Fantasy of Return

&
Phantom of Risk
(How does it work in the stock market?)

Prepared By:-
Shubhakanta Mallick
Roll no- 18MBA020

Guided By:-
Mr.Bipin Dutta
Odisha Capital Market & Enterprises Ltd.
Bhubaneswar

Submitted To:-
Department of Business Administration
Utkal University
Bhubaneswar

1
 CERTIFICATE BY COMPANY

This is to certify that Shubhakanta Mallick pursuing MBA from

Department of Business Administration, Utkal University,
Bhubaneswar has successful completed the project report in our
organization on the topic titled, “Fantasy of Return & Phantom
of Risk” at Odisha Capital Market & Enterprises Ltd. During
the project tenure in the organization, we found in hard working,
sincere, diligent and his behavior and conduct was good. We
wish him all the best for his future endeavors.

Mr.Bipin Dutta
Odisha Capital Market & Enterprises Ltd.
Bhubaneswar

2
 CERTIFICATE OF ORIGINALITY

This is certify that the project report entitled “Fantasy of Return

& Phantom of Risk” at Odisha Capital Market & Enterprises
Ltd. submitted to Department of Business Administration, Utkal
University, Bhubaneswar in partial fulfillment of the requirement
for the award of the degree of MBA is an original work carried out
by Shubhakanta Mallick, under the guidance of Dr. Rasmita
Sahoo. The matter embodied in this project is a genuine work
done by Shubhakanta Mallick to best of his knowledge and belief
and has not been submitted before, neither to this college nor to
any other college for the fulfillment of the requirement of any
course of study.

Dr. Rasmita Sahoo

Utkal University
Bhubaneswar

3
 ACKNOWLEDGEMENT

The internship opportunity I had with Odisha Capital Market &

Enterprises Ltd. was a great chance for learning and
professional development. Therefore, I consider myself as a very
lucky individual as I was provided with an opportunity to be a part
of it. I am also grateful for having a chance to meet so many
wonderful people and professionals who led me though this
internship period.

Bearing in mind previous I am using this opportunity to express

my deepest gratitude and special thanks to Mr. Bipin Dutta Sir
who in spite of being extraordinarily busy with his duties, took
time out to hear, guide and keep me on the correct path and
allowing me to carry out my project at their esteemed
organization and extending during the training.

I perceive as this opportunity as a big milestone in my career

development. I will strive to use gained skills and knowledge in
the best possible way, and I will continue to work on their
improvement, in order to attain desired career objectives.
Sincerely,

SHUBHAKANTA MALLICK

Place: BHUBANESWAR

4
 DECLARATION

I, Shubhakanta Mallick, hereby declare that the presented report

of internship titled “Fantasy of Return & Phantom of Risk” of
Stock Market is uniquely prepared by me after the completion of
one month training at Odisha Capital Market & Enterprises Ltd. in
Bhubaneswar.

I also confirm that the report is only prepared for my academic

requirement, not for any other purpose.

SHUBHAKANTA MALLICK
Roll No.- 18MBA020
Department of Business Administration
Utkal University

5
 CONTENTS

Headings Page no.

Introduction 7
Equity Investments 8
Income on Equity Investments
Dividend Income 12
Capital Gains 18
Cost Inflation Index 25
What is Risk 29
Risk-Return Trade off 33
Expected Return 35

Contract Note 39

Conclusion 42

References 43

6
Risk and return: an introduction

Risk and return is a complex topic. There are many types of risk,
and many ways to evaluate and measure risk. In the theory and
practice of investing, a widely used definition of risk is:
“Risk is the uncertainty that an investment will earn its
expected rate of return.”
Note that this definition does not distinguish between loss and
gain. Typically, individual investors think of risk as the
possibility that their investments could lose money. They are
likely to be quite happy with an investment return that is
greater than expected - a “positive surprise.” However, since
risky assets generate negative surprises as well as positive
ones, defining risk as the uncertainty of the rate of return is
reasonable. Greater uncertainty results in greater likelihood
that the investment will generate larger gains, as well as
greater likelihood that the investment will generate larger
losses (in the short term) and in higher or lower accumulated
value (in the long term.)

7
In financial planning, the investment goal must be considered in
defining risk. If your goal is to provide an acceptable amount of
retirement income, you should construct an investment portfolio
to generate an expected return that is sufficient to meet your
investment goal. But because there is uncertainty that the
portfolio will earn its expected long-term return, the long-
term realized return may fall short of the expected return. This
raises the possibility that available retirement funds fall short of
needs - that is, the investor might outlive the investment
portfolio. This is an example of "shortfall risk."
The magnitude and consequences of the potential shortfall
deserve special consideration from investors. However, since
the uncertainty of return could also result in a realized return that
is higher than the expected return, the investment portfolio might
"outlive" the investor. Therefore, considerations of shortfall risk
are subsumed by considering risk as the uncertainty of
investment return.

Equity Investments : Meaning, Benefits,

Taxation and More
1. What are Equity Shares?
In a company form of organisation, the total capital of the
business is divided into smaller units known as equity share.
When an investor subscribes to the equity share of a company,
contributes to the total capital of the business and he becomes a
shareholder. For the company, such a contribution is like a
liability on which it needs to give returns to the shareholder.
Investors earn returns in equity investing by way of dividends and
8
capital appreciation. Along with monetary benefits, the holders of
such shares also get voting rights in critical matters of the
company. Basically, they are treated as owners of the company
wherein the ownership is limited to the extent of the shares held
by them.
A business issues shares primarily when it is in need of funds for
growth and expansion. It approaches the investors by means of
an Initial Public Offering (IPO). IPO is treated as a primary market
wherein the equity shares of the company are offered to the
general public for subscription for the first time. Afterwards, the
shares get listed on a particular stock exchange and exchange
hands through frequent trading. You can subscribe to the IPO
and these shares can be sold on a stock exchange like NSE once
you are allotted shares. After you subscribe to shares of the
company, the record is maintained at depositories like NSDL and
CDSL. When the company needs to distribute dividends or bonus
shares, it will get the shareholders’ list from these depositories
and credit the dividends directly into your bank account.

2. Why should you invest in Equity?

Individuals have financial goals which motivate them to invest in
specific havens. However, the choice of investment avenue can
make or break the realisation of financial dreams. It is because of
the forces of inflation and taxes. These tend to reduce the
purchasing power of your money and impede faster wealth
accumulation. If you have been restricting you investments to
only bank fixed deposits (FDs), then you might face difficulties in
protecting your wealth. We can understand this with the help of
an example.

9
Imagine that the average annual returns earned on a bank FD is
8%. Assuming an individual falls in the highest tax bracket i.e.
30%, his returns on the FD after tax would be around 5.6%. It
means that his wealth is losing 2.4% every year. In other words, if
he begins with Rs 100, then at the end of a period of 10 years the
purchasing power of his wealth reduces to Rs 76.
Hence, inflation and taxes are always going to stay but your
choices of investing can bring about a lot of difference in your
rate of return.
Conversely, if you consider equities, these have delivered
average returns of around 12% annually. With equities, you can
think of protecting your wealth from getting lost to rising inflation
and simultaneously earn a higher real rate of return. Suppose if
you purchase an equity share of a company at Rs 200 and its
price increases to Rs 250, then you can sell the share on the
stock exchange to earn a profit of Rs 50. Investors make huge
profits when the shares are way above the price at which you
bought them initially. If the price of an equity share A increase to
Rs 200 after five years from the time when you bought it at Rs
100, it shows that you have doubled your money. On top of it, you
receive dividends, bonus or rights shares, which further
maximizes your returns.

3. How do prices of Equity Shares move?

Stocks are volatile instruments whose prices change everyday.
There are numerous reasons which explain the behaviour of
stock prices. To start with, you can think of market forces i.e.
theory of demand and supply. If the number of people who want
to buy a stock are more than those who want to sell it, then the
price of stock rises. Conversely, if the number of people who
want to sell a stock are more than those who want to buy it, then
10
the price of stock falls. At this juncture it becomes important to
know that what affects the demand and supply of stocks; which in
turn causes investors to like/dislike a stock.
You might have noticed headlines flashing on the news channels
throughout the stock trading session. Basically, if the investors
come across a positive news about a company like
growth/expansion plans, projects approval by the government,
the stock prices rise. On the contrary, any negative news like
legal suits filed against a company or rejection of a project makes
its stock prices fall. Even the equity analysts estimate about the
future value of a company is based on company’s earnings
projection. Ultimately, anything which increases the earnings and
value of a company causes its stock prices to rise and vice-
versa. Apart from this, you may use financial ratios to know the
intrinsic worth of the company.

4. How are Equity Shares taxed?

When you invest in shares, you make capital gains on the sale of
shares which are taxable. Capital gains is the difference between
the selling price and purchase price of the equity share. The rate
of taxation on capital gains depends on how long you stayed
invested in the stocks. When you sell an equity share, listed on a
recognised stock exchange, within one year from the date of
purchase, you earn short-term capital gains. These will be taxed
at the rate of 15%. Conversely, if you sell a listed equity share
after one year from the date of purchase, you earn long-term
capital gains (LTCG). LTCG in excess of Rs 1lac are taxable at
the rate of 10% without the benefit of indexation.

11
5. Are Equity Shares better than Equity Funds?
If you are investing directly in shares, there are a lot of
complexities that you need to take care of. To start with, you have
to examine a stock and assess if valuations are attractive.
Investing in stocks tends to be a dynamic process because the
business prospects change everyday due to immense
competition. On top of this, one should also understand how does
the stock exchanges like Sensex and Nifty functions. Moreover,
you would require relatively higher initial capital to build a well-
diversified portfolio.
If you take the case of equity funds, it is a more convenient way
to enter stock markets. There’s an experienced fund manager
who would take care of your portfolio. You need not worry about
the market movements and other decisions related to portfolio
management. More importantly, you can start systematic
investment plan (SIP) in mutual funds with as low as Rs 500
every month. In short, you can achieve similar level of
diversification at a smaller amount.

Two ways of income on equity investment

amidst phantom of risk
1. Dividend Income
Meaning.
A dividend is a payment made by a corporation to
its shareholders, usually as a distribution of profits. When a
corporation earns a profit or surplus, the corporation is able to re-

12
 invest the profit in the business (called retained earnings) and
pay a proportion of the profit as a dividend to shareholders.
Distribution to shareholders may be in cash (usually a deposit
into a bank account) or, if the corporation has a dividend
reinvestment plan, the amount can be paid by the issue of further
shares or share repurchase. When dividends are paid,
shareholders typically must pay income taxes, and the
corporation does not receive a corporate income tax deduction
for the dividend payments.[2]
A dividend is allocated as a fixed amount per share with
shareholders receiving a dividend in proportion to their
shareholding. For the joint-stock company, paying dividends is
not an expense; rather, it is the division of after-tax profits among
shareholders. Retained earnings (profits that have not been
distributed as dividends) are shown in the shareholders' equity
section on the company's balance sheet – the same as its issued
share capital. Public companies usually pay dividends on a fixed
schedule, but may declare a dividend at any time, sometimes
called a special dividend to distinguish it from the fixed schedule
dividends. Cooperatives, on the other hand, allocate dividends
according to members' activity, so their dividends are often
considered to be a pre-tax expense.
The word "dividend" comes from the Latin word "dividendum"
("thing to be divided").

Types of Dividends.

 Cash dividend. The cash dividend is by far the most common of

the dividend types used. On the date of declaration, the board
of directors resolves to pay a certain dividend amount in cash
13
 to those investors holding the company's stock on a specific
date. The date of record is the date on which dividends are
assigned to the holders of the company's stock. On the date of
payment, the company issues dividend payments.
 Stock dividend. A stock dividend is the issuance by a company
of its common stock to its common shareholders without any
consideration. If the company issues less than 25 percent of
the total number of previously outstanding shares, then treat
the transaction as a stock dividend. If the transaction is for a
greater proportion of the previously outstanding shares, then
treat the transaction as a stock split. To record a stock
dividend, transfer from retained earnings to the capital
stock and additional paid-in capital accounts an amount equal
to the fair value of the additional shares issued. The fair value
of the additional shares issued is based on their fair market
value when the dividend is declared.
 Property dividend. A company may issue a non-monetary
dividend to investors, rather than making a cash or stock
payment. Record this distribution at the fair market value of the
assets distributed. Since the fair market value is likely to vary
somewhat from the book value of the assets, the company will
likely record the variance as a gain or loss. This accounting rule
can sometimes lead a business to deliberately issue property
dividends in order to alter their taxable and/or reported income.
 Scrip dividend. A company may not have sufficient funds to
issue dividends in the near future, so instead it issues a scrip
dividend, which is essentially a promissory note (which may or
may not include interest) to pay shareholders at a later date.
This dividend creates a note payable.
 Liquidating dividend. When the board of directors wishes to
return the capital originally contributed by shareholders as a
14
 dividend, it is called a liquidating dividend, and may be a
precursor to shutting down the business. The accounting for a
liquidating dividend is similar to the entries for a cash dividend,
except that the funds are considered to come from the
additional paid-in capital account.

How to Calculate Dividends.

Method 1. Finding Total Dividends from DPS

1
Determine how many shares of stock you hold. If you're not
already aware of how many shares of company stock you own,
find out. You can usually get this information by contacting your
broker or investment agency or checking the regular statements
that are usually sent to a company's investors via mail or email.
2
Determine the dividends paid per share of company
stock. Find your company's dividends per share (or "DPS")
value. This represents the amount of dividend money that
investors are awarded for each share of company stock they
own. For a given time period, DPS can be calculated using the
formula DPS = (D - SD)/S where D = the amount of money paid
in regular dividends, SD = the amount paid in special, one-time
dividends, and S = the total number of shares of company stock
owned by investors. [2]
 For this calculation, you can usually find D and SD on a
company's cash flow statement and S on its balance sheet.
 Note that a company's dividend-payout rate can change over
time. Thus, if you're using past dividend values to estimate what
you'll be paid in the future, there's a chance that your calculation
may not be accurate.
15
 3
Multiply the DPS by the number of shares. When you know
the number of shares of company stock you own and the
company's DPS for the most recent recent time period, finding
the approximate amount of dividends you will earn is easy.
Simply use the formula D = DPS multiplied by S, where D = your
dividends and S = the number of shares you own. Remember
that since you're using the company's past DPS value, your
estimate for future dividend payments may end up differing
somewhat from the actual number.[3]
 For example, let's say that you own 1,000 shares of stock in a
company that paid $0.75 per share in dividends last year.
Plugging the appropriate values into the formula above, we get D
= 0.75 multiplied by 1,000 = $750. In other words, if the company
pays about the same amount of dividends this year as it did last
year, you'll make about $750.

Method 2. Finding Dividend Yield

1
Determine the share price of the stock you’re
analyzing. Sometimes when investors say that they want to
calculate the "dividend" on their stocks, what they're actually
referring to is the "dividend yield." The dividend yield is the
percentage of your investment that a stock will pay you back in
the form of dividends. Dividend yield can be thought of as an
"interest rate" on a stock. To get started, you'll need to find the
current price per share of the stock you're analyzing.
 For publicly-traded companies (Apple, for instance), you can find
the latest stock price by checking the website of any major stock
index (e.g., NASDAQ or S&P 500)[5]
16
 Keep in mind that the share price of a company's stock can
fluctuate based on the company's performance. Thus,
estimations for the dividend yield of a company's stock can be
inaccurate if the stock's price suddenly moves significantly.
2
Determine the DPS of the stock. Find the most recent DPS
value of the stock you own. Again, the formula is DPS = (D -
SD)/S where D = the amount of money paid in regular dividends,
SD = the amount paid in special, one-time dividends, and S = the
total number of shares of company stock owned by all
investors.[6]
 As noted above, you can typically find D and SD on a company's
cash flow statement and S on its balance sheet. As an additional
reminder, a company's DPS can fluctuate with time, so you'll
want to use a recent time period for the most accurate results.
3
Divide the DPS by the share price. Finally, divide your DPS
value by the price per share for the stock you own to find your
dividend yield (or, in other words, use the formula DY = DPS/SP).
This simple ratio compares the amount of money you are paid in
dividends to the amount of money you had to pay for the stock to
begin with. The greater the dividend yield, the more money you'll
earn on your initial investment.[7]
 For example, let's say that you own 50 shares of company stock
and that you bought these shares at a price of $20 per share. If
the company's DPS in recent time periods has been roughly $1,
you can find the dividend yield by plugging your values into the
formula DY = DPS/SP; thus, DY = 1/20 = 0.05 or 5%. In other
words, you'll make 5% of your investment back in each round of
dividends, no matter how much or how little you invest.
17
2. Capital Gains
1. What is a Capital Gain?
Simply put, any profit or gain that arises from the sale of a
‘capital asset’ is a capital gain. This gain or profit is comes
under the category ‘income’, and hence you will need to pay
tax for that amount in the year in which the transfer of the
capital asset takes place. This is called capital gains tax,
which can be short-term or long-term.
Capital gains are not applicable to an inherited property as
there is no sale, only a transfer of ownership. The Income
Tax Act has specifically exempted assets received as gifts by
way of an inheritance or will. However, if the person who
inherited the asset decides to sell it, capital gains tax will be
applicable.

2. Defining Capital Assets

Land, building, house property, vehicles, patents,
trademarks, leasehold rights, machinery, and jewellery are a
few examples of capital assets. This includes having rights in
or in relation to an Indian company. It also includes the rights
of management or control or any other legal right.

The following do not come under the category of capital

asset:
a. Any stock, consumables or raw material, held for the
purpose of business or profession
b. Personal goods such as clothes and furniture held for
personal use
c. Agricultural land in rural India

18
 d. 6½% gold bonds (1977) or 7% gold bonds (1980) or
national defence gold bonds (1980) issued by the central
government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme
(1999) or deposit certificates issued under the Gold
Monetization Scheme, 2015
Definition of rural area (from AY 2014-15) – Any area which
is outside the jurisdiction of a municipality or cantonment
board, having a population of 10,000 or more is considered a
rural area. Also, it should not fall within a distance (to be
measured aerially) given below – (population is as per the
last census).

Distance Population

2 kms from local If the population of the

limit of municipality municipality/cantonment board is
or cantonment more than 10,000 but not more than
board 1 lakh

6 kms from local If the population of the

limit of municipality municipality/cantonment board is
or cantonment more than 1 lakh but not more than
board 10 lakh

8 kms from local If the population of the

limit of municipality municipality/cantonment board is
or cantonment more than 10 lakh
board

19
3. Types of Capital Assets?
1. Short-term capital asset An asset held for a period of 36
months or less is a short-term capital asset. The criteria of 36
months have been reduced to 24 months for immovable
properties such as land, building and house property from FY
2017-18.
For instance, if you sell house property after holding it for a
period of 24 months, any income arising will be treated as
long-term capital gain provided that property is sold after
31st March 2017.

2. Long-term capital asset An asset that is held for more

than 36 months is a long-term capital asset. The reduced
period of the aforementioned 24 months is not applicable to
movable property such as jewellery, debt-oriented mutual
funds etc. They will be classified as a long-term capital asset
if held for more than 36 months as earlier.
Some assets are considered short-term capital assets when
these are held for 12 months or less. This rule is applicable if
the date of transfer is after 10th July 2014 (irrespective of
what the date of purchase is).

The assets are:

a. Equity or preference shares in a company listed on a
recognized stock exchange in India
b. Securities (like debentures, bonds, govt securities etc.)
listed on a recognized stock exchange in India
c. Units of UTI, whether quoted or not
d. Units of equity oriented mutual fund, whether quoted or
not
e. Zero coupon bonds, whether quoted or not
20
 When the above-listed assets are held for a period of more
than 12 months, they are considered as long-term capital
asset.
In case an asset is acquired by gift, will, succession or
inheritance, the period for which the asset was held by the
previous owner is also included when determining whether
it’s a short term or a long-term capital asset. In the case of
bonus shares or rights shares, the period of holding is
counted from the date of allotment of bonus shares or rights
shares respectively.
Tax on Short-Term and Long-Term Capital Gains

Tax Type Condition Tax applicable

Long- Except on 20%

term sale of
capital equity
gains tax shares/
units of
equity
oriented
fund

Long- On sale of 10% over and

term Equity above Rs 1 lakh
capital shares/
gains tax units of
equity
oriented
fund

21
Short- When The short-term
term securities capital gain is
capital transaction added to your
gains tax tax is not income tax return
applicable and the taxpayer
is taxed according
to his income tax
slab.

Short- When 15%.

term securities
capital transaction
gains tax tax is
applicable

4. Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer
period and for those held over a shorter period.
Terms You Need to Know:
Full value consideration The consideration received or to be
received by the seller as a result of transfer of his capital assets.
Capital gains are chargeable to tax in the year of transfer, even if
no consideration has been received.
Cost of acquisition The value for which the capital asset was
acquired by the seller.
Cost of improvement Expenses of a capital nature incurred in
making any additions or alterations to the capital asset by the
seller. Note that improvements made before April 1, 2001, is
never taken into consideration.
NOTE: In certain cases where the capital asset becomes the
property of the taxpayer otherwise than by an outright purchase

22
by the taxpayer, the cost of acquisition and cost of improvement
incurred by the previous owner would also be included.
How to Calculate Short-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:
o Expenditure incurred wholly and exclusively in
connection with such transfer
o Cost of acquisition
o Cost of improvement
Step 3: This amount is a short-term capital gain
Short term capital gain = Full value
consideration Less expenses incurred exclusively for such
transfer Less cost of acquisition Less cost of improvement.
How to Calculate Long-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:
o Expenditure incurred wholly and exclusively in
connection with such transfer
o Indexed cost of acquisition
o Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions
provided under sections 54, 54EC, 54F, and 54B
Long-term capital gain= Full value consideration
Less : Expenses incurred exclusively for such transfer
Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less:expenses that can be deducted from full value for
consideration*

23
(*Expenses from sale proceeds from a capital asset, that wholly
and directly relate to the sale or transfer of the capital asset are
allowed to be deducted. These are the expenses which are
necessary for the transfer to take place.)
As per Budget 2018, long term capital gains on the sale of equity
shares/ units of equity oriented fund, realised after 31st March
2018, will remain exempt up to Rs. 1 lakh per annum. Moreover,
tax at @ 10% will be levied only on LTCG on shares/units of
equity oriented fund exceeding Rs 1 lakh in one financial year
without the benefit of indexation.

Indexed Cost of Acquisition/Improvement

Cost of acquisition and improvement is indexed by applying CII
(cost inflation index). It is done to adjust for inflation over the
years of holding of the asset. This increases one’s cost base and
lowers the capital gains.
Indexed cost of acquisition is calculated as Cost of acquisition
/ Cost inflation index (CII) for the year in which the asset was first
held by the seller, or 2001-02, whichever is later X cost inflation
index for the year in which the asset is transferred.

Cost Inflation Index

Cost Inflation Index
The price of a product increase overtime, and this brings down
the purchasing power of money. Say, if 5 items can be bought for
Rs. 500 today, tomorrow you may only be able to buy 4 items at
the same rate on account of inflation. Cost inflation index
calculates the estimated rise in the cost of goods and assets
year-by-year as a result of inflation. It is fixed by the central
government in its official gazette to measure inflation. Section 48
24
of the Indian Income Tax Act, 1961, defines the index as notified
by the government every year.
Cost Inflation Index is a measure of inflation, used to calculate
long-term capital gains from sale of capital assets. Capital gains
is the profit that you make from selling an asset, which can be
real estate, jewellery, stock, etc. The entire process - where the
capital asset’s cost price is adjusted with the effect of inflation
using the cost inflation index number - is referred to as
indexation.

New Cost Inflation Index (CII) From FY 2001-02 To

FY 2018-19
Current CII:

FINANCIAL ASSESSMENT COST INFLATION

YEAR (FY) YEAR (AY) INDEX
2001-02 2002-03 100
2002-03 2003-04 105
2003-04 2004-05 109
2004-05 2005-06 113
2005-06 2006-07 117
2006-07 2007-08 122
2007-08 2008-09 129
2008-09 2009-10 137
2009-10 2010-11 148
2010-11 2011-12 167
2011-12 2012-13 184
25
 FINANCIAL ASSESSMENT COST INFLATION
YEAR (FY) YEAR (AY) INDEX
2012-13 2013-14 200
2013-14 2014-15 220
2014-15 2015-16 240
2015-16 2016-17 254
2016-17 2017-18 264
2016-17 2017-18 264
2017-18 2018-19 272
2018-19 2019-20 280

Old CII:

COST COST
FINANCIAL FINANCIAL
INFLATION INFLATION
YEAR YEAR
INDEX INDEX
1981-82 100 1999-00 389
1982-83 109 1999-00 406
1983-84 116 2001-02 426
1984-85 125 2002-03 447
1985-86 133 2003-04 463
1986-87 140 2004-05 480
1987-88 150 2005-06 497

26
 COST COST
FINANCIAL FINANCIAL
INFLATION INFLATION
YEAR YEAR
INDEX INDEX
1988-89 161 2006-07 519
1989-90 172 2007-08 551
1990-91 182 2008-09 582
1991-92 199 2009-10 632
1992-93 223 2010-11 711
1993-94 244 2011-12 785
1994-95 259 2012-13 852
1995-96 281 2013-14 939
1996-97 305 2014-15 1024
1997-98 331 2015-16 1081
1998-99 351 2016-17 1125

Base Year In Cost Inflation Index

The government has set a specific calendar year as the base
year, and accordingly calculates the CII beginning from base
year. To ascertain the rise in inflation percentage, index of the
other years is compared to the base year. Finance Minister, Arun
Jaitley, recently announced the change in base year from 1981 to
2001.
For the purpose of computing long term capital gains, the
property seller has to calculate the indexed cost of purchasing the
property. To assess the indexed cost, the seller needs to multiply
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the property's cost of acquisition with the cost inflation index, as
notified by the tax authorities for the year of transfer. This figure
then has to be divided by the cost inflation index of the year of
purchase. But, should the property be purchased prior to the
base year of cost inflation index, one needs to know the
property's fair market value for the base year.

Calculate Cost Inflation Index

To know how you can calculate cost inflation index, consider the
following example:
Example
 Purchased property on August 1, 2004 = Rs. 30 lakhs Sold
property on April 1, 2018 = Rs. 85 lakhs
 Indexed cost of acquisition = Rs. 30 lakhs x 280 / 113 =
74.33 lakh
 Capital gain = Rs. 85 lakh - Rs. 74.33 lakh = Rs. 10.67 lakhs

Shift In Cost Inflation Index Base Year From 1981 To 2001

Earlier, 1981-82 was regarded as the base year. However,
taxpayers started facing problems in getting their properties
valued for purchases prior to April 1, 1981. Tax authorities were
also facing difficulties relying on the valuation reports. Thus, the
government decided to shift the base year to 2001, so that
valuations can be done accurately and faster. In case of capital
assets bought before April 1, 2001, taxpayers can take higher of
actual cost or fair market value as on April 1, 2001, as the
purchase price and enjoy the benefit of indexation.
Changing the base year helps capture the property's inflated cost
in a better manner, bringing down the capital gains and the tax
burden.

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WHAT IS RISK?
All investments involve some degree of risk. In finance, risk refers
to the degree of uncertainty and/or potential financial loss
inherent in an investment decision. In general, as investment
risks rise, investors seek higher returns to compensate
themselves for taking such risks.
Every saving and investment product has different risks and
returns. Differences include: how readily investors can get their
money when they need it, how fast their money will grow, and
how safe their money will be. In this section, we are going to talk
about a number of risks investors face. They include:

Business Risk
With a stock, you are purchasing a piece of ownership in a
company. With a bond, you are loaning money to a
company. Returns from both of these investments require that
that the company stays in business. If a company goes bankrupt
and its assets are liquidated, common stockholders are the last in
line to share in the proceeds. If there are assets, the company’s
bondholders will be paid first, then holders of preferred stock. If
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you are a common stockholder, you get whatever is left, which
may be nothing.
If you are purchasing an annuity make sure you consider the
financial strength of the insurance company issuing the
annuity. You want to be sure that the company will still be
around, and financially sound, during your payout phase.

Volatility Risk
Even when companies aren’t in danger of failing, their stock price
may fluctuate up or down. Large company stocks as a group, for
example, have lost money on average about one out of every
three years. Market fluctuations can be unnerving to some
investors. A stock’s price can be affected by factors inside the
company, such as a faulty product, or by events the company has
no control over, such as political or market events.

Inflation Risk
Inflation is a general upward movement of prices. Inflation
reduces purchasing power, which is a risk for investors receiving
a fixed rate of interest. The principal concern for individuals
investing in cash equivalents is that inflation will erode returns.

Interest Rate Risk

Interest rate changes can affect a bond’s value. If bonds are held
to maturity the investor will receive the face value, plus
interest. If sold before maturity, the bond may be worth more or
less than the face value. Rising interest rates will make newly
issued bonds more appealing to investors because the newer
bonds will have a higher rate of interest than older ones. To sell
an older bond with a lower interest rate, you might have to sell it
at a discount.

Liquidity Risk
This refers to the risk that investors won’t find a market for their
securities, potentially preventing them from buying or selling
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when they want. This can be the case with the more complicated
investment products. It may also be the case with products that
charge a penalty for early withdrawal or liquidation such as a
certificate of deposit (CD).
Determining Your Risk Preference
With so many different types of investments to choose from, how
does an investor determine how much risk he or she can handle?
Every individual is different, and it's hard to create a steadfast
model applicable to everyone, but here are two important things
you should consider when deciding how much risk to take:
 Time Horizon: Before you make any investment, you should
always determine the amount of time you have to keep your
money invested. If you have $20,000 to invest today but
need it in one year for a down payment on a new house,
investing the money in higher-risk stocks is not the best
strategy. The riskier an investment is, the greater
its volatility or price fluctuations. So if your time horizon is
relatively short, you may be forced to sell your securities at a
significant loss. With a longer time horizon, investors have
more time to recoup any possible losses and are therefore
theoretically more tolerant of higher risks. For example, if
that $20,000 is meant for a lakeside cottage that you are
planning to buy in 10 years, you can invest the money into
higher-risk stocks. Why? Because there is more time
available to recover any losses and less likelihood of being
forced to sell out of the position too early.
 Bankroll: Determining the amount of money you can stand
to lose is another important factor of figuring out your risk
tolerance. This might not be the most optimistic method of
investing; however, it is the most realistic. By investing only
money that you can afford to lose or afford to have tied up for
some period of time, you won't be pressured to sell off any
investments because of panic or liquidity issues. The more
money you have, the more risk you are able to take.
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 Compare, for instance, a person who has a net worth of
$50,000 to another person who has a net worth of $5 million.
If both invest $25,000 of their net worth into securities, the
person with the lower net worth will be more affected by a
decline than the person with the higher net worth.

Investment Risk Pyramid

After deciding how much risk is acceptable in your portfolio by
acknowledging your time horizon and bankroll, you can use the
risk pyramid approach for balancing your assets.

This pyramid can be thought of as an asset allocation tool that

investors can use to diversify their portfolio investments
according to the risk profile of each security. The pyramid,
representing the investor's portfolio, has three distinct tiers:
 Base of the Pyramid – The foundation of the pyramid
represents the strongest portion, which supports everything
above it. This area should consist of investments that are low
in risk and have foreseeable returns. It is the largest area
and comprises the bulk of your assets.
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  Middle Portion – This area should be made up of medium-
risk investments that offer a stable return while still allowing
for capital appreciation. Although riskier than the assets
creating the base, these investments should still be relatively
safe.
 Summit – Reserved specifically for high-risk investments,
this is the smallest area of the pyramid (portfolio) and should
consist of money you can lose without any serious
repercussions. Furthermore, money in the summit should be
fairly disposable so you don't have to sell prematurely in
instances where there are capital losses.

The Bottom Line

Not all investors are created equal. While some prefer less risk,
other investors prefer even more risk than those who have a
larger net worth. This diversity leads to the beauty of the
investment pyramid. Those who want more risk in their portfolios
can increase the size of the summit by decreasing the other two
sections, and those wanting less risk can increase the size of the
base. The pyramid representing your portfolio should be
customized to your risk preference.

Risk-Return Tradeoff
WHAT IS THE Risk-Return Tradeoff
The risk-return tradeoff states that the potential return rises with
an increase in risk. Using this principle, individuals associate low
levels of uncertainty with low potential returns, and high levels of
uncertainty or risk with high potential returns. According to the
risk-return tradeoff, invested money can render higher profits only
if the investor will accept a higher possibility of losses.

BREAKING DOWN Risk-Return Tradeoff

The risk-return tradeoff is the trading principle that links high risk
with high reward. The appropriate risk-return tradeoff depends on
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a variety of factors including an investor’s risk tolerance, the
investor’s years to retirement and the potential to replace lost
funds. Time also plays an essential role in determining a portfolio
with the appropriate levels of risk and reward. For example, if an
investor has the ability to invest in equities over the long term,
that provides the investor with the potential to recover from the
risks of bear markets and participate in bull markets, while if an
investor can only invest in a short time frame, the same equities
have a higher risk proposition.Investors use the risk-return
tradeoff as one of the essential components of each investment
decision, as well as to assess their portfolios as a whole.

Measuring Singular Risk in Context and Portfolio Risk

Level
When an investor considers high-risk-high-return investments,
the investor can apply the risk-return tradeoff to the vehicle on a
singular basis as well as within the context of the portfolio as a
whole. Examples of high-risk-high return investments include
options, penny stocks and leveraged exchange-traded funds
(ETFs). Generally speaking, a diversified portfolio reduces the
risks presented by individual investment positions. For example,
a penny stock position may have a high risk on a singular basis,
but if it is the only position of its kind in a larger portfolio, the risk
incurred by holding the stock is minimal.That said, the risk-return
tradeoff also exists at the portfolio level. For example, a portfolio
composed of all equities presents both higher risk and higher
potential returns. Within an all-equity portfolio, risk and reward
can be increased by concentrating investments in
specific sectors or by taking on single positions that represent a
large percentage of holdings.

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What is Expected Return?
The expected return on an investment is the expected value of
the probability distribution of possible returns it can provide to
investors. The return on the investment is an unknown variable
that has different values associated with different probabilities.
Expected return is calculated by multiplying potential outcomes
(returns) by the chances of each outcome occurring, and then
calculating the sum of those results (as shown below).

35
In the short term, the return on an investment can be considered
a random variable that can take any values within a given range.
The expected return is based on historical data, which may or
may not provide reliable forecasting of future returns. Hence, the
outcome is not guaranteed. Expected return is simply a measure
of probabilities intended to show the likelihood that a given
investment will generate a positive return, and what the likely
return will be.
The purpose of calculating the expected return on an investment
is to provide an investor with an idea of probable profit vs risk.
This gives the investor a basis for comparison with the risk-free
rate of return. The interest rate on 3-month U.S. Treasury bills is
often used to represent the risk-free rate of return.

Basics of Probability Distribution

For a given random variable, its probability distribution is a
function that shows all the possible values it can take. It is
confined to a certain range derived from the statistically possible
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maximum and minimum values. Distributions can be of two
types: discrete and continuous. Discrete distributions show only
specific values within a given range. A random variable following
a continuous distribution can take any value within the given
range. Tossing a coin has two possible outcomes and is thus an
example of a discrete distribution. A distribution of the height of
adult males, which can take any possible value within a stated
range, is a continuous probability distribution.

Calculating Expected Return for a Single

Investment
Let us take an investment A, which has a 20% probability of
giving a 15% return on investment, a 50% probability of
generating a 10% return, and a 30% probability of resulting in a
5% loss. This is an example of calculating a discrete probability
distribution for potential returns.
The probabilities of each potential return outcome are derived
from studying historical data on previous returns of the
investment asset being evaluated. The probabilities stated in this
case might be derived from studying the performance of the asset
over the previous 10 years. Assume that it generated a 15%
return on investment during two of those 10 years, a 10% return
for five of the 10 years, and suffered a 5% loss for three of the 10
years.
The expected return on investment A would then be calculated as
follows:
Expected Return of A = 0.2(15%) + 0.5(10%) + 0.3(-5%)
(That is, a 20%, or .2, probability times a 15%, or .15, return; plus
a 50%, or .5, probability times a 10%, or .1, return; plus a 30%, or
.3, probability of a return of negative 5%, or -.5)
= 3% + 5% – 1.5%
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= 6.5%
Therefore, the probable long-term average return for Investment
A is 6.5%.

Calculating Expected Return of a Portfolio

Calculating expected return is not limited to calculations for a
single investment. Expected return can also be calculated for a
portfolio. The expected return for an investment portfolio is the
weighted average of the expected return of each of its
components. Components are weighted by the percentage of the
portfolio’s total value that each accounts for. Examining the
weighted average of portfolio assets can also help investors
assess the diversification of their investment portfolio.
To illustrate the expected return for an investment portfolio, let’s
assume the portfolio is comprised of investments in three assets
– X, Y, and Z. $2,000 is invested in X, $5,000 invested in Y, and
$3,000 is invested in Z. Assume that the expected returns for X,
Y, and Z have been calculated and found to be 15%, 10%, and
20%, respectively. Based on the respective investments in each
component asset, the portfolio’s expected return can be
calculated as follows:
Expected Return of Portfolio = 0.2(15%) + 0.5(10%) +
0.3(20%)
= 3% + 5% + 6%
= 14%
Thus, the expected return of the portfolio is 14%.
Note that although the simple average of the expected return of
the portfolio’s components is 15% (the average of 10%, 15%, and
20%), the portfolio’s expected return of 14% is slightly below that
simple average figure. This is due to the fact that half of the
38
investor’s capital is invested in the asset with the lowest expected
return.

Analyzing Investment Risk

In addition to calculating expected return, investors also need to
consider the risk characteristics of investment assets. This helps
to determine whether the portfolio’s components are properly
aligned with the investor’s risk tolerance and investment goals.
For example, assume that two portfolio components have shown
the following returns, respectively, over the past five years:
Portfolio Component A: 12%, 2%, 25%, -9%, 10%
Portfolio Component B: 7%, 6%, 9%, 12%, 6%
Calculating the expected return for both portfolio components
yields the same figure: an expected return of 8%. However, when
each component is examined for risk, based on year-to-year
deviations from the average expected returns, you find that
Portfolio Component A carries five times more risk than Portfolio
Component B (A has a standard deviation of 12.6%, while B’s
standard deviation is only 2.6%). Standard deviation represents
the level of variance that occurs from the average.

What is a Contract Note?

The Contract Note finds its origins in the time when Electronic
Trading did not exist & traders would have to call up their Brokers
to place orders. Brokers would execute the Trade in the “Ring” &
send a confirmation of the price to the client. While clients today
can see their trades being executed in real time with Exchange
Order Numbers & time stamps, in the days of the Outcry system,
Brokers would send the Confirmation to the clients & the Contract
Note became the de-facto reference point for clients to see their
trades & the price at which it was made. Brokers would take the
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 print outs, sign & stamp them & post them to the Client. This was
a legal contract between the Broker & Client & could be used in
case of any Legal issues if they arose down the line.

These contract notes used to be called Physical Contract

Notes/Bills because they were printed & posted. Now with all
trading going online, clients get the Contract Note via E-Mail, &
that too the same day (next day in case of Commodity Market
Trades) as the processing time is reduced & the note is system
generated.

What are the Contents of a Contract Note?

The Contract Note has provides details as prescribed by the
exchanges:

1. Name of the Client

2. Address of the Client
3. PAN of the Client
4. Trading Client Code
5. Order Number
6. Trade Time
7. Trade Number
8. Name and Symbol of the security traded
9. Action Carried Out i.e. Buy or Sell
10. Quantity traded
11. Trade Price of the security
12. Closing rate per unit (Only for Derivatives)
13. Total Charges before Brokerage and Statutory levies
The Contract Note also shows the Brokerage applicable to the
Client for trades across the various segments, Exchange
Transaction Charges which are levied by the
Exchanges, STT or CTT, SEBI Turnover Fees & Stamp Duty.

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When do you get a Contract Note?
A Digital Contract Note generally is processed by the Broker after
market hours & is sent via E-Mail to the Clients Registered E-Mail
ID. Physical Contract Notes take a lot longer as the Broker has to
print & post them.

How do I verify that my Trades were executed on

the Exchange?
In order to safeguard investors, all the Exchanges send a SMS
with the Turnover to the registered Mobile Number & send an E-
Mail with details like Broker Name, Scrip/Contract, Trade Number
& Trade Time.

Details like Brokerage do not appear on the Exchange

Confirmation.

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 CONCLUSION

As a whole the stock market is sometimes highly volatile. It

depends upon the investors how he can make use of this in order
to get the money which he has put in the market. An investor
should be in a position to analyze the various investment options
available to him and thus minimize the risk and maximize the
returns. It is useful for comparing the relative systematic risk of
different stocks & in practice; it is used by investors to judge a
stock’s riskiness. The investor should keep the risk associated
with the return proportional as risk is directly correlated with
return. It is generally believed that higher the risk, the greater the
reward but seeking excessive risk does not ensure excessive
return. At a given level of return, each security has a different
degree of risk. Based on the calculations the investor can come
to a conclusion that investors should analyze the market on a
continuous basis which will help them to pick the right companies
to invest their funds.

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 DATA SOURCES & REFERENCES

WEB LINKS:
WIKIPEDIA:- https://en.wikipedia.org
INVESTOPEDIA:- https://www.investopedia.com
SLIDESHARE:- https://www.slideshare.net
ECONOMICTIMES:- https://economictimes.indiatimes.com
MONEYCONTROL:- https://www.moneycontrol.com
TOPPER:- https://www.toppr.com
REALTAX:- https://www.realtax.ca

BOOKS:
FINANCIAL MANAGEMENT; By: Paresh Shah
INVESTMENT MANAGEMENT; By: V.K. Bhalla
INVESTMENT FABLES; By: Aswath Damodaran

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