STUDY MATERIAL

COURSE:II MBA
UNIT: I
SUBJECT: SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
FACULTY:Ms. S.Usha
Investment -Concept of investment-importance-alternate forms of investment-LIC schemes-bank
deposits-government securities-mutual fund schemes-post office schemes-provident fundcompany deposits-real estate-Gold and Silver.
INVESTMENT
Investment is the employment of funds with the aim of achieving additional income or
growth in value.
The essential quality of an investment is that it involves waiting for reward.
It involves the commitment of resources which has been saved or put away from
current consumption in the hope that some benefits will accrue in future.
The term investment does not appear as simple as it has been defined.
Investment has been further categorized by financial experts and economists.
Investment involves long-term commitment.
Financial and Economic Meaning of Investment
Investment is the allocation of monetary resources to assets that are expected to yield some gain
or positive return over a given period of time.
These assets may range from safe investments to risky investments. Investment in this form is
called Financial investment.
From the point of view of people who invest their funds, they are the suppliers of capital and in
their view investment is a commitment of a persons funds to derive future income in the form of
interest, dividends, rent, premiums, pension benefits or the appreciation of the value of their
principal capital.
IMPORTANCE OF INVESTMENT
Investments are both important and useful in the context of present-day conditions.
Longer life expectancy:
Investment decisions have become significant as people retire between
ages of 55 and 60.also trend shows longer life expectancy.
The importance of investment decision is further enhanced by the fact that there is an increasing
number of working people.
Increasing rates of taxation: taxation is one of the crucial factors in any country which introduces
an element of compulsion,in persons savings. There are various forms of savings outlets in our
country in the form of investments which help in bringing down the tax level by offering
deductions in personal income.
Interest rates:
Interest rates vary between one investment and another. These may vary between
risky and safe investments, they may also differ due to different benefit schemes offered by the
investments.
Inflation:
The investor will try and search an outlet which gives him a high rate of return in the form
of interest to cover any decrease due to inflation. before funds are invested, erosion of the
resource will have to be carefully considered in order to make the right choice of investments.
Income:
Another reason why investment decisions have assumed importance is the general
increase in employment opportunities in India .more income and more avenues for investment
have led to the ability and willingness of working people to save and invest their funds.
CONCEPTS OF INVESTMENT
There are four concepts of investments
1.Financial investment
2.Economic investment
3.Business investment
4.General investment

1.Financial investment:
Allocation of monetary resources to assets that are expected to yield some gain or positive return
over a given period of time is known as financial investment. Purchasing of shares, debentures,
post office savings certificates and insurance policies all are investment in the financial assets.
These investments range from safe investments to risky investments.
2.Economic investment:
According to the economists,investment means the net additions to the economy s capital stock,
which concsists of goods and services that are used in the production of other goods and
services. Hence it includes all types of plant,machinery,equipment,inventory and construction
materials as well as types of services.
3.Business investment:
Investing money in a private business is known business investment.for instance a man is
investing Rs.200000 in his newly started provisional store. Such investment is called business
investment.
4.General investment:
Sometimes some persons invest in the avenues which do not give any additionl income such as
interest,dividends ,rent or capital growth.such type of personal or general investment is called as
the general investment.
ALTERNATIVE FORMS OF INVESTMENTS
The various investment alternatives can be grouped under
I.Direct invest alternative
II.Indirect investment alternative
I.Direct investment alternative:
These are those where the individual makes his own choice and investment decision. they
include the following.
1. Fixed principal investments
2. Varaiable principal securities
3. Non-security investments
(1)Fixed principal investments: Fixed principal investments are those whose principal amount
and the terminal value are known with certainty. There will not be any change in the terminal
value. These investments include the following
a. Cash: cash has a definite and constant value. It does not earn any return while in hand. It is the
safest investment.
b. Savings account:
They have a fixed return. They differ only in terms of time period .however only a very low
return can be received from this type of investment. Here the principal amount is fixed plus
interest earned.
c. Savings certificates:
These are quite recent some of the examples are national savings certificates, bank savings
certificates, postal savings certificates.
d. Government bonds:
These are issue of state and central governments. These bonds have a fixed maturity value.
2. Variable principal securities:
They include the following
a. Preference shares: preference share is a share that bears a stated dividend and has the
priority of claim over equity shares in the matter of dividend and assets in the event of
liquidation of the company.
b. Equity shares: it is a security that represents owenership interest in a company. It is issued to
those have contributed capital in setting up an enterprise. They neither have fixed return nor
maturity period.
c. Convertible securities: convertible securities such as convertible debentures or preference
shares can convert themselves into equity shares according to certain prescribed condition

3. Non-security investments:
a. Real estate: It denotes the ownership of residential as well as commercial properties. It is less
liquid than corporate securities.
b. Mortgages: Mortgages denote the financing of real estate. It has a periodic fixed income and
the principal is recovered at stated maturity date.
c.Commodities: In the process of buying and selling commodities while purchasing the goods we
pay price for them. That is why this transaction is also brought under investment.
d. Business ventures: These denote direct ownership investments in new or growing business
before firms sell securities on a public basis.
e. Art,Antiques and other valuables:
They include silver gold and jewellery. They are also type of specialized investments which
offer aesthetic qualities also.
II. INDIRECT INVESTMENT ALTERNATIVES
Indirect investment alternatives are those in which individual has no direct hold on the amount
he invests . he contributes his savings to certain organizations such as LIC,UTI etc and depends
upon them to make investments on his behalf. so he has no direct responsibilities or hold on
securities.
Public provident fund:
Under this fund deposits can be made in monthly installments with minimum of Rs.100
and
maximum of Rs.60000 per annum. These deposits carry cumulative interest of 12% credited to
the account. The account has a maturity period of 15 years. It is not transferable.
Bank deposits:
These are the most popular form of non-corporate investments. It includes current accounts,
savings account and fixed deposits accounts.
Life insurance schemes:
There are several types of life insurance policies and of them the following are the most popular.
1. Endowment policy: Under this type of policy ,the sum assured is to be paid on his reaching
age or if he dies earlier the amount is paid to his or heirs or his nominee. The premium on such
policies are to be paid until the assured reaches the specified age or until death if it occurs earlier.
The rate of premium on this policy is however higher than whole time policies.
2. Whole life policy: Under this policy the insured sum becomes due for payment to the
beneficiary only after the death of the assured. The premiums an such policy may be spread over
ones whole life or they may be made payable for a fixed number of years.
3. Joint life policies: A policy covering more than one life is called joint assurance policy. The
assured amount becomes payable on the death of the insured under the policy.
LIC schemes
Life insurance is a contract between a person and an insurance company for a number of years
covering either the life time period or a fixed number of years. Life insurance is called as an
investment because of a number of reasons
It provides protection against risk of early death
It can be used as a collateral for taking loans from banks
Life of key men in an association can be protected
It provides tax advantages
It is measure of protection at the time of death because it gives provision for estate duty
Life insurance corporation issues whole life policies, endowment polices and term policies the
different types of policies are given below
Whole life policy
The whole life policy is for the full life of the insurer and the amount of insurance will be paid
only at the time of death. The premium of whole life policy may be paid in three ways
Single premium plan
Limited premium plan where premium ceases at a stated age
Continuous premium plan where premiums are paid throughout the life time of
policy holder

The whole life policy may be issued in the following way

(a) Ordinary whole life policy :
Ordinary whole life policy remains in force till the life of the assured and the premium is paid till
the life time of assured. The premium charged under this policy is the lowest and minimum of
this policy is Rs.1000
(b) Limited payment whole life policy:
It is measure for payment of premium for a limited period only after the expiry of the contract
period further premium need not to be paid. Premium is to paid up to the retirement age. The
minimum amount for which the policy can be issued is Rs.5000
c. Single payment whole life policy:
It is not very popular as large premiums have to be paid and in one lump sum. This kind of
insurance can be taken either by people who have received income through windfall like a
lottery or rich industrialists
d. Special whole life policy
This policy can be surrendered and converted into paid up policy under the terms of special
whole life policy. The sum which is assured which is insured is paid on the death of the life
insured.
e. Convertible whole life policy:
It gives the option of conversion into endowment policy under the expiry of five years of the
contract. This is useful as the protection to a person is given at a lower rate and the benefits of
conversion after a particular time is allowed.
f. Endowment policy:
This is the best form of investment to an investor who wishes to take policy as a form of
investment with the benefit of,
saving his income
protection to life
receiving tax benefits.
Under this plan the company promises to pay a stated amount of money to the beneficiary if the
insured dies during the life of policy or to the insurer himself if he survives the endowment
period policies can be issued for a minimum sum of Rs.5000
Ordinary endowment policy
The ordinary endowment policy is a promise by LIC to pay the insured amount on death or
attainment of a specified age of the insured whichever is earlier. The premium is to be paid for a
fixed number of years.
Pure endowment policy:
It is issued for a specified period and the amount on the policy is to be paid only if the insured
person survives the endowment period.
Double endowment policy:
It is a promise by the insurer to pay double the amount of the sum which has been insured if the
insured lives beyond the date of maturity. The minimum amount under this policy can be issued
is Rs.1000. this policy can be issued upto the age of 65 years
Joint endowment policy:
This policy is taken by the husband and life jointly. The insured sum is payable at the end of
specified period to either the husband or the wife or to them jointly if both survive the contract
period.
Jeevan Balya:
This policy may be taken up for a child from 0to 17 years age group. It may be taken up by either
mother or father of the child before attaining the age of 50.the minimum premium is Rs.1000
The child will receive a regular income of Rs.300 per quarter till the age of 5, rs.600 per quarter
between the ages of 5 to 15 years and Rs.900 per quarter from the age of 15 till the deferred date.
Jeevan Dhara
LIC started Jeevan Dhara scheme to ensure individual pension and social security for the aged
population with an investment return. It protects people against absence of income due to

longevity of life. It also offers protection on the death of the person to his beneficiary. This
policy has a maximum deferment period of 35 years. It also provides death protection.
Dhanashree
This scheme was open for a limited period. A minimum sum of 1000 could be invested between
june 19, 1989 and October 31, 1989. This scheme was to be operative like the units of the unit
Trust of India. LIC promises a return of 12% on such investments. This scheme is operative only
upto 7 years after which fund will close and assets and liabilities will be evaluated, disposed of
and the proceeds will be distributed among the Dhanashree holders. Income tax relief has been
offered under section 80L of the income tax Act of 1961 and exemption of wealth tax upto 5
lakhs.
Dhanaraksha
Dhanaraksha is one of the schemes operating under the LIC Mutual Fund. This mutual fund has
been set up as a separate Trust of the LIC for the purpose of providing access to investment
media in semi urban, urban and rural areas. In Dhanaraksha, a large group of savers entrust their
savings to the fund. The fund becomes large due to the accumulation of money of a large number
of people. It is then managed by specialists who invest the Trusts funds in different corporate
securities which will yield a high return to the mutual fund. Out of this return the trust will
distribute a dividend to the savers who are also policy holders of Dhanaraksha
Dhanavriddhi
Dhanavriddhi scheme originated on june 19, 1989. Each Dhanavriddhi unit is of the face value of
Rs.10 and the minimum number of units to be purchased is 100 for a value of rupees 1000
investments in these units is of fixed period covering 7 to 10 years.
BANK DEPOSITS
Bank deposits are the most popular form of non-corporate investments. It includes current
accounts,savings account and fixed deposits accounts. In case of fixed account no interest is paid
on the amount of deposits as businessmen and companies mean these for regular transactions
Saving deposits are those on which interest is paid at 4.5% which is the
lower among the various categories of investments.
Fixed deposits may be recurring deposits wherein savings are deposited at
regular intervals or fixed deposits of varying maturities .
The interest rate on these deposits are 9% to 12%.
PROVIDENT FUNDS
There are mainly four types of provident funds
1.Statutory provident fund:
This fund is maintained by government, semi-organistions, local authorities, railways,
universities and educational institutions. In this fund contribution from the employer is exempt
from tax.
2.Recognized provident fund:
This fund is recognized by the commissioner of income tax. The employers contribution is
exempt upto 10% of the salary of the individual. Loans may be taken from this account without
any payment of any interest due recognized provident and statutory fund.
3.Unrecognized provident fund
It is exempt from the tax when the employer contributes. The interest which is credited to this
account is exempt from tax and the payment which is received in respect of employees own
contribution at the time of retirement is also exempt from tax.
4.Public provident fund:
The employer does not contribute any amount .it is a fund provided for non-salaried people to
mobilize personal savings. any amount upto maximum of Rs.40000 can be deposited under this
account but the amount so accumulated will be paid only at the end of maturity.

POST OFFICE SCHEMES

Post office schemes are generally like the commercial bank schemes. They have a savings
account, a recurring account, a ten-year cumulative time deposit account which are also recurring
in nature. Those accounts which have a minimum balance of Rs.200 in the months of April,
September, October and March have an additional benefit.
Recurring deposits
Recurring deposits are in the form of cumulative deposit schemes covering a period of 10
years,15 years and 20 years. These schemes range from a minimum of Rs.10 monthly installment
contribution to Rs.500 .Generally these schemes are operative from Rs.10 to Rs.100 installment
per month.
Post office time deposits
The time deposits can be purchased for a minimum of Rs.50. there is no maximum limit. 2,3 and
5-year post office schemes can be encashed after one-year at a discount.
Interest is paid annually.
NATIONAL SAVING SCHEMES
It has been stared by the Government of India mainly to finance its economic development plans
through the mobilisation of savings of smaller income group.
This scheme is operated mainly through the post offices
The national saving schemes safe throughout the country.
Its main purpose is to attract higher income group of people and thse schemes
resemble that of commercial banks.
The mode of arrangement is basically the payment of lumpsum amount to be
received at the end of a certain period,the interest being paid annually or to be
paid altogether with the principal at the time of termination of contract period.
The rate of interest on national saving scheme is usually higher than the
commercial banks.
MUTUAL FUNDS:
A mutual fund is a corporation which receives funds from investors and deploy same in equities,
long-term bonds, and money market etc.
Types of mutual funds
Open-ended scheme:
It is a scheme which continuously issues new shares or units to meet the demand of the investors
Close-end funds:
Close-end fund is a scheme of an investment company in which a fixed number of shares are
issued. The funds so mobilized are invested in a variety of vehicles including shares and
debentures to achieve the stated objective
GOLD AND SILVER
GOLD:
Gold is one of the valuable assets in any economy. It has been used in India primarily as a form
of savings. Gold may be called as hedge against inflation or a well or reservoir for future use. It
has been used for more speculation rather than for a long-term investment and for quick profits
Gold Jewellery: Gold jewellery is a method of shaping pure gold into ornaments. The standard
used in India usually 22 carats. The price of gold changes erratically sometimes sharply and also
equally dependent on the economic and environmental conditions. It is also sensitive to the
speculation of international money markets and the demand and supply conditions in the country.
SILVER
Silver may be owned in the form of coins utensils, glasses, bowls, plates or jewellery. Like gold
silver has been a hedge during the inflation. The price of silver although less than gold also keeps
on rising in the same way as gold. Silver utensils and trays from the point of view of use are an
excellent possession but it is difficult to re-sell them and get the value of the investments. At time

of re-sale of these investments the silversmith takes away the expenses of polish and non silver
which is used in shaping these beautiful vessels. As result , the investor is able to get only 60%
of the value of silver. The sale of silver bars is the price recorded for pure silver. The price of
silver and gold is quoted daily in the stock exchange list.

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