Course Semester Subject Code Book Id Subject Name Unit number Unit Title

: MBA : III : MF0001 : B1035 : SAPM :1 : Investment A Conceptual Framework

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Introduction

Explain the meaning of real asset and financial Asset Explain the meaning of real asset and financial Asset Define investment, security, security analysis and portfolio management Explain different modes of investment Explain various characteristics of investment Differentiate between investment and speculation and between investment and gambling List the investment process Analyze common errors in Investment Management Identify the qualities of a Smart List the investment process Analyze common errors in Investment Management Identify the qualities of a Smart Investor

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Difference between Real Asset and Financial Asset

Real Asset Appear only on the asset side of the balance sheet

Financial Asset Always appears on both assets side and liabilities of the balance sheet

It is destroyed only by accident or by It is created and destroyed in the ordinary course of business wearing out overtime.

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Definitions

An investment is a sacrifice of current money or other resources for future benefit. It denotes conversion of cash or money into a monetary asset or claim on future money for a return. The two key factors that determine investment decisions are return and risk which are dealt in subsequent units Securities are financial assets in various categories with different characteristic. Securities take the form of shares, bonds, debenture, money market instruments, derivatives etc. Portfolio is the combination of assets held by the investors. These combinations may be of various asset classes like equity, debt corporate debentures, warrants, money market instruments etc.

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 Security analysis involves the projection of future earnings, forecast of the share price in the future and estimating the intrinsic value of a security. Intrinsic value is derived by forecasting the future cash flows of the security both annual cash flows (dividends/interest) and terminal value (redemption value) of the security. Portfolio analysis includes portfolio construction, selection of securities, revision, evaluation and monitoring of the performance of the portfolio on a regular basis.

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Security form of investment (Marketable)

Equity shares Bonds/ Debentures Money Market Instruments Mutual funds scheme

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Non Security form of investment (Non-marketable financial assets) National saving scheme National saving certificate Recognized provident fund Public provident fund Post office saving scheme National pension scheme Corporate fixed deposit LIC Unit scheme of UTI Bank Fixed deposit / recurring deposit

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Characteristics of Investment

Rate of return Risk Marketability Tax shelter Convenience

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Types of Assets

Primary Securities - Common stock, Preferred

stock, Govt. bonds, Corporate bonds, Treasury

Bills, Commercial Papers. Derived Instruments Mutual Fund, Options, Forward, Futures. Physical Assets - House, land, building, gold,

diamond, art objects etc.

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Investment & Speculation

Investment Immediate gains is not possible Thorough analysis is required

Speculation Quick gains is possible Thorough analysis is not required

Generally promises safety of principle and an adequate return

It does not promises safety of principle and an adequate return.

Investors make informed decision but their risk appetite is low

Speculators also make informed decision yet take higher risk.

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Investment & Gambling

Investment

Gambling

Investment decision is based on the Gambling is based on random performance of the economy outcomes Chances of gaining is high if the investment horizon is for a longer period of time Risk is directly linked to economic benefit. Chances of losing is high if the gambling process is continued for a long time. It creates risk without expectation of economic benefit.

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Investment Process

1. 2.

Set Investment Policy Perform Security Analysis

3.
4. 5.

Construct a Portfolio
Revise the Portfolio Evaluate the performance of Portfolio

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1. Setting Investment Policy

Involves asset allocation decision Important factors are: Time Horizon Risk Tolerance Styles: Active Management and Passive Management.

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2. Performing Security Analysis

It involves security selection decision Examining a number of individual securities

Identify mispriced securities through fundamental and technical

analysis

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3. Portfolio Construction

1.

Three factors involved are: Selectivity

2.
3.

Timing
Diversification

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How a portfolio is constructed?

Asset Allocation Active Investor Market Timing

Security Selection Stock Picking

Passive Investor

Maintain predetermined selections

Try to track a wellknown market index like Nifty, SenSex.

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4. Portfolio Revision: - Repetition of the three previous steps.

5. Portfolio Performance Evaluation

- Periodic review of the performance of the portfolio.

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Risks of Investment

Risk is the degree of uncertainty about the expected return from an investment:

Credit risk / Counterparty risk

Inflation risk Interest rate risk Market risk

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Common Errors

Not having a clearly-defined investment plan Investors become bored with their plan

Investors fail to book profit when price rises.

Information overdose. Investors are constantly in search of a shortcut or gimmick

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Qualities of a Smart Investor

Smart investors have a plan for investing, and they stick to it. They invest consistently

They are patient

They are not emotionally tied to their investment positions.

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