AN INSIGHT INTO

SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT

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 Learning Objectives
By the end of the course one should be able to:
♦ Explain the most important investment
alternatives available
♦ Describe the markets in which financial
securities are traded
♦ Differentiate between expected and
realized returns
♦ Analyze return and risk of both single
investment alternatives and portfolios.

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♦ Practice bond and stock valuation based on
fundamental and technical analysis.
♦ Describe the mechanics of trading, and the role
of financial institutions.
♦ Describe different investment strategies.
♦ Construct the portfolio
♦ Revise and re-construct optimal portfolio
(Efficient Frontier)
♦ Evaluate the performance of the portfolio
♦ Use the key terms involved with financial
investments and interpret market research
information

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 Investment Attributes
♦ Commitment of funds
♦ Definite time period
♦ Cash inflows at defined intervals
♦ Appreciation/depreciation
♦ Risk
♦ Marketability
♦ Tax shelter
♦ Convenience

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 Investment Vs. Speculation
1. Planning horizon
* Investor has a relatively longer period
* Speculator has a very short period
2. Risk disposition
* Investor assumes relatively moderate
calculated risk
* Speculator assumes high risk
3. Return expectations
* Investor seeks moderate return
* Speculator seeks a high rate of return

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 Investment Vs. Speculation
Contd…..
4. Basis for decision
* Investor attaches greater significance
to fundamental factors and attempts a
careful evaluation of the prospects of
the firm
* Speculator relies more on hearsay,
technical charts and market
psychology

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 Investment Vs. Speculation
Contd…..
5. Leverage
* Investor uses his own funds and
eschews borrowed funds
* Speculator resorts to borrowings very
substantially to supplement his
personal resources

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 Investment alternatives
Investment avenues

Non-marketable
Equity shares
financial assets

Bonds Money market

instruments

Mutual funds Life insurance

policies

Real estates Precious objects

Financial
derivatives
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 Structure of Securities Market
Securities market

Derivatives
Equity market Debt market market
(Primary and
Secondary)

Corporate debt Money market

G-securities
market

Options market Futures market

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Money Market
♦ Purely for short-term funds not exceeding a year
♦ Deals with highly liquid assets
♦ Transactions over telephone or online
♦ No brokers
♦ Commercial Banks would play vital role
♦ Establish the link between RBI and other banks

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Money Market Instruments
♦ Treasury Bills
♦ Interbank Call Money
♦ Commercial Papers
♦ Bills Discounted
♦ Certificates of Deposit
♦ Repurchase options (REPO)

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Capital Market
♦ Meant for Long-term funds
♦ Provides funds for CAPEX
♦ Divided into Primary and Secondary Markets
♦ Secondary Market provides liquidity for Primary Market
♦ The instruments would include
– Debentures/Bonds
– Preferential Shares
– Common Shares
♦ As per RBI, household sector’s savings are Rs. 7,97,117
crore and 50% of this is invested in financial assets

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Suggested factors to be considered for investment
in Primary Markets
♦ Promoters’ track record
♦ Professional Management
♦ Objects of the issue
♦ Project details including location and raw-material
♦ Product portfolio and market conditions
♦ Financial data
♦ Profitability projections
♦ Issue pricing
♦ Pending litigations
♦ Risk factors
♦ Statutory requirements and clearances

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Individual Investor Life Cycle

♦ Accumulation phase – early to middle

years of working career
♦ Consolidation phase – past midpoint of
careers. Earnings greater than
expenses
♦ Spending/Gifting phase – begins after
retirement

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 Individual Investor Life Cycle
Net Worth
Accumulation Phase Consolidation Phase Spending Phase
Gifting Phase
Long-term: Long-term:
Retirement Retirement Long-term:
Children’s college Short-term: Estate Planning
Short-term: Vacations Short-term:
House Children’s College Lifestyle Needs
Car Gifts
25 35 45 55 65 75

Age

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Life Cycle Investment Goals

♦Near-term, high-priority goals

♦Long-term, high-priority goals

♦Lower-priority goals

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Investment Profile of Indian Population

♦ 4.5 mn participate in equity markets

♦ 33% of earners own life insurance policies

♦ 20 mn will buy life insurance in 2008

♦ 11 mn plan to buy residential property soon

♦ 5.7 mn is the retail mutual fund base

♦ 18 mn individuals have some form of investments

♦ 6% of 321 mn working age Indians buy gold purely as an investment option

♦ 82% of all consumer loans are from money lenders and friends

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Investment Profile of Indian Population

♦ $ 6.4 bn of retail savings in gold in 2006-2007

♦ Rs. 57000 cr is the latest demand for voluntary retirement savings

♦ 79 mn are willing to join NPS on voluntary minimum SIP basis

♦ 144 mn has incomes, but no bank accounts

♦ $ 35 bn is the annual savings potential of low income investors

♦ Rs. 2268 cr is held as savings in Self Helf Groups (SHGs)

♦ 25% is the increase in aggregate earnings in the last three years

♦ 87% of the latent demand can be served through post offices and banks’ networks

♦ By 2020 the private pension market is expected to grow to $ 300 bn

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 Security defined
‘SCRA (1956)’ defined the security as
inclusive of shares, scrips, stocks, bonds,
debenture, marketable securities of a
company or body corporate or govt.

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 Security Analysis defined
♦ It is a process of examining and evaluating individual
securities to estimate the results of investing in them.
♦ It involves the projection of future earnings or dividends,
forecasts of share price and intrinsic value of a security.
♦ Develops and presents important facts regarding corporate
stocks and bonds
♦ Establishes the framework for risk return analysis

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 Security Analysis as a discipline must
achieve……

♦ A true picture of a company as a going concern

♦ A carefully prepared estimate of normal earning
power
♦ A projection of future profitability and growth
♦ A translation of all conclusions into a valuation of
the company
♦ Security Analysis is a tool for efficient portfolio
management

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 The functions of Security Analysis
♦ Descriptive functions
– Analysing and interpreting and presenting the
facts and figures about an issue
– A thorough probing of companies to understand
the causes of past and present profitability and to
interpret their relationship to future profitability.
This would include:
• Mergers and Acquisitions
• Shifts in product mix
• Expansion of market areas
• Changes in the market share
• Intensity of foreign competition
• Capacity utilisation
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 The functions of Security Analysis
♦ Valuation Function
– Developing value estimates for stocks and
bonds
– Express judgments on the relative investment
attractiveness of securities under review

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 The functions of Security Analysis
♦ Corporate critic function
– Providing insight into financial practices and
policies and corporate governance
– Assessing the impact of such practices and
governance on the objectives of an individual
investor
– Commenting on the accounting methods and
disclosure practices
– Assessing the impact of capital structure and
dividend decisions on the value of equity

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