Security Analysis

and
Portfolio Management
Rahul Kumar
(Department of Business Administration-
M.J.P. Rohilkhand University, Bareilly)

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 Finance
• Life blood of any business.
• It is a field that deals with the study
of investments.
• It includes the dynamics
of assets and liabilities over time under
conditions of different degrees of
uncertainty and risk.

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 Security analysis
• Security analysis is the analysis of
tradeable financial instruments called
securities.
• These can be classified into debt
securities, equities, or some hybrid[Preference
Shares (Mix of equity & debts)] of the two.

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 Financial instruments
• Financial instruments are tradable assets of
any kind.

• They can be cash, evidence of an ownership

interest in an entity, or a contractual right to
receive or deliver cash or another financial
instrument.

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 Portfolio Management
• Portfolio Management is the art and science
of making decisions about investment mix and
policy.
• Matching investments to objectives.
• Asset allocation for individuals and
institutions.
• Balancing risk against performance.

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 Unit-1

The Investment Environment

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 Outline

• Introduction –Concept & Nature of Investment

• Investment, Speculation & Gambling
• Real Assets Vs Financial Assets
• Features of Investment Programme
• Investment Decision Process
• Investment Alternatives

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 Introduction
• Investment involves making of a sacrifice in
the present with the hope of deriving future
benefits.
Current sacrifice & Future benefit

• “Postponed Consumption”

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 Some type of Investments
• A Portfolio Manager buys 10,000 shares of ITC
Ltd. for his Mutual Fund.
• Your relative may have subscribed to the 6-year
Post Office Monthly Income Scheme.
• A corporate firm may spend Rs. 5 crores for
expansion programmers.
• A middle-aged man with a family decides to
spend Rs. 10 lakhs to buy an apartment in a city
and so on......

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 Why Invest?
• Improve our future welfare.

• Enhance our future consumption possibilities.

• Anticipated future consumption.

• Manage our wealth effectively- protecting our

assets form inflation, taxes and other factors.

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Nature of Investment Decisions

Risk and Return

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The Investment Process
Determine the investment objectives & policy.

Undertake security analysis.

Construct a portfolio.

Review the portfolio.

Evaluate the performance of the portfolio.

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 Investment, Speculation and
Gambling
• Investment involves making of a sacrifice in
the present with the hope of deriving future
benefits.
• Speculation tend to buy assets with the
expectation that a profit can be earned from a
subsequent price change and sale.
• Gambling is usually a very short-term
investment in a game of chance.

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Sl.No. Basis Investment Speculation Gambling
1 Type of Contract Creditor Ownership Ownership
2 Basis of Usually by outright Often-on-margin According to deal
acquisition purchase
3 Psychological Cautious and Daring and Daring and
attitude of conservative careless careless
participants
4 Basis for decisions Fundamental Technical Analysis Own concepts
Analysis
5 Quantity of risk Willing low risk Willing high risk Unnecessary Risk
& not possible to
balance risk &
return
6 Stability of income Very stable Uncertain Unplanned or
impulsive action
7 Length of Comparatively For a short time Spur of the
commitment long-term only movement
8 Source of income Earnings of Change in market Earnings and
enterprise price borrowed
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 Real Assets Vs Financial Assets
• Real Assets – Assets used to produce goods
and services
– Examples: factories, land, human capital,
etc.
• Financial Assets – Claims on real assets such
as stocks bonds
– Derivatives

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 Investment Alternatives/Investment Avenues
Non-marketable Financial Assets Equity Shares
•Bank deposits •Blue chip shares
•Post office deposits •Growth shares
•Company deposits •Income shares
•Provident fund deposits •Cyclical shares
•Speculative shares

Bonds Money Market Instruments

•Government securities •Treasury bills
•Government of India relief bonds •Commercial paper
•Government agency securities •Certificates of deposit
•PSU bonds
•Debentures of private sector companies
•Preference shares(Hybrid securities)

Mutual Fund Schemes Life Insurance Policies

•Equity schemes •Endowment assurance policy
•Debt schemes •Money back policy
•Balanced schemes •Whole life policy
•Premium back term assurance poilcy

Real Estate Precious Objects

•Agricultural land •Gold and silver
•Semi-urban land •Precious stones
•Time share in a holiday resort •Art objects

Financial Derivatives- i) Options and ii) Futures 16

 Derivatives

• A derivative is a financial instrument whose

value derives from the value of something
else, generally called the underlying(s).
• Underlying: a barrel of oil, a financial asset, an
interest rate, the temperature at a specified
location.
 Factors Influencing Selection of
Investment
• Rate of Return
• Risk
• Marketability
• Tax shelter
• Convenience

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 Rate of Return
The rate of return on an investment for a period
(which is usually a period of one year) is defined as
follows:

R Total return over the period

C +(PE - PB ) C Cash Payment received during the period
R = --------------------
PE Ending price of the investment
PB
PB Beginning price
 Example: Rate of Returns
Consider the following information for an equity stock:
Price at the beginning of the year : Rs 60.00
Dividend paid at the end of the year : Rs 2.40
Price the end of the year : Rs 69.00
R Total return over the period
C +(PE - P B )
R = ------------------------- C Cash Payment received during
PB the period

2.40 +(69.00 – 60.00 ) PE Ending price of the investment

R= -------------------------------------------
60.00
PB Beginning price

R = 0.19 or 19%
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 It is helpful to split the rate of return into two components:
Current yield and capital gains/losses yield as follows:

Rate of return = Current yield + capital gain yield

Cash payment Ending price – Beginning price

--------------------- + --------------------------------------------
Beginning price Beginning price

2.40 69.00-60.00
= -------- + --------------------
60.00 60.00

4% current yield + 15 % Capital gains yield

 Risk
• Variance : This is the mean of the squares of
deviations of individual returns around their
average value.
• Standard deviation : This is the square root of
variance.
• Beta : This reflects how volatile is the return
from an investment in response to market
swings.

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 Marketability
• Transacted quickly.

• Transaction cost is low.

• The price change between two successive

transactions is negligible.

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How does one evaluate the ‘marketability’ of an
investment like a provident fund deposit which is non-
marketable by its very nature?

• In such a case, the relevant question is ask is:

– Can withdrawals be made or loans be taken
against the deposit?
– A substantial portion of the accumulated balance
can be withdrawn without significant penalty?
– A loan (representing a significant portion of the
accumulated balance) can be raised at a rate of
interest that is only slightly higher than the rate of
interest earned on the investment itself?
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 Tax Shelter
1. Initial Tax Benefit- At the time of making the
investment
Eg: When you make a deposit in a Public Provident Fund
Account, you get a tax rebate under Section 88 of the
Income Tax Act.
2. Continuing Tax Benefit- Tax shield associated with the
periodic returns.
Eg: Dividend income and income from certain other sources
is tax-exempt, upto certain limit.
3. Terminal Tax benefit- Investment is realised or
liquidated.
Eg: A withdrawal form a Public Provident Fund Account is
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not subject to tax.
 Convenience
• Degree of convenience.

• Deposit in a savings bank account – does not

require any maintenance effort.

• Purchase of a property – Lot of procedural and

legal hassles.

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 Summary Evaluation of Various Investment Avenues
Return Risk Marketa Tax shelter Convenie
bility/liq nce
Current Capital
uidity
yield appreciation
Equity shares Low High High Fairly Section 80 L High
high benefit
Non-convertible High Negligible Low Average Nil High
Debentures
Equity Schemes Low High High High Section 80 L Very high
benefit
Debt Schemes High Low Low High No tax on Very high
dividends
Bank Deposits Moderat Nil Negilible High Section 80L Very high
e benefit
Public Provident Nil High Nil Average Section 88 very high
Fund benefit
Life Insurance Nil Moderate Nil Average Section 88 Very high
Policies benefit
Residential house Moderat Moderate Negiligibl Low High Fair
e e
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Gold and Silever Nil Moderate Average Average Nil Average
Thank you.......

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