Investment Management: Concept of Investment Meaning of Investment

INVESTMENT MANAGEMENT
CONCEPT OF INVESTMENT
MEANING OF INVESTMENT
Investment refers to putting your money in an asset with the aim of

generating income. Financial investments come in different forms, such as
mutual funds, unit linked investment plans, endowment plans, stocks,
bonds and more. However, the primary goal behind all investments
remains the same, i.e., to increase the value of your invested money.
FEATURES OF GOOD INVESTMENT
Risk and return
Risk and return are the twin determinants that shape every
Investment decision. In the context of Investment, risk encapsulates the
possibility of not achieving expected returns or experiencing losses. It's
vital to recognise that higher levels of risk often accompany the potential
for higher returns. This relationship underscores the importance of
aligning one's risk tolerance with one's choices.
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Liquidity
Liquidity is the ease and speed at which an Investment can be converted

into cash without significantly affecting its value. Cash itself is the most
liquid asset, as it can be used immediately for transactions. Conversely, real
estate or certain Investments might have lower liquidity due to the time
required for selling and the potential impact on the sale price.
Time horizon
Short-term Investments, such as day trading or short-maturity bonds, focus

on preserving capital and generating immediate gains. Medium-term
Investments span several years and aim to achieve growth or specific
financial milestones. Long-term Investments, often held for decades,
leverage the power of compounding to deliver substantial returns
potentially.
Diversification
Diversification is akin to distributing risk across various baskets to protect

against unforeseen events. It involves investing in a mix of asset classes,
sectors, and geographic regions to help decrease the impact of poor
performance in any single area. By diversifying, an investor can potentially
achieve more stable returns over time, as different assets often react
differently to economic events.
Inflation protection
Inflation is the eventual erosion of purchasing power over time due to

rising prices. Certain Investments have historically acted as a hedge against
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inflation, aiming to retain or even increase their value in the face of rising
costs. These assets include commodities like gold and oil, real estate, and
specific equities.
Tax efficiency
Tax efficiency in investing focuses on optimising after-tax returns by

managing the tax impact of Investment decisions. This involves
understanding the tax implications of different choices and structuring
Investments to minimise tax liabilities.
Market volatility
Market volatility underscores the dynamic nature of financial markets,

where prices can rapidly fluctuate due to economic data releases,
geopolitical events, or investor sentiment. Understanding market volatility
is essential for maintaining a disciplined Investment approach.
Investment goals
Defining clear and realistic Investment objectives provides a roadmap for

asset allocation and risk tolerance. Short-term goals might lean towards
lower-risk, more liquid Investments, while long-term objectives allow for
exposure to higher-risk, higher-return assets.
Cost efficiency
Cost efficiency is a crucial yet often overlooked characteristic of

Investment. It pertains to the expenses associated with acquiring,
managing, and eventually selling Investments. These costs can impact the
overall returns an investor receives.
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PROCESS OF INVESTMENT
Step 1: Setting financial goals
Setting clear financial goals is the cornerstone of any successful Investment

journey. Short-term goals like purchasing a car and long-term objectives
such as retirement planning must be defined and prioritised. These goals
act as guiding stars, shaping your Investment strategies and providing
direction.
Step 2: Assessing risk tolerance
Understanding your risk tolerance is pivotal in making Investment

decisions. It refers to your ability to endure fluctuations in the value of
your Investments. Assessing your risk tolerance involves evaluating your
comfort level with market uncertainties.
Conservative Investors prefer stability, while aggressive ones seek high

returns despite higher risks. This step ensures that your Investments align
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with your temperament, making your financial journey not just profitable
but also emotionally secure.
Step 3: Creating a budget and emergency fund
A strong financial foundation starts with disciplined budgeting and building

an emergency fund. Budgeting helps in tracking income and expenses,
ensuring surplus funds for Investments. Simultaneously, having an
emergency fund safeguards Investments from unexpected events such as
medical emergencies or sudden job loss.
The emergency fund acts as a safety net, preventing the need to liquidate
Investments during crises, thus preserving long-term goals.
Step 4: Diversifying Investment portfolio
Diversification is the golden rule of Investments. It refers to spreading

Investments across different asset classes, such as stocks, bonds, mutual
funds, and real estate. This strategy mitigates risks by reducing the impact
of poor performance in any single Investment. Diversifying ensures that a
downturn in one sector doesn’t devastate your entire portfolio, balancing
potential losses.
Step 5: Conducting research and analysis
Informed decisions are the bedrock of successful investing. Conducting

thorough research and analysis is imperative before making Investment
choices. Fundamental analysis delves into a company's financial health,
while technical analysis studies market trends. Staying updated on
economic indicators and market dynamics enables anticipation of trends.
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Step 6: Making informed Investment decisions
Professional guidance and continuous monitoring are pivotal in making

informed Investment decisions. Seeking advice from financial experts
provides nuanced insights tailored to your specific needs. Regularly
monitoring Investment performance is essential, ensuring they align with
your goals. Adapting strategies to market changes and evolving life goals is
critical.
Step 7: Regularly reviewing and rebalancing the portfolio
Investment strategies need periodic review and adjustment. Regular

portfolio reviews help gauge performance against goals. Rebalancing
involves adjusting asset allocation to maintain the desired risk and return
levels. Life events like marriage or nearing retirement may necessitate
changes in the Investment approach.
INVESTMENT ATTRIBUTES
Risk efficient. Risk is something to be avoided, when- and wherever

possible. To know the quality of your portfolio, you must know how much
return to expect from it and how likely it is to deliver something else. A
good portfolio delivers the expected return you need with the least possible
risk.
Tax efficient. Like other costs, taxes must be minimized in order to

maximize the quality of your investment strategy and the portfolio it
produces.
Simple. A good portfolio minimizes complexity and avoids using

unnecessary components. If your portfolio contains more than 20
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securities, you can probably do better. When it comes to selecting the

building blocks of your portfolio, fewer is better than more.
Transparent. You should clearly understand what each element of your

portfolio is, and what it is supposed to do. Trust is not something that
should be given to anyone in the investment business.
Risk averse. Your portfolio should not expose you to any more risk than is
necessary to meet your objectives. For some, this will mean a portfolio
composed of mostly stocks. For others, it will mean all cash. For most, it
will mean something in between.
What are Money Market Instruments?
The main characteristic of money market instruments is that they can be

easily converted to cash, thereby preserving an investor's cash
requirements. The money market and its instruments are usually traded
over the counter and, therefore, cannot be done by standalone individual
investors themselves. It has to be done through certified brokers or a
money market mutual fund.
Types of Money Market Instruments

Treasury Bills (T-Bills)
Treasury Bills, which are issued by the federal government, are among the
safest money market securities available. Treasury bills, however, have no
risk. i.e., are instruments with zero risk. As a result, the results one receives
from them are not desirable.
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Treasury bills are traded on primary and secondary markets and have
varying maturity terms, such as three months, six months, and one year.
The central government issues Treasury banknotes at a discount from their
face value.
Certificate of Deposits (CDs)
When money is deposited with a bank or financial institution, a Certificate

of Deposit, or CD, serves as a deposit receipt. A Certificate of Deposit, on the
other hand, differs from a Fixed Deposit Receipt in two ways.
The first distinction is that a CD is only ever issued for a higher amount of
money. A Certificate of Deposit is moreover freely negotiable. Certificates of
Deposits, first introduced by the RBI in 1989, have grown to become a
popular investment option for businesses looking to invest short-term
surplus funds since they carry no risk while offering interest rates that are
greater than those offered by Treasury bills and term deposits.
Commercial Papers (CPs)
Commercial Papers are can be compared to an unsecured short-term

promissory note which is issued by highly rated companies with the
purpose of raising capital to meet requirements directly from the market.
CPs usually feature a fixed maturity period which can range anywhere from
1 day up to 270 days.
Highly popular in countries like Japan, UK, USA, Australia and many others,
Commercial Papers promise higher returns as compared to treasury bills
and are automatically not as secure in comparison. Commercial papers are
actively traded in the secondary market.
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Repurchase Agreements (Repo)
Loans of a brief period that are agreed upon by buyers and sellers for the
purpose of buying and selling are referred to as repurchase agreements
(repo), sometimes known as reverse repo or simply as repo.
These transactions can only be made between parties that the RBI has
approved. Transactions involving repo or reverse repo can only be made
between parties that the RBI has permitted. Only transactions involving
RBI-approved securities, such as treasury bills, securities issued by the
federal, state, or local governments, corporate bonds, and PSU bonds, are
allowed.
Banker's Acceptance (BA)
A Banker's Acceptance, often known as a BA, is essentially a document that

guarantees a future payment and is issued by a commercial bank. Banker's
Acceptance, which is used in money market funds frequently and is similar
to a treasury bill, stipulates the terms of the repayment, including the
amount to be repaid, the date of repayment, and the information about the
person to whom the payback is due. The durations available with Banker's
Acceptance range from 30 to 180 days.
Bill of exchange
A bill of exchange is a written order used primarily in international trade

that binds one party to pay a fixed sum of money to another party on
demand or at a predetermined date. Bills of exchange are similar to checks
and promissory notes—they can be drawn by individuals or banks and are
generally transferable by endorsements.
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A bill of exchange is a written order binding one party to pay a fixed sum of
money to another party on demand or at some point in the future.
Capital Market Instruments

Equities
As capital market instruments, equities enable companies to raise capital

by selling ownership stakes. They are traded on stock markets, allowing
investors to buy and sell shares, with their value influenced by the
company's performance and market dynamics.
Equity Share
An equity share represents a portion of ownership in a company. When you

buy equity shares, you become a part-owner of that company. As a
shareholder, you may get voting rights in major company decisions and a
share of the profits, known as dividends. These shares can increase in value
if the company does well, offering profit potential.
Preference Share
Preference shares are a type of stock in a company that give shareholders

certain advantages over common stockholders. Typically, preference
shareholders receive dividends before common shareholders and these
dividends are often fixed. While they usually don't have voting rights in
company decisions, they have a higher claim on company assets if the
company goes bankrupt. Preference shares are a blend of stocks and bonds
characteristics.
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Debt Instruments
Debt instruments, like bonds and debentures, are essentially loans that
investors give to companies or governments. When you invest in these,
you're lending money and in return, you receive interest payments over a
specified period. At the end of the term, the principal amount is repaid.
They are a key part of capital markets, providing a way for entities to raise
funds for various projects. Unlike equities, which represent ownership,
debt instruments are a form of borrowing and offer a fixed return, making
them a different kind of investment with generally lower risk compared to
stocks.
Bonds
Bonds are like loans given by investors to companies or governments.

When you buy a bond, you're lending money to the bond issuer. In return,
they promise to pay you back the principal amount on a future date and
make regular interest payments along the way, known as coupon
payments. Bonds are a way to invest while earning steady income, and are
generally considered lower-risk compared to stocks.
Debentures
Debt instruments, like bonds and debentures, are essentially loans that
investors give to companies or governments. When you invest in these,
you're lending money and in return, you receive interest payments over a
specified period. At the end of the term, the principal amount is repaid.
They are a key part of capital markets, providing a way for entities to raise
funds for various projects. Unlike equities, which represent ownership,
debt instruments are a form of borrowing and offer a fixed return, making
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them a different kind of investment with generally lower risk compared to

stocks.
Derivative Instruments
Derivative instruments are financial contracts whose value is derived from

an underlying asset, like stocks, commodities, or interest rates. They are
used for hedging risks or for speculation. Examples include:
Forward: A customized contract between two parties to buy or sell an

asset at a predetermined future date and price.
Future: Similar to forwards but standardized and traded on exchanges.

They oblige the buyer to purchase, or the seller to sell, an asset at a set
future date and price.
Options: These give the buyer the right, but not the obligation, to buy (call
option) or sell (put option) an asset at a specified price before a certain
date.
Interest Rate Swap: A contract in which two parties exchange cash flows
based on different interest rates applied to a principal amount, often used
to hedge interest rate risks.
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UNIT-2 FUNDAMENTAL ANALYSIS
EIC FRAMEWORK
INDUSTRY ANALYSIS
Industry analysis is a market assessment tool used by businesses and

analysts to understand the competitive dynamics of an industry. It helps
them get a sense of what is happening in an industry, e.g., demand-supply
statistics, degree of competition within the industry, state of competition of
the industry with other emerging industries, future prospects of the
industry taking into account technological changes, credit system within
the industry, and the influence of external factors on the industry.
Competitive Forces Model (Porter’s 5 Forces)
One of the most famous models ever developed for industry analysis,
famously known as Porter’s 5 Forces, was introduced by Michael Porter in
his 1980 book “Competitive Strategy: Techniques for Analyzing Industries
and Competitors.”
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1. Intensity of industry rivalry
The number of participants in the industry and their respective market

shares are a direct representation of the competitiveness of the industry.
These are directly affected by all the factors mentioned above. Lack of
differentiation in products tends to add to the intensity of competition.
High exit costs such as high fixed assets, government restrictions, labor
unions, etc. also make the competitors fight the battle a little harder.
2. Threat of potential entrants
This indicates the ease with which new firms can enter the market of a
particular industry. If it is easy to enter an industry, companies face the
constant risk of new competitors. If the entry is difficult, whichever
company enjoys little competitive advantage reaps the benefits for a longer
period. Also, under difficult entry circumstances, companies face a constant
set of competitors.
3. Bargaining power of suppliers
This refers to the bargaining power of suppliers. If the industry relies on a

small number of suppliers, they enjoy a considerable amount of bargaining
power. This can particularly affect small businesses because it directly
influences the quality and the price of the final product.
4. Bargaining power of buyers
The complete opposite happens when the bargaining power lies with the
customers. If consumers/buyers enjoy market power, they are in a position
to negotiate lower prices, better quality, or additional services and
discounts. This is the case in an industry with more competitors but with a
single buyer constituting a large share of the industry’s sales.
5. Threat of substitute goods/services
The industry is always competing with another industry producing a

similar substitute product. Hence, all firms in an industry have potential
competitors from other industries. This takes a toll on their profitability
because they are unable to charge exorbitant prices. Substitutes can take
two forms – products with the same function/quality but lesser price, or
products of the same price but of better quality or providing more utility
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Economic and fundamental analysis is essential tools for investors and

traders to understand the financial markets. In this blog, we'll break down
these complex concepts into simple terms so that even beginners can grasp
their significance.
1. Economic Analysis:
What is it? Economic analysis involves studying various economic
indicators and factors to assess the health and performance of a country's
economy.
Key Indicators: Discuss common economic indicators such as GDP (Gross
Domestic Product), unemployment rate, inflation rate, interest rates, and
consumer confidence.
Impact on Markets: Explain how changes in these indicators can influence
different asset classes such as stocks, bonds, currencies, and commodities.
Company Analysis:
Company analysis refers to the detailed study of a company’s

operations, financials, management, products and services,
competitors, market position, and industry trends. Company analysis is
an essential part of fundamental analysis that investors conduct before
deciding to invest in a company’s stock. The goal of company analysis is to
gain a comprehensive understanding of the business so investors
determine if the stock is undervalued or overvalued compared to its true
worth.
How to do a company analysis?

Company analysis involves a multi-step process examining all aspects of
the business to provide data-driven strategic recommendations. It is crucial
for understanding a firm’s current position and growth opportunities. The
steps to be followed are given below.
1. Research the company’s industry and competitors: Analyse the

industry landscape, including size, growth, regulations, and technology
trends. Identify key competitors and perform competitive benchmarking
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on market share, strengths, weaknesses, and advantages versus the

company. This provides insight into the external environment and
competitive positioning.
2. Examine the company’s business model and operations: Evaluate the
company’s target markets, products/services, distribution, supply chain,
partnerships, manufacturing processes, assets, and resource utilisation.
Assess operational efficiency and productivity. The goal is to understand
the company’s core businesses, operating model, and how efficiently it
delivers value.
3. Review financial statements and performance: Analyze past financial
statements (balance sheet, income statement, cash flow statement) over 3-
5 years. Calculate and benchmark key financial ratios against competitors.
Identify positive/negative trends in revenues, profits, debt, and other
metrics.
4. Assess management and leadership: Research the background of
executives/board and their strategy. Evaluate leadership qualifications,
track record, vision, and governance policies. This provides insight into
management’s capabilities and alignment with shareholders.
5. Conduct a SWOT analysis: Based on preceding research, perform a
SWOT highlighting key strengths, weaknesses, opportunities, and threats
impacting the company’s position and growth prospects. Provides strategic
insights into internal and external factors.
6. Make recommendations: Provide data-driven strategic
recommendations to leverage strengths, address weaknesses, capitalize on
opportunities and mitigate threats. Assess risks and costs/benefits to drive
growth and shareholder value.
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Valuation of shares
Valuation of shares is the process of knowing the value of a company’s

shares. Share valuation is done based on quantitative techniques and share
value will vary depending on the market demand and supply. The share
price of the listed companies which are traded publicly can be known
easily. But w.r.t private companies whose shares are not publicly traded,
valuation of shares is really important and challenging.
When is Valuation of shares required
Listed below are some of the instances where the valuation of shares is
important:
 One of the important reason is when you are about to sell your
business and you wanted to know your business value
 When you approach your bank for a loan based on shares as a security
 Merger, acquisition, reconstruction, amalgamation etc – valuation of

shares is very important
 When your company shares are to be converted i.e. from preference to

equity
 Compensating the shareholders, the company is nationalized
Sometimes, even publicly traded shares have to be valued because the

market quotation may not show the true picture or large blocks of shares
are under transfer etc.
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How to choose the share valuation method
There are various reasons for adopting a particular method for share
valuation; it generally depends upon the purpose of valuation. Using a
combination of methods generally provides a more reliable valuation. Let’s
see under each approach what the main reason is:
i. Assets Approach
If a company is a capital-intensive company and invested a large amount in

capital assets or if the company has a large volume of capital work in
progress then an asset-based approach can be used. This method is also
applicable for valuing the shares during amalgamation, absorption or
liquidation of companies.
ii. Income Approach
This approach has two different methods namely Discounted Cash Flow
(DCF) or Price Earning Capacity (PEC) method. DCF method uses the
projection of future cash flows to determine the fair value and if this data is
reasonably available, DCF method can be used. PEC method uses historical
earnings and if an entity is not in the business for a long time and just
started its operations, then this method cannot be applied.
iii. Market Approach
Under this approach, the market value of the shares is considered for
valuation. However, this approach is feasible only for listed companies
whose share prices can be obtained in the open market. If there are a set of
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peer companies that are listed and engaged in a similar business, then such
a company’s share public prices can also be used.
Valuation Bonds
Bond Valuation?
Bond valuation is the process of determining the fair value or theoretical
price of a bond.
This involves calculating the present value of the bond's future cash flows,
which include periodic interest payments and the face value returned
upon maturity.
Bond valuation is crucial for investors as it allows them to assess the

attractiveness of a bond relative to its market price.
Bond Components
Face Value
The face value, or par value, of a bond, is the amount that the issuer will
repay the bondholder at maturity. It is the principal amount on which the
periodic interest payments are calculated.
Coupon Rate
The coupon rate is the annual interest rate paid on a bond, expressed as a
percentage of the bond's face value. This rate determines the periodic
interest payments made to the bondholder throughout the life of the bond.
Maturity Date
The maturity date is the date when the bond's principal amount is due to
be repaid to the bondholder. Bonds can have short-term, medium-term, or
long-term maturities, typically ranging from a few months to 30 years or
more.
Issuer's Credit Rating

The issuer's credit rating is an assessment of the issuer's creditworthiness
and likelihood of defaulting on its debt obligations.
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Credit rating agencies, such as Standard & Poor's, Moody's, and Fitch,
assign ratings based on their evaluation of the issuer's financial strength
and stability.
Preference Share
Preference shares also known as preferred stock, is an exclusive share
option which enables shareholders to receive dividends announced by the
company before the equity shareholders.
Preference shares provide the shareholders with the special right to claim
dividends during the company lifetime, and also with the option to claim
repayment of capital, in case of the wind up of the company.
Features of Preference Shares
The following are the features of preference shares:
1. Preferential dividend option for shareholders.
2. Preference shareholders do not have the right to vote.
3. Shareholders have a right to claim the assets in case of a wind up of

the company.
4. Fixed dividend payout for shareholders, irrespective of profit earned.
5. Acts as a source of hybrid financing.
Types of Preference Shares
The various types of preference share are discussed below:
1. Cumulative preference share: Cumulative preference shares are a

special type of shares that entitles the shareholders to enjoy
cumulative dividend payout at times when a company is not making
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profits. These dividends will be counted as arrears in years when the

company is not earning profit and will be paid on a cumulative basis,
the next year when the business generates profits.
2. Non-cumulative preference shares: These types of shares do not

accumulate dividends in the form of arrears. In the case of non-
cumulative preference shares, the dividend payout takes place from
the profits made by the company in the current year. If there is a year
in which the company doesn’t make any profit, then the shareholders
are not paid any dividends for that year and they cannot claim for
dividends in any future profit year.
3. Participating preference shares: These types of shares allow the

shareholders to demand a part in the surplus profit of the company
at the event of liquidation of the company after the dividends have
been paid to the other shareholders. In other words, these
shareholders enjoy fixed dividends and also share a part of the
surplus profit of the company along with equity shareholders.
4. Non-participating preference shares: These shares do not yield the

shareholders the additional option of earning dividends from the
surplus profits earned by the company. In this case, the shareholders
receive only the fixed dividend.
5. Redeemable Preference Shares: Redeemable preference shares are

shares that can be repurchased or redeemed by the issuing company
at a fixed rate and date. These types of shares help the company by
providing a cushion during times of inflation.
6. Non-redeemable Preference Shares: Non-redeemable preference

shares are those shares that cannot be redeemed during the entire
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lifetime of the company. In other words, these shares can only be

redeemed at the time of winding up of the company.
7. Convertible Preference Shares: Convertible preference shares are a

type of shares that enables the shareholders to convert their
preference shares into equity shares at a fixed rate, after the expiry of
a specified period as mentioned in the memorandum.
8. Non-convertible Preference Shares: These type of preference

shares cannot be converted into equity shares. These shares will only
get fixed dividend payout and also enjoy preferential dividend payout
during the dissolution of a company.
Business Cycle?
A business cycle is a cycle of fluctuations in the Gross Domestic

Product (GDP) around its long-term natural growth rate. It explains the
expansion and contraction in economic activity that an economy
experiences over time.
A business cycle is completed when it goes through a single boom and a

single contraction in sequence. The time period to complete this sequence
is called the length of the business cycle.
Stages of the Business Cycle
In the diagram above, the straight line in the middle is the steady growth
line. The business cycle moves about the line. Below is a more detailed
description of each stage in the business cycle:
1. Expansion
The first stage in the business cycle is expansion. In this stage, there is an
increase in positive economic indicators such as employment, income,
output, wages, profits, demand, and supply of goods and services. Debtors
are generally paying their debts on time, the velocity of the money supply is
high, and investment is high. This process continues as long as economic
conditions are favorable for expansion.
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2. Peak
The economy then reaches a saturation point, or peak, which is the second
stage of the business cycle. The maximum limit of growth is attained. The
economic indicators do not grow further and are at their highest. Prices are
at their peak. This stage marks the reversal point in the trend of economic
growth. Consumers tend to restructure their budgets at this point.
3. Recession
The recession is the stage that follows the peak phase. The demand for
goods and services starts declining rapidly and steadily in this phase.
Producers do not notice the decrease in demand instantly and go on
producing, which creates a situation of excess supply in the market. Prices
tend to fall. All positive economic indicators such as income, output, wages,
etc., consequently start to fall.
4. Depression
There is a commensurate rise in unemployment. The growth in the

economy continues to decline, and as this falls below the steady growth
line, the stage is called a depression.
5. Trough
In the depression stage, the economy’s growth rate becomes negative.

There is further decline until the prices of factors, as well as the demand
and supply of goods and services, contract to reach their lowest point. The
economy eventually reaches the trough. It is the negative saturation point
for an economy. There is extensive depletion of national income and
expenditure.
6. Recovery
After the trough, the economy moves to the stage of recovery. In this phase,
there is a turnaround in the economy, and it begins to recover from the
negative growth rate. Demand starts to pick up due to low prices and,
consequently, supply begins to increase. The population develops a positive
attitude towards investment and employment and production starts
increasing.
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Unit-5 Portfolio management
Meaning
A portfolio Investment can be understood as a bunch of different financial

securities (including assets, stocks, government bonds, corporate bonds,
mutual funds, other money market instruments, cash and cash equivalents,
crypto currencies, commodities, and bank certificates of deposit.), bought
with an expectation to gain either in the form of return or increased value, or
both. So, the art of constructing and managing these portfolio investments is
known as Portfolio Management.
Objectives of Portfolio management
1. Attaining Long-term Financial Goals: An investor always invests with a

motive to secure the future by earning a high return, keeping this in mind
Portfolio Management works with the objective to fulfil the long-term
financial goals of the investors by recommending the most profitable
portfolio, overseeing and rebalancing it from time to time to ensure high
return with minimum risk appetite.
2. Capital Appreciation: Capital appreciation means an increase in the
value of an asset over a time period. Portfolio Management intends to make
the portfolio of the investor grow, so the market value of the investment
rises within the given timeline, in comparison to its purchase value. Capital
appreciation is the main source of investors’ earnings.
3. Maximizing Return on Investment: Portfolio Management aims to
maximize the ROI by analyzing the market before selecting the right
investment mix. Other factors like time period, inflation, Legal restrictions,
and economic conditions are also considered.
4. Achieving Asset Allocation: The primary objective of Portfolio
Management is to allocate assets across different investment classes, such as
equities, fixed income, and alternative investments in such a way that the
asset allocation goes with the investor’s risk profile and investment goals.
5. Risk Management: Portfolio Management minimizes the degree of risk
associated with the investment by using the concept of diversified
investment.
Under this, investment is not made in a single category of an asset or the
same industry, rather the investment is scattered into various investment
classes or different industries, so even if any of the categories or industries
so a downfall the other can overcome it by experiencing the rise.
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6. Rebalancing and Monitoring the Portfolio: Portfolio Management aims

to regularly monitor and adjust the portfolio by rebalancing the portfolio,
adding or removing assets, or changing investment strategies so, it remains
consistent with the investor’s risk profile and investment goals.
Process of Portfolio Management

Like any management process, Portfolio Management also includes steps like
planning, execution, and evaluation. Let’s understand the process of
managing a portfolio in detail:
1. Understanding Financial Objectives: The first and foremost step is to
determine and understand the short-term and long-term financial objectives
of the investor. This also includes understanding the risk appetite and time
horizon of the investor to make the best decision.
2. Asset Selection and Allocation: Once the goals the fixed, it is important
to walk on the right path to achieve those goals. So, the next step is to
perform research on different asset classes to analyse the risk associated
with each asset class to ensure security and minimise the risk. Once the
analysis and research are done, asset allocation is done to meet the
investor’s objectives and risk tolerance.
3. Portfolio Construction: As mentioned above, a portfolio is a bunch of
assets belonging to different asset classes. Once the risk analysis and
security check are done, the portfolio is constructed as per the financial goal,
timeline, and risk tolerance of the investor. This is followed by the optimal
weightings of each security in the portfolio.
4. Portfolio Overseeing and Rebalancing: After creating a suitable
portfolio and investing in it, it becomes necessary to monitor and rebalance
the portfolio from time to time. Overseeing helps to minimise the risk factor
and rebalancing is important to stay confined to the financial goals and risk
appetite.
5. Performance Evaluation: Last but the most important step of the
management process is to conduct a performance evaluation to judge the
growth and take necessary corrective steps to grow further. This involves
comparing the portfolio’s returns to its benchmark and assessing its risk-
adjusted performance. Evaluation is important to know whether the
investing goals have been accomplished or not.
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What is Portfolio Analysis?
Portfolio analysis is a quantitative technique that is used to determine the

specific characteristics of an investment portfolio. The process of analyzing
a portfolio involves several stages, including a statistical performance
review, risk and risk-adjusted metrics, attribution, and positioning.
Steps in Portfolio Analysis
The analysis process can differ depending on investment philosophy,

composition, and objectives, but generally involves multiple layers of
quantitative analysis. Below are some of the key steps.
Performance Analysis
Performance analysis assesses how well a portfolio has performed over a

specific period, helping investors evaluate the success of their investments.
This is done both on absolute and relative basis.
Risk Analysis
By analyzing the risk in their portfolio, investors can understand the

likelihood of future fluctuations or financial losses. Like performance, risk
must be considered relative to factors that are relevant to the portfolio
such as specific indices, peer groups, or custom benchmarks
Risk-Return Analysis
Risk-adjusted returns relate portfolio performance to the level of risk

taken. This provides a measure of how well returns compare to the
inherent investment risk.
Sharpe’s Single Index Model
Assumptions of the Sharpe single-index model:
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a. Investors have homogenous expectations with respect to return and risk.
b. A uniform holding period is considered for calculating the risk and

return of every security.
c. Investors can borrow and lend at a risk-free rate of return.
d. Price movements of securities are influenced by prevailing economic

conditions.
Portfolio performance evaluation
Portfolio performance evaluation is an essential aspect of the investment

process that allows investors and portfolio managers to assess the
effectiveness of their investment strategies.
Components of Portfolio Performance Evaluation
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UNIT-3 Risk and Return
What is a Risk?
A risk is any activity or investment that presents a potential for gain but
also contains the possibility of loss. Risk can be associated with various
aspects of life, including business, financial investments, and even personal
decisions. In general, risks are divided into two broad categories: economic
activities (such as stock market investments) and physical activities (such a
Systematic Risk Meaning
Systematic risk, often called market risk, encapsulates the potential for a
broad market downturn resulting from factors that affect the entire
financial system. Unlike unsystematic risk, which pertains to individual
assets or sectors, systematic risk is inherent to the entire market and
cannot be eliminated through diversification.
It is influenced by geopolitical events, economic shifts, and widespread

financial crises, among other factors. Understanding systematic risk is
paramount for investors as it directly impacts investment portfolios and
dictates the need for strategic risk management practices.
Types of Systematic Risk
Systematic risk manifests in various forms, each influenced by different

external factors. Recognizing the types of systematic risk is essential for
developing effective risk management strategies:
Interest Rate Risk: This type of systematic risk arises from fluctuations in
interest rates, which can significantly affect the value of fixed-income
securities. When interest rates rise, the prices of existing bonds typically
fall, and vice versa.
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Market Risk: Market risk involves the potential for investors to experience
losses due to factors that affect the overall performance of the financial
markets. This can include changes in market sentiment, economic
indicators, and global events.
Inflation Risk: Also known as purchasing power risk, inflation risk is the
danger that the value of assets or income will be eroded as inflation
diminishes the purchasing power of money. This is particularly relevant for
cash and fixed-income investments.
Currency Risk: For investments that involve foreign exchange, currency

risk, or exchange rate risk, comes into play. It refers to the potential for loss
due to variations in the currency exchange rate.
Socio-Political Risk: Political instability, regulatory changes, and

geopolitical conflicts can lead to socio-political risk, impacting markets and
investment values globally.
Liquidity Risk: This risk refers to the potential difficulty in selling an

investment at its fair market value due to a lack of buyers, which can be
exacerbated during market stress driving).
Unsystematic risk
the term "unsystematic" refers to a quality that is not commonly shared

among many investment opportunities. This is distinct from systematic
risk, the dangers inherent to the market as a whole.
The most common examples of unsystematic risk are the risks that are
specific to an individual firm. Examples can include management risks,
litigation risks, location risks, and succession risks.
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Types of Unsystematic Risk
Business Risk
Both internal and external issues may cause business risk. Internal risks
are tied to operational efficiencies. For example, management failing to
take out a patent to protect a new product would be an internal risk, as it
may result in the loss of competitive advantage.
Financial Risk
Financial risk relates to the capital structure of a company. A company

needs to have an optimal level of debt and equity to continue to grow and
meet its financial obligations.
A weak capital structure may lead to inconsistent earnings and cash flow
that could prevent a company from trading.
Operational Risk
Operational risks can result from unforeseen or negligent events, such as a

breakdown in the supply chain or a critical error being overlooked in the
manufacturing process.
A security breach could expose confidential information about customers

or other types of key proprietary data to criminals.
Strategic Risk
A strategic risk may occur if a business gets stuck selling goods or services
in a dying industry without a solid plan to evolve the company's offerings.
A company may also encounter this risk by entering into a flawed

partnership with another firm or competitor that hurts their future
prospects for growth.
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Legal and Regulatory Risk
Legal and regulatory risk is the risk that a change in laws or regulations
will hurt a business. These changes can increase operational costs or
introduce legal hurdles. More drastic legal or regulation changes can even
stop a business from operating altogether.
Risk and Return:
Returns are created in two ways: the investment creates income or the
investment gains (or loses) value. To calculate the annual rate of return for
an investment, you need to know the income created the gain (loss) in
value, and the original value at the beginning of the year.
While information about current and past returns is useful, investment

professionals are more concerned with the expected return [1] for the
investment, that is, how much it may be expected to earn in the future.
Estimating the expected return is complicated because many factors (i.e.,
current economic conditions, industry conditions, and market conditions)
may affect that estimate.
Returns are the value created by an investment, through either income or

gains. Returns are also your compensation for investing, for taking on some
or all of the risk of the investment, whether it is a corporation, government,
parcel of real estate, or work of art. Even if there is no risk, you must be
paid for the use of liquidity that you give up to the investment (by
investing).
Returns are the benefits from investing, but they must be larger than its
costs. There are at least two costs to investing: the opportunity cost of
giving up cash and giving up all your other uses of that cash until you get it
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back in the future and the cost of the risk you take—the risk that you won’t
get it all back.
Risk
Investment risk is the idea that an investment will not perform as expected,
that its actual return will deviate from the expected return. Risk is
measured by the amount of volatility, that is, the difference between actual
returns and average (expected) returns. This difference is referred to as the
standard deviation [2]. Returns with a large standard deviation (showing
the greatest variance from the average) have higher volatility and are the
riskier investments.
KEY TAKEAWAYS
There is a direct relationship between risk and return because investors

will demand more compensation for sharing more investment risk.
Actual return includes any gain or loss of asset value plus any income
produced by the asset during a period.
Actual return can be calculated using the beginning and ending asset values
for the period and any investment income earned during the period.
Expected return is the average return the asset has generated based on
historical data of actual returns.
Investment risk is the possibility that an investment’s actual return will not
be its expected return.
The standard deviation is a statistical measure used to calculate how often

and how far the average actual return differs from the expected return.
Investment risk is exposure to
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 economic risk,
 industry risk,
 company- or firm-specific risk,
 asset class risk, or market risk.
Irrespective of the type of investment, there is always a degree of risk

involved. As a smart investor, it is important to weigh your risks against the
potential rewards and decide if the chosen investment is suitable as per
your risk appetite and investment needs. Risk parameters vary as per the
chosen investment option. Determining the risk levels and the
corresponding returns can help you create a portfolio that is more suited to
your needs.
What is risk in an investment portfolio?
Risk in an investment portfolio can be defined as the possibility that the

actual return from your total investment will be less than the expected
return. Sometimes, it may also mean losing a part or all of your original
investment, thus affecting your financial goals.
Portfolio risk management is the practice of managing the risks associated

with a portfolio of financial investments.
This can include any portfolio, such as an investment portfolio or a

portfolio of projects for a business.
An investment portfolio can include a collection of financial assets, such

as stocks, bonds, and other investments.
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Expected rate of return
A project portfolio for a business can include a collection of projects and

processes. This portfolio enables an organization to achieve its financial
and strategic goals.
The management of portfolio risk involves collecting and analyzing these

risks, devising strategies to reduce them, and then implementing those
strategies.
It also involves monitoring long-term portfolio performance to identify

potential changes that could boost portfolio returns.
What are the different types of investment portfolio risks?
Market risk - Also known as systematic risk, this risk affects the overall
financial market. This is caused by factors such as a change in interest
rates, recessions, natural disasters, political turmoil, or other such factors.
Liquidity risk - This risk arises when an asset cannot be readily converted
into money. This may lead to a loss as you may have to sell your high
valued assets at a lower price.
Concentration risk - The risk of loss because all your funds are invested in
a specific investment is concentration risk. You should diversify your
investments to spread the risk over different types of investments,
industries, and geographies.
Reinvestment risk - This is the risk of loss from reinvesting the previously
invested fund at a lower interest rate than before.
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Inflation risk - Over time, the same amount of money will buy lesser goods
and services, owing to inflation. This leads to a loss in the real value of
money.
How is risk-return trade-off calculated in mutual funds?
There are several ratios used to calculate the risk-return trade-off in

mutual funds:
Alpha ratio: Alpha refers to a metric that evaluates a mutual fund's risk-
adjusted returns in comparison to its benchmark index. If you are investing
in a fund that tracks, for instance, the Nifty 50 or the BSE Sensex, you would
employ alpha to gauge its performance.
A positive alpha indicates that the fund has outperformed its benchmark,
while a negative alpha suggests underperformance. A higher alpha rating
indicates the potential for superior mutual fund returns.
Beta ratio: Beta measures a mutual fund's volatility concerning its

benchmark index. A positive beta indicates that the fund is more volatile
than its benchmark, while a negative beta suggests lower volatility.
A higher beta implies greater volatility, which may result in the potential
for higher returns.
The Sharpe ratio: This ratio assesses a fund's performance concerning

low-risk or risk-free investment options. A Sharpe ratio of 1 suggests that
the fund has the potential to deliver superior risk-adjusted returns.
Ratios below 1 indicate that the returns achievable may not adequately
compensate for the associated level of risk.
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Standard Deviation: Standard deviation measures the degree of variation

or volatility in a fund's returns from its average. A higher standard
deviation indicates greater variability, suggesting higher risk.
Investors often use standard deviation as a key metric for assessing the
fund's historical performance stability.
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Unit-4 Technical Analysis
Technical analysis
What is Dow Theory in Stock Market?
Dow Theory is a technical analysis approach to investing. It was developed

by Charles Dow, the founder of the Dow Jones and Company.
The dow theory was developed to explain the concept that share market
moves in trends that can be analyzed and predicted.
How Does it Work?
Dow theory meaning is based on the idea that the stock market theory
moves in three trends: the primary trend, the secondary trend, and the
minor trend.
The primary trend is the overall direction of the market, which can last for
several years.
The secondary trend is a correction to the primary trend, which can last for
several months.
The minor trend is a short-term fluctuation in the market, which can last
for several days.
This theory also emphasizes the importance of volume in confirming price

movements. If one of the prices are rising in high volume, it is considered to
be a bullish sign. On the other hand, if prices are falling on high volume, it is
considered to be a bearish sign. Dow’s Theory also emphasizes the
importance of trend confirmation.
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Importance of Dow Theory
Understanding Market Trends: The Dow’s Theory helps investors

understand the direction of the overall market trend. By analyzing the
primary, secondary, and minor trends, investors can make more informed
investment decisions.
Identifying Stock Trends: Dow Theory can help investors identify the
trends of individual stocks. By understanding the stock’s trend, investors
can make better decisions about when to buy or sell.
Technical Analysis: The Dow Theory is a key tool in technical analysis. It

helps investors identify support and resistance levels, as well as important
trend lines.
Risk Management: Dow’s Theory can help investors manage risk. By

understanding the trend of the market, investors can adjust their portfolios
to protect against potential losses.
What Is the Elliott Wave Theory?
The Elliott Wave Theory in technical analysis describes price movements in

the financial market. Developed by Ralph Nelson Elliott, it observes
recurring fractal wave patterns identified in stock price movements and
consumer behaviour.
Investors who profit from a market trend are described as riding a wave.
 The Elliott Wave theory is a technical analysis of price patterns

related to changes in investor sentiment and psychology.
 The theory identifies impulse waves that establish a pattern and
corrective waves that oppose the larger trend.
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 Each set of waves is within another set of waves that adhere to the
same impulse or corrective pattern, described as a fractal approach
to investing.
 Some The theory assumes that stock price movements can be
predicted because they move in repeating up-and-down patterns
called waves created by investor psychology or sentiment.
 The theory is subjective and identifies two different types of waves:
motive or impulse waves, and corrective waves.
 Wave analysis does not equate to a template to follow instructions.
 Wave analysis offers insights into trend dynamics and helps
investors understand price movements.
 Impulse and corrective waves are nested in a self-similar fractal to
create larger patterns.
Top 5 Types of Technical Analysis Charts:
A line chart
A line chart is a basic chart that depicts information through the line
segments for the change in value over time. It is used to track the changes
going on for short and long periods.
Use in Technical Analysis
A line chart is the most basic and common chart used in technical analysis
which is represented by a graphical representation of lines and dots. It is
quite simple in comparison to other complicated charts.
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A line chart helps the traders identify the trend and movement of the stock.
You can track the dots of the line chart as the closing price which moves to
form the line chart. Traders use a line chart to spot and track the closing
prices. The closing price is considered is the strongest movement that
assists to find strength in a particular stock.
Bar charts
A bar chart can be defined as a chart where rectangular bars are used to
identify the values that each bar represents.
In technical analysis, a bar chart depicts the prices of security with its open,
close, high and low prices.
Using bar charts you can spot trends, identify opportunities and create
categorical data within the form of bars. Generally, analysts and traders use
the bar chart to spot volatile movements.
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When you open a bar chart you see comparative and distinctive sizes of
bars that indicate the opening and closing prices of the security.
In a bar chart, the vertical line indicates the prices – high and low, whereas
the horizontal line marks the market opening and closing prices.
Candlestick Chart
Definition
A candlestick chart is also known as a Japanese candlestick chart or K-line

is used to analyse the past trends of an asset or security. It is a method of
representation that represents the movement and stability of the stock.
A candlestick pattern in technical analysis is of utmost importance because

it recognized the movement of the stock price. Traders use candlestick
patterns to track and predict the price of the security.
A candle shows high, low, open and close prices and is of two colors- red
candles refer to the bearish movement and green candles refer to the
bullish movement.
There are different kinds of candles that are created during the price
movement of a security or an asset. But some of the powerful candles are:
a. Doji b. Hammer
c. Bullish Engulfing d. Dragonfly Doji
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Renko Chart
Definition
A Renko chart is a type of chart which is developed to analyse price

movement by ignoring time-factor. Renko is not well-known among newbie
traders. Although, it is used by professional traders.
In technical analysis, the Renko chart is used by traders that prefer to enter
and make an exit in the larger trends. In the words of normal traders, the
larger the pattern, the larger will be the trend.
What Is a Reversal?
A reversal is a change in the price direction of an asset. A reversal can occur

to the upside or downside. Following an uptrend, a reversal would be to the
downside. Following a downtrend, a reversal would be to the upside.
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Reversals are based on overall price direction and are not typically based
on one or two periods/bars on a chart.
Certain indicators, such a moving average, oscillator, or channel, may help

in isolating trends as well as spotting reversals. Reversals may be
compared with breakouts.
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INVESTMENT MANAGEMENT

Investment refers to putting your money in an asset with the aim of

FEATURES OF GOOD INVESTMENT

Risk and return

Liquidity is the ease and speed at which an Investment can be converted

Short-term Investments, such as day trading or short-maturity bonds, focus

Diversification is akin to distributing risk across various baskets to protect

Inflation is the eventual erosion of purchasing power over time due to

Tax efficiency in investing focuses on optimising after-tax returns by

Market volatility underscores the dynamic nature of financial markets,

Defining clear and realistic Investment objectives provides a roadmap for

Cost efficiency is a crucial yet often overlooked characteristic of

Step 1: Setting financial goals

Setting clear financial goals is the cornerstone of any successful Investment

Step 2: Assessing risk tolerance

Understanding your risk tolerance is pivotal in making Investment

Conservative Investors prefer stability, while aggressive ones seek high

Step 3: Creating a budget and emergency fund

A strong financial foundation starts with disciplined budgeting and building

Step 4: Diversifying Investment portfolio

Diversification is the golden rule of Investments. It refers to spreading

Step 5: Conducting research and analysis

Informed decisions are the bedrock of successful investing. Conducting

Step 6: Making informed Investment decisions

Professional guidance and continuous monitoring are pivotal in making

Step 7: Regularly reviewing and rebalancing the portfolio

Investment strategies need periodic review and adjustment. Regular

Risk efficient. Risk is something to be avoided, when- and wherever

Tax efficient. Like other costs, taxes must be minimized in order to

Simple. A good portfolio minimizes complexity and avoids using

securities, you can probably do better. When it comes to selecting the

Transparent. You should clearly understand what each element of your

What are Money Market Instruments?

The main characteristic of money market instruments is that they can be

Types of Money Market Instruments

Certificate of Deposits (CDs)

When money is deposited with a bank or financial institution, a Certificate

Commercial Papers (CPs)

Commercial Papers are can be compared to an unsecured short-term

Repurchase Agreements (Repo)

Banker's Acceptance (BA)

A Banker's Acceptance, often known as a BA, is essentially a document that

A bill of exchange is a written order used primarily in international trade

Capital Market Instruments

As capital market instruments, equities enable companies to raise capital

An equity share represents a portion of ownership in a company. When you

Preference shares are a type of stock in a company that give shareholders

Bonds are like loans given by investors to companies or governments.

them a different kind of investment with generally lower risk compared to

Derivative instruments are financial contracts whose value is derived from

Forward: A customized contract between two parties to buy or sell an

Future: Similar to forwards but standardized and traded on exchanges.

UNIT-2 FUNDAMENTAL ANALYSIS

Industry analysis is a market assessment tool used by businesses and

Competitive Forces Model (Porter’s 5 Forces)

1. Intensity of industry rivalry

The number of participants in the industry and their respective market

2. Threat of potential entrants

3. Bargaining power of suppliers