Dr. Leena B. Dam
Security Analysis and Portfolio Management

Security Analysis + Portfolio Management
Security Analysis = Valuation and analysis of
individual securities
Portfolio Management = The selection,
revision, and evaluation of a group assets

Unit 1: Markets and Financial Instruments

Learning Objectives:
1. To understand the different types of financial
markets.
2. To learn the various kinds of investment instruments.
3. To analyses the risk and return associated with
various investment instruments.
4. To differentiate between Investment and Speculation
5. To learn to prepare financial plans for individual
investors.

Financial
Market
Money
Market
Organise
d
Call
Money
Treasur
y Bill
Certificate
Of Deposit
Commer
cial
Paper
Unorganise
d
Hund
i
Chit
Fund
Mone
y
Lende
r
Capital
Market
Organise
dCorporat
e
Securitie
s
Primary
Secondary
Deb
t
Unorganise
d
Others
Derivatives Futures
Foreign
Exchange
Commodity

Cost of Living
Why
Investment?
Goals of Life How to achieve?
Own House
Children’s Education
Daughter’s Marriage
Peaceful Retirement
Legacy for next generation
Save part of the earnings
Make the earnings sweat to
expedite reaching the goal
Investments are required because
• Savings alone will not be enough to meet the goals
• Costs of inflation
InvestmentAmount Nominal Valueafter
10 years
Real Value after10
years
Cash stored at house Rs. 100 Rs 100 Rs. 61.4 (at 5% inflation)
Invested (6% return) Rs. 100 Rs 179 Rs. 110 (at 5% inflation)
Why Investment

Inflation/Interest
• Rate at which the value of currency
decreases.
• Money can't buy the same amount of
goods in the future.
• At 5% inflation, 1kg sugar that costs
40 rupees now will cost 65 rupees
after 10 years.
• Rate charged by the lender to the
borrower of money.
• Rate at which value of money invested
increases.
• At 8% interest, 10,000 rupees
invested today will value 22,000
rupees after 10 years
Inflation
Interest
Inflation/Interest

Inflation/Interest Illustration
Price of 1kg
sugar
with inflation
5%
Rs. 40 Rs. 65 Rs. 65
Present Value
After 10 years
(without
investing
– kept idle in a
locker )
Value after 10
years (with
investing at
8%)
Value of Rs.
1000
Rs. 1000 Rs. 1000 Rs. 2160
Quantity of
sugar that
can be
bought
1000/40 = 25
kgs
1000/65 = 15.4
kgs
2160/65 = 33.2
kgs
Inflation/Interest Illustration

Power of Compounding
• Compound interest is the interest on the Principal along with
accumulated interest.
• Money invested gives more money as it gets compounded
– Interest on interest
Tounleash the power ofcompounding
Invest early
Invest regularly
Invest for long-term not the short-term
“Compounding interest is the greatest mathematical discovery of all time”
- Albert Einstein
Power of Compounding

Illustration
• Ramu and Krishna save Rs. 20000 at the end of each year.
• Ramu invested in a financial instrument that gives 10%
returns and Krishna didn't want to take any risk and so he
saved his money in savings bank that gives 3.5% returns.
• After 10 years Krishna realizes the power of investment and
starts to invest instead of saving.
Money with Ramu Money with Krishna
After 10 years Rs. 3,18,800 Rs. 2,34,620
Money with Ramu Money with Krishna
After 20 years Rs. 11,45,500 Rs. 9,27,320
Total Money
Invested
Rs. 20,000 X 20 =
Rs. 4,00,000
Rs. 20,000 X 20 =
Rs. 4,00,000
Total Gain Rs. 7,45,500 Rs. 5,27,000
Power of Compounding Illustration

What is Investment?
Investment is the current commitment of money for a period
of time in order to derive future payments that will
compensate the investor for:
- The time the funds are committed
- The expected rate of inflation
- The uncertainty of the future payments.

How to select investments that will give investors their
required rate of return?
Real vs Financial Investment
Amount
Time horizon
Extent of liability
Uncertainty
Impact of time and risk
Liquidity
Investment Vs Speculation
Investments Vs Gambling

Liquidity
Maturity
Need for regular income
Time Horizon
Risk Tolerance
Tax Liability
Investment Constraints

Categories of Investor
Aggressive – high risk and expects higher return in capital gain
Conservative – low risk and low return, regular income
Balanced – Some risk and expects moderate returns
The price of a security in the financial markets:
decided by forces of demand and supply
Types of Investors
Individual Investors
Institutional Investors
Foreign Investors

Fundamental Principles of Investment
Safety
Liquidity
Risk
Return
Risk, return and diversification
Combining securities in a portfolio
Results in a lower level of risk
Than a simple average of the risks of each
Investment in securities which are negatively correlated

Asset Allocation Model/Portfolio
•In a portfolio, investments are made in two or more assets.
•To achieve a given level of returns with the min risk possible.
Factors considered for Asset Allocation
Goal
Investor’s Risk
Tolerance
Time Horizon
Asset Allocation for different investors
Asset Allocation Model/Portfolio

Stage of Life - Investment
Insurance
Small Savings
Two Wheeler
Home
Four Wheeler
TaxSaving
Schemes
Equity
Mutual Funds
Child Education
Gold
Mutual Funds
Young Age
Early Middle
Age
Early Young
Age
Middle Age
Security
against
Uncertainty Tax Saving
Plans and Early
stages of
Wealth
Building Wealth
Building
Retirement
Planning
Stage of Life

What are securities?
Definition – a legal representative of the right to receive
prospective future benefits under stated conditions.
Generic term used for those documents evidencing
liabilities that are negotiable – that can be bought or
sold in the market.

Types of Instruments
Gilt Edged Securities
Corporate Debentures
Bonds
Preference shares
Equity Shares
Mutual Funds

Non Security Forms of Investment
•National Saving Schemes
•Post Office Savings Deposit Schemes
•Deposits with Commercial Banks
•Corporate Fixed Deposits

Investment Process
1. Set Investment Policy (Amt, Duration, Risk, Return)
2. Perform Security Analysis (in which security desired objective
can be best fitted)
3. Construct a portfolio (Choosing securities and diversify)
4. Revise the portfolio (necessary to review to check if desired
objective is fulfilled)
5. Evaluate performance (After a certain period)

Meaning of Investment
Investment refers to the acquisition of the asset, in the expectation of generating
income. In a wider sense, it refers to the sacrifice of present money or other resources
for the benefits that will arise in future. The two main element of investment is time
and risk
Nowadays, there is a range of investment options available in the market as one can
deposit money in the bank account, or can acquire property, or purchase shares of
the company, or invest your money in government bonds or contribute in the funds
like EPF or PPF.
Investments are majorly divided into two categories i.e. fixed income investment and
variable income investment. In fixed income investment there is a pre-specified rate of
return like bonds, preference shares, provident fund and fixed deposits while in
variable income investment, the return is not fixed like equity shares or property.

Definition of Speculation
Speculation is a trading activity that involves engaging in a risky financial transaction, in
expectation of making enormous profits, from fluctuations in the market value of
financial assets.
In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset by
the probability of significant profit. Although, the risk is taken by speculators is properly
analysed and calculated.
Speculation ca be seen in markets where the high fluctuations in the price of securities
such as the market for stocks, bonds, derivatives, currency, commodity futures, etc.

BASIS FOR
COMPARISON
INVESTMENT SPECULATION
Meaning The purchase of an asset with
the hope of getting returns is
called investment.
Speculation is an act of
conducting a risky financial
transaction, in the hope of
substantial profit.
Basis for decision Fundamental factors, i.e.
performance of the company.
Hearsay, technical charts and
market psychology.
Time horizon Longer term Short term
Risk involved Moderate risk High risk
Intent to profit Changes in value Changes in prices
Expected rate of return Modest rate of return High rate of return
Funds An investor uses his own
funds.
A speculator uses borrowed
funds.
Income Stable Uncertain and Erratic
Behavior of
participants
Conservative and Cautious Daring and Careless
Difference between Investment and Speculation