To provide students with a conceptual framework of
evaluating various investment avenues.
To provide students with a conceptual and analytical
framework of different financial.
instruments, markets, regulations, their risk and returns
and strategies in managing funds.
To familiarize students with portfolio management
techniques that challenges a financial manager.
To give an overview of the global markets and their
impact on the domestic markets
Why learn this Subject?
Unit 1 Introduction to Investments 10 Hours
Investment management, nature and scope, investment avenues, types of
financial assets and real assets, Security return and risk – Systematic and
unsystematic risk; sources of risk, Measurement of risk and return; courses of
investment information; Profile of Indian investors.
Unit 2 Fixed Income Securities 10 Hours
Fixed income securities – bonds, preference shares-sources of risk, valuation,
duration of bond-theory of interest rates-yield curve; Bond innovations and their
valuation; Analysis of variable income securities.
Unit 3 Methods of Security Analysis 15 Hours
Fundamental analysis – analysis of economy, industry analysis, company
analysis – financial and non-financial; Equity valuation models - options, futures,
forwards, warrants and their valuations; Technical analysis – Dow theory;
Efficient market hypothesis and its implications.
Unit 4 Introduction to Portfolio Management 05 Hours
Meaning of portfolio management; portfolio analysis; Importance; Portfolio
objectives; Portfolio management process; selection of securities.
Unit 5 Modern Portfolio Theories
Portfolio theory; Markowitz model; Sharpe’s single index model; Efficient frontier
with lending and borrowing, optimal portfolio, capital asset pricing model;
Arbitrage pricing theory, two factor and multifactor models.
Unit 6 Portfolio Management Strategies & Portfolio Evaluation 08 Hours
Bond Portfolio management strategies; Equity portfolio management strategies,
strategies using derivatives, hedging; Portfolio revision – rebalancing plans,
Portfolio evaluation- Sharpe’s index, Treynor’s measure and Jenson’s measure.
♠ Alexender & Bailey. (2001). Fundamentals of Investments. New Delhi:
♠ Bhalla V K. (2008). Investment Management. New Delhi: S Chand &
♠ Fischer and Jordan (2006). Security Analysis and Portfolio
Management. New Delhi: Prentice- Hall.
♠ Prasanna Chandra.(2011). Investment Analysis and Portfolio
Management .New Delhi: Mcgraw-Hill.
♠ Preeti Singh. (2000). Investment Management. New Delhi: HPH .
♠ Punithavathy Pandian .(2010). Security Analysis and Portfolio
Management. New Delhi: Vikas Publishing House.
♠ SudhindraBhat.(2011). Security Analysis and Portfolio Management.
New Delhi: Excel Books.
In simple terms, Investment refers to process of investing
money in financial or real assets for profit or material result.
Investment made in buying financial instruments such as
new shares, bonds, securities, etc. is considered as a
Financial Investment. Investment made in plant and
equipment, land and building and other infrastructure facilities
is considered as Real Investment.
Investment decisions refers to application of funds in long-term
assets in anticipation of future benefits and maximization
of long-term profitability.
Investment refers to
Difference between Savings and Investment
Difference Savings Investment
Meaning Saving money means keeping aside a
part of your income regularly in order
to deal with unexpected expenses.
Investment means putting your saved
money in various products in order to earn
returns and grow your wealth.
Time Savings are usually used to meet your
short term needs. People save in
order to deal with emergency
situations and meet unexpected
However, investment generally entails a
longer horizon of six months or more. It is
designed to provide returns and grow your
money over a period of time.
savings stored in a safety vault are
very safe, they will not generate any
returns over the years. Even if money
is kept in a savings account, it will
provide a negligible rate of return.
money invested in various products like
stocks, mutual funds, gold, etc. is subject to
more risks, but has the potential to grow
over time. If invested wisely, your money
can grow manifold over years.
Liquidity savings are the most liquid assets, as
they can be accessed at any time.
It takes a few days for the money to reach
your bank account after you decide to sell
• A: On the Basis of Physical Investments
• Gold and Silver
• Precious stones
Investment refers to a
money commitment of
• B: On the Basis of Financial Investment
• Marketable and Transferable investments
• Non-Marketable Investments
B.1: Marketable and Transferable investments
• Government Securities
B.2: Marketable and Transferable investments
• Bank Deposits
• Provident and Pension Funds
• Insurance Certificates
• Post office Deposits
• National Saving Certificates
• Company Deposits
• Features and rights of equity share holders
Pre-emptive right (Right issue)
Par value The capital of a company is
divided into shares. Each
share forms a unit of
ownership of a company
and is offered for sale so as
to raise capital for the
1. Easily transferable
3. Profit potential
4. Purchasing power risk
1. Uncertain and Irregular Income
2. Capital loss During Depression Period
3. Loss on Liquidation
Preference shares are
those, which enjoy
• Features and rights of equity share holders
Pre-emptive right (Right issue)
Retirement of debt through sinking fund
1. No Voting Right
2. Fixed Income
3. No claim over surplus
4. No Guarantee of Assets
1. Regular Fixed Income
2. Lesser Capital Losses
3. Preferential Rights
4. Voting Right for Safety of Interest.
5. Fair Security
Preference shares. Sec.
85(1) of the Companies
Act defines preference
shares as those shares
which carry preferential
rights as the payment of
dividend at a fixed rate
and as to repayment of
capital in case of winding
up of the company.
Classification of preference shares
1. Cumulative or non cumulative
2. Participating or Non-participating
3. Redeemable or Non-Redeemable
4. Convertible or Non-convertible
Classification of Equity Shares
According to Stock Market
Stock market has classified equity shares as follows:
Type Key feature
Share of large, well established and financially strong companies
shares with an impressive record of earnings and dividends.
Enjoy an above average rate of growth as well as profitability.
fairly stable operations, relatively limited growth opportunities, and
high dividend payout ratios.
A Cyclical stock is a stock highly correlated to the economic activity.
Relatively unaffected by the ups and downs in general business
tend to fluctuate widely because there is a lot of speculative trading
Concept of Debentures in India
• According to Indian Company’s Act, 1956, defined the
• Debentures includes debenture stock, bonds and any
other securities of a company, whether constituting a
charge on the assets of the company or not, in
common parlance, debenture is an instrument issued
by a company under its common seal, acknowledging
its debt to the holder, and containing an undertaking to
repay the debt on or after a specified period and to pay
interest on the debt at a fixed rate at regular intervals,
usually, half yearly, until the debt is repaid.
• The person to whom the debentures are issued are
called debenture holders. The debenture holders are
not the owners of the company. They are just the loan
creditors of the company.
A type of debt instrument
that is not secured by
physical assets or
1. Higher rates of financial return
2. Choice of converting
3. Fixed interest
1. Credit Risk
Classification of Debentures
1. Convertible debentures
2. Non-convertible debentures
• The deposit placed by investors with companies for a fixed term
carrying a prescribed rate of interest is called Company Fixed
• Financial institutions and Non-Banking Finance Companies
(NBFCs) also accept such deposits. Deposits thus mobilized are
governed by the Companies Act under Section 58A.
• These deposits are unsecured, i.e., if the company defaults, the
investor cannot sell the documents to recover his capital, thus
making them a risky investment option.
Companies that find it
difficult to get loans from
banks raise money from
1. Company fixed deposits offer better interest rates than
2. Additional risk
3. Company fixed deposits are rated by Rating Agencies
4. TDS on Company Fixed Deposits
5. You could keep a shorter horizon
A debt investment
in which an
money to an entity
borrows the funds
for a defined
period of time at a
fixed interest rate.
Features of Bonds
2. Covenants: Affirmative & Negative
4. Par Value
5. Coupon Rate
Types of Bonds
1. Serial Bonds
2. Sinking Fund bonds
3. Registered bonds
4. Mortgage bond
5. Collateral trust bonds
6. Convertible bonds
7. Zero-coupon bonds
8. Callable Bonds
Symbols Rating Definition Remarks
CRISIL AAA Highest Safety Timely servicing of financial obligations-lowest
CRISIL AA High Safety Timely servicing of financial obligations
very- low credit risk.
CRISIL A Adequate safety Adequate degree of safety- low credit risk.
CRISIL BBB Moderate Safety carry moderate credit risk.
CRISIL BB Moderate Risk risk of default -financial obligations
CRISIL B High Risk
CRISIL C Very High Risk
CRISIL D Default
• The main features of fixed deposit account are as
• Tenure ranges between six months to 10 years
• Guaranteed Returns
• Interest income monthly, quarterly or annually.
• Reinvest interest income and gain the influence of
• Partial or full withdrawal facility is available with penalty
• Loan against deposits
• Senior citizens get higher coupon rates in the range of 0.25 -
The term 'fixed
that the deposit
is fixed and is
after a specific
period is over.
Safety Lower rate of returns
Regular Income Taxes
Saves tax inflation
& Credit Guarantee
Scheme of India
• Recurring deposits are special kind of Term Deposits and are suitable for people
who do not have lump sum amount of savings, but are ready to save a small
amount every month.
Difference Fixed Recurring
Rate of Return Approximately 8%-8.5%
for a period of 1 year
Approximately 8%-8.5% for
a period of 1 year
Loan facility available Loan facility available
Tenure Tenure ranges from 7
days to 10 years
Tenure ranges from 1 years
to 10 years
Rs. 10,000 (may differ
from Bank to Bank)
No limit No Limit
Interest penalty levied,
varies from Bank to Bank
Interest penalty levied,
varies from Bank to Bank
Tax benefit Incase of a Tax saver FD,
a tax exemption u/s 80c
No tax benefit
Interest Income Taxable and subject to Taxable but no TDS
It provides a parking place to employ short term surplus
It is a market purely for short term funds or financial
assets called near money.
It deals with debt instrument which have a maturity of less
than one year at the time of issue are called money market
Money market instruments are highly liquid and have
The money market is dominated by the government,
financial institutions, banks and corporates.
Features of a
• Treasury Bills are money market instruments to finance the
short term requirements of the Government of India.
• These are discounted securities and thus are issued at a
discount to face value.
• The return to the investor is the difference between the maturity
value and issue price.
• Treasury Bills are issued for the following tenors 91-days, 182-
days and 364-days Treasury bills.
Benefits of Investment In Treasury Bills
1. No tax deducted at source
2. Zero default risk being sovereign paper
3. Highly liquid money market instrument
4. Better returns especially in the short term
6. Simplified settlement
7. High degree of tradability
The treasury bills are issued in the form of promissory note in physical form or by
credit to Subsidiary General Ledger (SGL) account or Gilt account in
Minimum Amount of Bids
Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only
and in multiples thereof.
All entities registered in India like banks, financial institutions, Primary Dealers,
firms, companies, corporate bodies, partnership firms, institutions, mutual funds,
Foreign Institutional Investors, State Governments, Provident Funds, trusts,
research organizations, Nepal Rashtra bank and even individuals are eligible to bid
and purchase Treasury bills.
The treasury bills are repaid at par on the expiry of their tenor at the office of the
Reserve Bank of India, Mumbai.
All the treasury Bills are highly liquid instruments available both in the primary and
For treasury bills the day count is taken as 365 days for a year.
• A cooperative bank wishes to buy 91 Days Treasury on Oct. 12, 20014, Bill Maturing on Dec. 6,
2014. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values.
The yield of a Treasury Bill is calculated as per the following formula:
Y = discounted yield
D= Days to maturity
YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70%
Salient Features of The Auction
• The auction of treasury bills is done only at Reserve Bank of India,
• Bids are submitted in terms of price per Rs 100.
• For example, a bid for 91-day Treasury bill auction could be for Rs
97.50. Auction committee of Reserve Bank of India decides the cut-off
price and results are announced on the same day.
• Bids above the cut-off price receive full allotment; bids at cut-off price
may receive full or partial allotment and bids below the cut-off price are
Types of Auctions
There are two types of auction for treasury
1. Multiple Price Based or French Auction: Under this method, all bids equal to
or above the cut-off price are accepted. However, the bidder has to obtain the
treasury bills at the price quoted by him.
2. Uniform Price Based or Dutch auction: Under this system, all the bids equal
to or above the cut-off price are accepted at the cut- off level. However, unlike
the Multiple Price based method, the bidder obtains the treasury bills at the
cut-off price and not the price quoted by him.
INADEQUACY OF WC
Under-utilization of capacity
Creditworthiness is hit
Cannot utilize business opportunity
Modernization and Maintenance
Discounts and Perks
Money Market Instruments
1. Certificate of deposit - Time deposit, commonly offered to consumers by
banks, thrift institutions, and credit unions.
2. Repurchase agreements - Short-term loans—normally for less than two
weeks and frequently for one day
3. Commercial paper - Unsecured promissory notes with a fixed maturity of
one to 270 days; usually sold at a discount from face value.
4. Treasury bills - Short-term debt obligations of a national government that are
issued to mature in three to twelve months
Certificates of Deposit
• Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialized form or as a Usance Promissory Note against funds deposited at a bank
or other eligible financial institution for a specified time period.
• Guidelines for issue of CDs are presently governed by various directives issued by the
Reserve Bank of India (RBI), as amended from time to time.
Difference FD CD
Negotiability No Yes
Return Low High
Rating No Yes
1. Eligibility-Who can issue?
2. Aggregate Amount- How much?
3. Denominations-Pricing? multiples of Rs. 1 lakh thereafter.
4. Investors-Who can buy?
5. Maturity 7d-1y
6. Coupon Rate
7. Reserve Requirements
Commercial Paper (CP)
• A Commercial Paper (CP) is an unsecured, short-term debt instrument
issued by a corporation, typically for meeting short-term liabilities.
• It was introduced in India in 1990.
• It was aimed at providing highly rated corporates with a borrowing
• So while they could borrow from a bank, now with the help of a CP,
they could also borrow from the open market.
• This process is also called Financial Disintermediation or in other
words getting rid of the mediator.
Who can issue CP? Corporates, primary dealers (PDs) and the All-India Financial
Institutions (FIs) are eligible to issue CP.
Rating requirement All eligible participants shall obtain the credit rating for issuance of
In what denominations a CP
that can be issued?
CP can be issued in denominations of Rs.5 lakh or multiples thereof.
minimum and maximum
period of maturity
a minimum of 7 days and a maximum of up to one year from the date
Who can invest in CP? a Individuals, banking companies, other corporate bodies (registered
or incorporated in India) and unincorporated bodies, Non-Resident
Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can
invest in CPs. However, investment by FIIs would be within the limits
set for them by Securities and Exchange Board of India (SEBI) from
What is the mode of
Initially the investor in CP is required to pay only the discounted value
of the CP by means of a crossed account payee cheque to the
account of the issuer through IPA. On maturity of CP.
• An agreement with a commitment by the seller (dealer) to buy a security
back from the purchaser (customer) at a specified price at a designated
• The repurchase price should be greater than the original sale price, the
difference effectively representing interest, sometimes called the repo rate.
• The party that originally buys the securities effectively acts as a lender. The
original seller is effectively acting as a borrower, using their security as
collateral for a secured cash loan at a fixed rate of interest.
• Legal title to the collateral security which is used in repo transaction, passes
to the buyer during the repo period. As a result in case the seller defaults the
buyer does not require to establish right on the collateral security.
Gilt Edged Securities
• Gilts, short for Gilt Edged Securities, are securities issued by the
Government with a fixed interest rate for a predetermined length of
• Gilt-edged securities are a high-grade investment with very low risk.
Typically, these are issued by blue chip companies that dependably
meet dividend or interest payments because they are well-established
and financially stable .
“Risk is defined as the chance of
having a loss due to occurrence of an
“The risk is always associated with the
loss aspects since the word itself has
the association of DANGER OF LOSS”
The definition can be “
PROBABAILITY OF THE
OCCURRENCE OF AN EVENT
RESULTING IN LOSS/ GAIN
Types of Risk
Results in loss, or break even or
Making a profit
Pure RISK Produces only loss or in some
cases break even.
Outside the control &
Fall on masses
Exposure to loss from a
situation associated with
specific individual events
Dynamic and Static Risk
1. Personal Risk
Dependent Old Age
Sickness and Disability
2. Property Risk
Loss or Damage
Loss on use of property
Additional expenses on
3. Liability Risk
4. Default Risk
1. Horse race
2. Busying stocks
3. Real estate
4. Diversify on the existing product line
5. Fire at home due to short circuit
6. Natural disasters
7. Betting and Gambling
9. Hurricane Katrina
11.Bhopal Gas tragedy
12.Employee violence at Maruti Plant
Types of Life
Term Life Insurance
• Increasing/Decreasing term policies
• Convertible Term Assurance Policy
• Level Term Life Insurance
• Renewable term life Insurance
◦ Joint life endowment plan
◦ Money back endowment plan
◦ Marriage endowment plan
Permanent (Whole) Life Insurance
◦ Ordinary whole life plan
◦ Limited payment whole life plan
Unit Linked Plans
• Sum assured is payable only in the event of
death during the term.
• In case of survival, the contract comes to an
end at the end of term.
• Term Life Insurance can be for period as long
as 40 years and as short as 1 year.
• No refund of premium
• Non-participating policies
• Low premium as only death risk is
Increasing Term Insurance
Life insurance cover under
this plan goes on increasing
periodically over the term in
a predetermined rate. (Riders)
Decreasing Term Insurance
The sum assured decreases with the
term of the policy. Normally decreasing
term assurance plan is taken out for
mortgaged protection, under which
outstanding loan amount decreases
as time passes as also the sum assured.
Types of Term
Convertible term assurance policy
Under this plan a policyholder
is entitled to exchange the term
policy for an endowment
insurance or a whole life policy.
Conversion can be done at any
time during the term except last
Level Term Life Insurance
The sum assured throughout the term of the
policy does not change.
Renewable Term Life Insurance
With renewable term insurance, the insurance
company automatically allows you to renew
your coverage after the term of the policy is
over (generally 5 to 20 years)
• Endowment insurance plans is an investment
oriented plan which not only pays in the event of
death but also in the event of survival at the end of
• Is a contract underwritten by a life insurance
company to pay a Fixed term plus Accumulated
profits that are declared annually.
• Premium includes 2 elements
-mortality element & investment element
• Minimum age at entry : 12years
• Maximum age at entry: 65 years
• Maximum age at maturity : 75years
Joint Life Endowment Plan:
Under this plan, two lives can be insured under
The sum assured is payable at the end of the
endowment term or death of either of the two.
Money Back Endowment Plan:
In this plan, there is an additional advantage of
receiving a certain amount of money at periodic
intervals during the policy term.
Marriage Endowment Plan:
This plan has the specific condition that the sum assured
is payable only after the expiry of the term even if death
of the life assured takes place earlier.
Educational Endowment Plan:
These plans are specially designed to meet educational
expense of children at a future date. If the insured parent
dies before the date of maturity the installment is paid in
lump sum with immediate effect which helps to meet the
• Whole life plans are another type of endowment
plan, which cover death for an indefinite period.
• When the policy holder dies, the face value of the
policy, known as a death benefit, is paid to the
person or persons named in the life insurance policy
(the beneficiary or beneficiaries).
• It can be with or without profits.
• If you cancel the policy after a certain amount of time
has passed, the insurance company will surrender
the cash value to you.
• Ordinary Whole Life Plan:
• This is a continuous premium payment plan. The
insured pays premium throughout his life. It provides
dual facility of protection plus savings.
• Limited Payment Whole Life Plan:
• It provides the same benefit as above but premiums
are paid for a limited period. Premiums are
sufficiently higher to cover the risk
3. Anticipated Whole Life Plans:
Under this plan, the insured receives a
fixed sum in a periodic interval on his
survival and full sum assured is paid on
death of the policy holder without any
It takes care of family needs after
death of the insured and interim needs
of the insured and his family.
• Since last few years insurance companies have
started offering risk cover plans like limited
payment whole life, and endowment assurance
plan from the age of 12years and money back
plan from age of 13 years(completed).
• New plans have been specifically designed for
children where the risk of the child starts much
earlier say 7 years.
• It has emerged as one of the fastest growing
• It is a combination of an investment fund( such
as mutual fund) and an insurance policy.
• The premium amount is invested in the stock
market and returns better income on the
• Add-on’s or Riders
• Accident and Disability benefit
• Critical illness benefit
• Major surgical assistance
• Level Term Insurance
• The Pru Life Guard or Term Level Assurance
• Death Risk Coverage
• No maturity benefits in case of single premium level
• Add-on’s or Riders as in ICICI Pru Cash Bank
1. Immediate funds requirements upon
after death- medical expenses for
terminal illness, expenses for
performance of last rites and
religious ceremonies etc
2. Children's Education and Marriage
3. Recurring dependent spouse and
4. Funds for paying off debts.
1. Sufficient number of homogeneous exposure
2. The loss must occur by chance
3. Risk must be predictable
4. Loss must not be catastrophic
5. Loss must be definite and measurable
• Should also meet all the requirements of a valid
• Offer and Acceptance
• Legal Capacity
• Legal Purpose
Insurance - contractual
agreement between the
insurer and the insured.
• Insurance contracts are special type of contracts which
have certain additional distinguishing features associated
• Insurable Interest
• Principle of Contribution
• Subrogation (Applicable only to indemnity contracts… not to life
• Utmost good faith Utmost good faith
• Principle of Causa Proxima
Concept of Risk
• Concept of Risk The actual returns that an investor receives from a stock
may vary from his expected return and the this probability of variance itself is
• Risk is expressed in terms of variability of return. An investor before investing
in securities must properly analyze the risks associated with these securities.
• Sometimes the term risk and uncertainty are used interchangeably but
uncertainty the possible events and probabilities of their occurrence are not
known, whereas in case of risk they are known.
• So, risk and uncertainty are different from each other.
Business Entities are Exposed to Many Risks
• Interest Rate Risk Exchange
• Risk Liquidity Risk Default Risk
• Internal Business Risk
• External Business Risk
• Financial Risk
• Market Risk
• Marketability Risk
• Credit Risk
• Operational Risk
• Environmental Risk
• Production Risk
• Events of God
• And many more
Types of Risks Types of Risk
Systematic Risk It is the risk that is caused by external factors such as
economic, political and sociological conditions.
It affects the functioning of the entire market.
Since these risks arise due to external factors they are beyond the control of
the company affected, and hence are uncontrollable or referred to as
They are of three types:
1. Market risk
2. Interest rate risk
3. Purchasing power risk
• Market risk as that portion of the total variability of returns that is caused by the alternating forces
of bull and bear markets.
• When the stock market moves upwards, it is known as bull market. On the other hand, when the
stock market moves downwards, then it is known as bear market.
• The two forces that affect the market are:
1. Tangible events : Earthquake, war, political uncertainty and decrease in the value of money are some
of the examples of tangible events.
2. Intangible events: It is related to market psychology. Political unrest or fall of government affects the
market sentiments. Inflow of foreign funds may make the market psychology positive.
Interest Rate Risk
• Interest Rate Risk It is the risk caused by the variations in the market interest rates.
• Prices of debentures, bonds, etc. are mainly affected by the interest rate risk. (as demand for
bonds and debentures varies directly with the ups and downs of the stock market) Extensive use
of borrowed funds in the stock market
• The causes of interest rate risk are as follows:
Changes in the government’s monetary policy
Changes in the interest rate of treasury bills
Changes in the interest rate of government bonds.
Purchasing Power Risk:
• Purchasing Power Risk Variations in returns are caused by the loss of purchasing power of
• So, the purchasing power risk is the probable loss in the purchasing power of the returns to be
received in the future.
• There are mainly two types of inflation:
1. Demand-pull inflation : The demand for goods and services remains higher than the supply.
2. Cost-push inflation : There is a rise in price due to the increase in the cost of production.