity: Balance Sheet Valuation – Dividend Discount Model – Zero Growth – Constant

Growth – Multiple Growth Model – Price Earnings Ratio Model. Debentures: Debt Instruments – Bond Valuation and Pricing – Yield to Maturity (YTM),

Interest Rate Risk – Determinants of Interest Rate Risk.

SYLLABUS

Investment Analysis and Portfolio Management

TYBMS – SEMESTER VI

(1) An Overview:Investment Alternatives – Investment Attributes – How Does Various InvestmentAvenues Compare? – Investment Versus Speculation – Financial Markets – PortfolioManagement Process – Sources Investment Risk – Approaches to Investment Deci-sion Making

(2) Investment Alternatives:Non-marketable Financial Assets – Money Markets Instrument – Bonds or FixedIncome Securities – Equity Shares – Mutual Fund Schemes – Life Insurance – RealEstate Precious Objects.

(3) Securities Market:Primary Equity Market – Secondary Market and Its Operations – NSE and BSE –Buying and Selling Shares – Stock Market Quotations and Stock Market Indices –SEBI and Future Challenges – Stock Market Abroad – Government Securities Market– Corporate Debt Market – Money Market.

(4) Risk and Return:Measuring Historical Return – Measuring Historical Risk – Measuring Expected (Ex.ante) Return and Risk

(5) The Time Value of Money:Time Lines and Notation – Future Value of a Single Amount – Present Value of a SingleAmount – Future Value of an Annuity – Present Value of an Annuity – Intra-yearCompounding and Discounting.

(6) Financial Statement Analysis:Financial Statement – Financial Ratio – Comparative Analysis – DuPont Analysis –Applications of Financial Statement Analysis – Problems in Financial Statement Analy-sis – Guidelines for Financial Statement Analysis.

(7) Portfolio Theory:Portfolio Return – Portfolio Risk – Portfolio Diversification – Optimal Portfolio – TheSingle Index Model.

(8) Capital Asset Pricing Model:Basic Assumptions – Capital Market Line – Security Market Line – Inputs Required forApplying CAPM – Empirical Evidence on Capital Asset Pricing Model.

(9) Efficient Market Hypothesis:Random Walk and Search for Theory – What is an Efficient Market? – EmpiricalEvidence on Weak Form Efficient Market Hypothesis – Empirical Evidence on Semi-strong Form Efficient Market Hypothesis – Empirical Evidence on the Strong FormEfficient Market Hypothesis – An Alternative Paradigm – What is the Verdict? –Implications for Investment Analysis.

SYLLABUS

Security Analysis and Portfolio ManagementTYBBI – SEMESTER V

(10) Analysis and Valuation of Debt:Types and Features of Debt Instruments – Bond Pricing – Bond Yields – Risk in Debt– Interest Rate Risk – Rating of Debt Securities – The Yield Curve – Determinants ofInterest Rates – Analysis of Convertible Bonds – Bond Portfolio Management.

(11) Equity Valuation:Balance Sheet Valuation – Dividend Discount Model – Earnings – Multiplier ApproachEarnings Price Ratio, Expected Return and Growth – Equity Portfolio Management.

(12) Fundamental Analysis:Macroeconomic Analysis – Industry Analysis – Company Analysis: The Study ofFinancials – Company Analysis: Going Beyond Numbers – Estimation of IntrinsicValue – Some Tools for Judging Undervaluation or Overvaluation.

(13) Technical Analysis:What is Technical Analysis? – Charting Techniques – Technical Indicators – TestingTechnical Trading Rules – Evaluation of Technical Analysis.

(14) Options:How Options Work? – Options and Their Pay-offs Just Before Expiration – OptionStrategies – Factors Determining Option Values – Binomial Model for Option Values– Black and Scholes Model – Equity Options in India.

(15) Futures:Features of a Futures Contract – Futures Contracts: The Global Scene – EquityFutures in India – Pricing of Future Contracts – Use of Futures Contracts.

(16) Portfolio Management Framework:Specification of Investment Objectives and Constraints – Selection of Asset Mix –Formulation of Portfolio Revision – Performance Evaluation.

UNIT – I: Introductionl Avenues and Multiple Investments.l Need for Designing and Investment Portfolio.l Relevance of Portfolio Management in Different Sectors of Financial Markets.l Popularity of Equity Portfolio Management Services.

UNIT – II: Portfolio Theory and Applicationl Markowitz Portfolio Theory.l Efficient Frontier and Investor Utility.l The Capital Asset Pricing Model – Expected Return and Risk – Security Market Line

(SML).l Arbitrage Pricing Theory.l Capital Market Line.

UNIT – III: Performance Evaluation of a Portfoliol Treynor's Portfolio Performance Measure.l Sharpe's Portfolio Performance Measure.l Jenson's Measures.l Factors Affecting Performance Measures.l Reliability of Performance Measures.l EMH (Efficient Market Hypothesis).

UNIT – IV: Portfolio Management Services in Indial Portfolio Management Service Providers in India.l Procedure for Setting Portfolio Management Services.l Regulation of Portfolio Management Services.l Evaluation of Present Scenario and Estimation of Future Prospects.

SYLLABUS

Portfolio Management ServicesTYBFM – SEMESTER V

COURSES BMS BFM BBI

SUBJECTS IAPM PMS SAPM

Sr. No. CHAPTER Pg. No

1 Investment Overview 1 - 7

2 Portfolio Management 8 - 13

3 Investment Avenues 14 - 39

4 Portfolio Management Framework 40 - 59

5 Securities Market × 60 - 70

6 Public Issue × × 71 - 80

7 Prospectus for Issue of Shares × × 81 - 86

8 Time Value of Money × 87 - 106

9 Risk and Return 107 - 136

10 Fundamental and Technical Analysis 137 - 174

11 Valuation of Debentures × 175 - 185

12 Valuation of Equity 186 - 208

13 Efficient Market Hypothesis × 209 - 211

14 Portfolio Management Services in India × × 212 - 216

15 Options and Futures × × 217 - 222

16 Strategies of the Great Masters(For MMS) × × × 223 - 228

17 Model Question Paper 229 - 236

CONTENTS

QUESTION PAPER PATTERN

FOR TYBMS IAPM APR 2015 ATTEMPT

Duration – 2.5 hours. 75 Marks.

N.B: 5 Question of 15 Marks Each.All Question compulsory.

Attempt any 2Q.1 (a) Sum Portfolio mgmt Framework 7.5 marksQ.1 (b) Sum IPO/NAV 7.5 MarksQ.1 (c) Theory 7.5 Marks

Attempt any 2Q.2 (a) Sum Time value of Money 7.5 marksQ.2 (b) Sum Time value of Money 7.5 marksQ.2 (c) Theory 7.5 Marks

Attempt any 2Q.3 (a) Sum RISK AND RETURN 7.5 marksQ.3 (b) Sum fundamental Analysis 7.5 MarksQ.3 (c) Theory 7.5 Marks

Attempt any 2Q.4 (a) Sum Valuation of equity 7.5 marksQ.4 (b) Sum Valuation of debentures 7.5 MarksQ.4 (c) Theory 7.5 MarksQ.5 Case Study Investment Alternatives 15 Marks

DETAILED CONTENTS

1. Investment Overview 1 - 71.1 Introduction1.2 Meaning of Investment1.3 Investment Alternatives1.4 Investment Attributes1.5 Investment and Speculation1.6 Structure of Financial System

2. Portfolio Management 8 - 132.1 Meaning of Portfolio2.2 Construction of Portfolio2.3 Portfolio Composition2.4 Principles of Portfolio Construction2.5 Approaches to Investment Decision Making

3. Investment Avenues 14 - 393.1 Non-marketable Financial Assets3.2 Money Market Instruments3.3 Bonds or Debentures3.4 Equity Shares3.5 Financial Derivatives3.6 Life Insurance3.7 Real Assets3.8 Education3.9 Business

3.10 Mutual Fund

4. Portfolio Management Framework 40 - 594.1 Element or Phases of Portfolio Management Framework4.2 Portfolio Management4.3 Formulation of Portfolio Strategy4.4 Measure of Return4.5 Performance Evaluation Measures4.6 Illustration and Solution

5. Securities Market 60 - 705.1 Participants in the Securities Market5.2 Structure of the Securities Market5.3 Policy Recommendations5.4 Regulatory Framework of Capital Market

6. Public Issue 71 - 806.1 Public Issue6.2 Book Building6.3 Principal Steps in an IPO6.4 Concept Testing

7. Prospectus for Issue of Shares 81 - 867.1 Prospectus7.2 Contents of a Prospectus7.3 Concept Testing

8. Time Value of Money 87 - 1068.1 Concept8.2 Illustration

9. Risk and Return 107 - 136

9.1 Risk-return Relationships of Various Securities Risk9.2 Risk Preference of Investors/Risk Group9.3 Illustration9.4 A Risk Tolerance Questionnaire

10. Fundamental and Technical Analysis 137 - 17410.1 Fundamental Analysis10.2 Technical Analysis10.3 Trend Analysis10.4 Chart Analysis10.5 Calculation of Beta10.6 Technical Analysis Illustration10.5 Fundamental 'Ratio Analysis' Theory10.6 Ratio Illustration

11. Valuation of Debentures 175 - 18511.1 Analysis and Valuation of Debt11.2 Illustration

12. Valuation of Equity 186 - 20812.1 Concept12.2 Balance Sheet Valuation12.3 Balance Sheet Valuation: Illustrations12.4 Equity Shares Valuation Models12.5 Illustration12.6 Capital Asset Pricing Model12.7 CAPM Illustration

13. Efficient Market Hypothesis 209 - 21113.1 Introduction to Efficient Market Hypothesis13.2 Random Walk Theory13.3 Efficient Market13.4 Efficient Market Hypothesis13.5 An Alternative Paradigm13.6 The Verdict

14. Portfolio Management Services in India 212 - 21614.1 Portfolio Management Services — Introduction14.2 Procedure for Setting Up Portfolio Management Services14.3 FAQ (From Website of www.Sebi.Gov.In)

15. Options and Futures 217 - 22215.1 Introduction15.2 Options and Futures15.3 Binomial Model for Option Values15.4 Futures Contracts15.5 Pricing Futures

16. Strategies of the Great Masters 223 - 22816.1 Benjamin Graham16.2 Philip Fisher16.3 Warren Buffet16.4 John Templeton

17. Model Question Paper 229 - 236

Investment Overview 1

1 INVESTMENT OVERVIEW

1.1 INTRODUCTIONInvestors choose to hold groups of securities rather than single security that offers the greater

expected returns. They believe that a combination of securities held together will give a beneficialresult if they are grouped in a manner to secure higher return after taking into consideration the riskelement. Traditional portfolio analysis has been of a very subjective nature but it has provedsuccessfull to some investors who have made their investments by making analysis of individualsecurities through evaluation of risk and return conditions. Investor's has been able to get themaximum return at the minimum risk. The normal method of calculating the return on individualsecurity is to find out the amount of dividends, price earning ratios, common holding period andan estimate of the market value of the securities. The modern portfolio theory believes in themaximisation of return through a combination of securities. It deals with the relationship betweendifferent securities and interrelationships of risks between them. An investor can achieve greatersuccess by making a choice of investment outlets and combining a security of low risk with anothersecurity of high risk.

1.2 MEANING OF INVESTMENTThe concept of investment has many meanings. Investment is the employment of funds

with the aim of getting return on it. It is the commitment of funds which have been saved fromcurrent consumption with the hope that some benefits will be received in future. Thus, it is a rewardfor waiting for money. Savings of the people are invested in assets depending on their risk appetiteand return potential.

There are two concepts of investment:(1) Economic Investment: The concept of economic investment means additions to the

capital stock of the society. The capital stock of society is the goods which are used in theproduction of other goods. The term investment implies the formation of new and productive capitalin the form of new construction and produce durable instrument such as plant and machinery,inventories and human capital are also included in this concept. Thus, an investment, in economicterms means an increase in building, equipment, inventory etc.

2 Investment Overview

(2) Financial Investment: This is an allocation of monetary resources to assets that areexpected to yield some gain and return over a given period of time. It is a general or extended senseof the term. It means an exchange of financial claims such as shares and bonds, etc. Financialinvestment involves contracts written on pieces of paper such as shares and debentures. Peopleinvest their funds in Shares, Debentures, Fixed deposits, National Saving Certificates, Life InsurancePolicies, Provident Funds etc. In their view, investment is a commitment of funds to derive futureincome in the form of interest, dividends, premiums, pension benefits and the appreciation of thevalue of their principal capital.

Meaning of SecurityA security means a document that gives its owner a specific claim of ownership of a particular

financial asset. Financial market provide facilities for buying and selling of financial claims andservices. Thus, securities are the financial instruments which are bought and sold in the financialmarket for investment. The important financial instruments are shares, debentures, bonds etc. Otherfinancial instruments are also known as securities such as Treasury Bills, Mutual Fund Units, FixedDeposits, Insurance Policies, Post Office Savings like National Savings Certificates, Public ProvidentFunds etc.

1.3 INVESTMENT ALTERNATIVESWide varieties of investment avenues are now available in India. An investor can himself select

the best avenue after studying the merits and demerits of different avenues. Even financialadvertisement, newspaper supplements on financial matters and investment journals offer guidanceto investors in the selection of suitable investment avenues. The following investment avenues arepopular and used extensively in India:

(1) Investment in shares, debentures of bonds of different types issued by private sectorcompanies, and public sector companies.

(2) Postal Savings Schemes.(3) PF, PPF and other tax sheltered savings schemes such as National Savings Schemes,

National Savings Certificates and Tax Savings Schemes of LIC, Infrastructure bonds etc.(4) Investment in investment intermediaries such as Mutual Fund Companies run by LIC,

HDFC, Reliance, Tata, UTI, etc.(5) Deposits in companies (public deposits) or deposits in public sector organisations and

banks.(6) Life insurance investment, i.e., investment in different life policies such as whole life

policy, endowment policy, health Insurance etc.(7) Investment in gold, silver, precious metals and antiques.(8) Investment in real estates.(9) Investment in gilt-edged securities and securities of government and semi-government

organisations (e.g., relief bonds, bonds of port trusts, treasury bills, etc).It may be noted that from above list there are some avenues/investment schemes where tax

benefits are available. Such investment schemes are called tax savings schemes.

‘No Price is Too High for a Bull or Too Low for a Bear’.

Investment Overview 3

The following figure indicates alternative avenues for investment.

1.4 INVESTMENT ATTRIBUTESEvery investor has certain specific objectives to achieve through his long-term/short-term

investment. The objectives include safety and security of the funds invested (principal amount),profitability (through interest, dividend and capital appreciation) and liquidity (convertibility intocash as and when required). These objectives are universal in character as every investor will liketo have a fair balance of these three financial objectives.

Investment avenue selected should be suitable for achieving both the objectives (financial andpersonal). Merits and demerits of various investment avenues need to be considered in the contextof such investment objectives.

(1) Period of Investment: Period of investment is one major consideration while selectingavenue for investment. Such period may be short (upto one year), medium (one or three years) orlong (more than three years). Return/rate of interest is normally more in the case of longer terminvestment while it is less in the shorter period investment. The period of investment relates toliquidity. An investor has to decide when he needs money back and adjust the period accordingly.LIC/PPF/EPF policy is an investment for a long period. Balance in the savings bank account is ashort-term investment with highest liquidity but lowest rate of return.

(2) Risk in Investment: Risk is another factor which needs careful consideration whileselecting the avenue for investment. Risk is a normal feature of every investment as an investor hasto part with his money immediately and has to collect it back with some benefit in due course. Therisk may be more in some investment avenues and less in others.

‘Every Time a Trade is Made, Somebody is Wrong’.

Gold,Silver etc.

Shares andDebentures

GOISavingsBonds

MutualFunds

PF andPPF

RealEstates

National(Postal)Savings

SchemesBank

Deposits

PublicDeposits

FinancialDerivatives

LICSchemes

MoneyMarket

Securities

InvestmentAvenues

4 Investment Overview

The risk in the investment may be related to non-payment of principal amount or return/interest thereon. In addition, liquidity risk, inflation risk, market risk, business risk, political risk,etc. are some more risks connected with the investment made. The risk in investment depends onvarious factors. For example, the risk is more, if the period of maturity is longer. Similarly, the riskis less in the case of debt instrument (e.g., govt. securities, debentures) and more in the case ofownership instrument (e.g., Equity share, F&O). In addition, the risk is less if the agency issuingsecurity is creditworthy. It is always desirable to select an investment avenue where the riskinvolved is minimum/comparatively less/manageable. Thus, the objective of an investor is tominimise the risk and to maximise the return out of the investment made.

The following points are considered for selecting suitable investment avenue:

The objectives can be classified on the basis of the investor’s approach as follows:(a) Short-term High Priority Objectives: Investors have a high priority towards achieving

certain objectives in a short time. For example, a family will give high priority to buy a house. Thus,investors will go for high priority objectives and invest their money accordingly.

(b) Long-term High Priority Objectives: Some investors look forward and invest on thebasis of objectives of long-term needs. They want to achieve financial independence on retirement.For example, investing for post-retirement period or education of a child etc... Investors usuallyprefer a diversified approach while selecting different types of investments.

(c) Low Priority Objectives: These objectives have low priority in investing. These objectivesare not painful. After investing in high priority assets, investors can invest in these low priorityassets. For example, provision for tour, domestic appliances, car etc.

‘A Cynic Knows the Price of Everything and the Value of Nothing’.

Period ofInvestment

Risk inInvestment

MarketStanding ofCompany

MarketConditions

LoanFacility

TaxBenefits

Return onInvestment

InvestmentObjectives

Selection ofInvestment

Avenues

Investment Overview 5

(d) Money Making Objectives: Investors put their surplus money in this kind of investment.Their objective is to maximise wealth. Usually, investors invest in shares of companies, Real Estate,commodities, F&O etc. to achieve money making objectives.

1.5 INVESTMENT AND SPECULATION“Speculation, is an activity, quite contrary to its literal meaning, in which a person assumes

high risk, often without regard for the safety of his invested principal, to achieve large capitalgains.” The time span in which the gain is sought to be made is usually very short.

Investment involves putting money into an asset which is not necessarily marketable in orderto enjoy a series of returns. The investor sacrifices some money today in anticipation of a financialreturn in feature.

An investment can be distinguished from speculation in three ways – risk, capital gain andtime period. Risk has a definite financial meaning. It is a possibility of incurring a loss in a financialtransaction. Investment involves limited risk/manageable risk while speculation is considered as aninvestment of funds with high risk. The purchase of a security for earning a stable return over aperiod of time is an investment whereas the primary motive to earn high profits through pricechanges is termed as speculation. Thus, speculation involves buying a security at low price andselling at a high price to make quick capital gain or vice versa, i.e., Intra-day trading. Investmentinvolves longer term allocation of funds whereas speculation involves holding a security for a short-term and trading quickly for earning higher gain. Also speculation generally involves high leverageTrading on Equity.

Warren Buffet stated Capital Market is a place where money moves from “Disinvestor to aninvestor”.

Elements of Investments(a) Return: Investors buy or sell financial instruments in order to earn return on them. The

return on investment is the reward to the investors. The return includes both current income andcapital gains or losses, which arises by the increase or decrease of the security price.

(b) Risk: Risk is the chance of loss due to variability of returns on an investment. In case ofevery investment, there is the chance of loss. It may be loss of interest, dividend or even principalamount of investment. However, risk and return are inseparable. Return is a precise statistical termand it is measurable. But the risk is not precise statistical term. However, the risk can be quantified.The investment process should be considered in terms of both risk and return.

(c) Time: Time is an important factor in investment. It offers several different courses ofaction. As time moves on, analysts believe that conditions may change and investors may revaluatethe expected return and risk for each investment made.

1.6 STRUCTURE OF FINANCIAL SYSTEMThe financial system implies a set of complex and closely connected institutions, agents,

practices and markets. The following is a typical structure of financial system in any economy.

‘Money Management is 10 Per Cent Inspiration and 90 Per Cent Perspiration’.

6 Investment Overview

(a) Financial Institutions:Financial institutions are business organisations who act as mobilisers and depositories of

savings, and suppliers of credit or finance. These institutions provide various financial services tothe business organisations and common people. Financial institutions can be divided into bankingand non-banking institutions (NBFC, MFI, etc).

(b) Financial Markets:Financial markets are the centers which provide facilities for buying and selling of financial

claims and services. The participants in the financial market are financial institutions, brokers,dealers, borrowers and investors. They are interlinked by the laws, contracts and communicationnetworks. Financial markets can be divided into two parts. The primary market which deals in newfinancial claims or instruments. It is also called as New Issue Market. The secondary market dealsin securities which are already issued by the companies. Stock exchange is an example of secondarymarket (BSE, NSE, NASDAQ). The primary markets mobilise savings and supply additional capitalto the companies. Secondary markets do not supply direct capital but indirectly help the companiesand investors in providing liquidity.

The capital market is co-extensive not only with the stock market but it is much wider thanthe stock market. The financial markets may be classified as organised or unorganised, formal orinformal and domestic or foreign markets.

(c) Financial Instruments:Financial instruments are claims to the payment of sum of money in future or a periodic

interval. For example, the important financial instruments are shares, debentures, bonds, fixeddeposits etc. Regular payment in the form of interest or dividend is paid by the company to theinvestors. These instruments are classified as primary or secondary instruments. The primary

‘To Err is Human, To Hedge Divine’.

FinancialSystem

FinancialInstitutions

FinancialMarkets

FinancialInstruments

FinancialServices

Investment Overview 7

instruments are issued by the ultimate investors directly to the ultimate savers such as equity shares,debentures. Secondary instruments are issued by financial intermediaries to the ultimate savers suchas bank deposits, mutual fund units and insurance policies. The financial instruments differ fromeach other in respect of their investment characteristics. The important characteristics are liquidity,transferability, volatility, maturity, risk and return. Market conditions and risk appetite of investorplay an important role in selection of financial instrument.

(d) Financial Services:A financial service is any kind of service of a financial nature offered by a financial service

provider. All banking and insurance related services are included in this concept. These services areintangible and invisible. There should be proximity between the service provider and the consumerin order to complete a service transaction. These services cover a wide range of economic activities.Financial services have developed to meet the needs of investors. Banking and insurance aretraditional financial services. The modern financial services include over-the-counter services, sharetransfer, pledging of shares, mutual funds, factoring, discounting, venture capital, credit cards,PMS, It Internet development results into Lower cost and Greater convienience for both parties.Wealth Management Services, etc. Internet is helping to improve various financial services.

REVIEW QUESTIONS

Q.1 Concept Testing(a) Financial Investments(b) Investment attributes.

Q.2 State and explain the structure of financial system.

'There is no problem. All we lack is courage'Pawan Jhabak.