CONTEMPORARY ISSUES INVESTMENT MANAGEMENT

SUBMITTED BY: PAYAL GOYAL SEMESTER:-II MBA SESSION- 2011-2013.

SUBMITTED TO: AMIT KUMAR

ACKNOWLEDGEMENT

This project report could not have been completed without the guidance of My Project Guide AMIT KUMAR Faculty SIMCS Jaipur I express my sincere thanks and gratitude to the above stated person who Have helped me directly and also to those who have indirectly helped me.

Payal Goyal
MBA II SEM.

PREFACE

As a part of subject requirement of my MBA program From SIMCS Jaipur, I have prepared a report on seminar on Investment management by an individual and organization So as to give exposure to practical management and to get With various investments making by an individuals And organizations.

The report has been prepared to deliver as much information -on as I could gather from whatever limited resources I have.

It is very important for every organization to invest their Money at right place and right time.

My report is based on this important topic i.e. InvestmentManagement.

CONTENTS
Part-1

1.0

INTRODUCTION TO INVESTMENT MANAGEMENT

Part-2
2.0 INVESTMENT ALTERNATIVES 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 NON MARKETABLE FINANCIAL ASSETS EQUITY SHARES BONDS & DEBENTURES MONEY MARKET INSTRUMENTS MUTUAL FUNDS LIFE INSURANCE REAL ESTATE PRECIOUS OBJECTS FINANCIAL DERIVATIVES WHAT ARE OPTIONS?

Part-3

3.0 INVESTMENT MANAGEMENT PROCESS

3.1 3.2 3.3 SETTING THE INVESTMENT OBJECTIVE ESTABLISHING INVESTMENT POLICY. SELECTING THE PORTFOLIO STRATEGY. SELECTING THE ASSETS. MEASURING AND EVALUATING PERFORMANCE

3.4
3.5

Part-4 .4.0 INTRODUCTION TO THE INVESTMENT ENVIRONMENT Part-5 5.0 INVESTMENT ATTRIBUTES 5.1 5.2 5.3 5.4 5.5 Rate of return Risk Marketability Taxes Convenience

Part-6 6.0 COMPARISON OF INVESTMENT AVENUES Part-7 7.0 INVETMENT DECISION MAKING: APPROACHES Part-8 8.0 INVESTMENT AND SPECULATION Part-9 9.0 INVESTMENT WISDOM: ONE LINERS Part-10 10.0 THE SECURITIES MARKET Part-11 11.0 THE BROKER Part-12 12.0 THE FIVE QUESTION 12.1 12.2 12.3 12.4 12.5 WHY TO INVEST? WHAT TO INVEST? WHERE TO INVEST? WHEN TO INVEST? HOW TO INVEST? 6

Part-13 13.0 INVESTMENT MANAGEMENT AND FIRST POSITION Part-14 14.0 INVESTMENT MANAGEMENT AND INVESTOR PREPARATION Part-15 15.0 QUALITIES OF THE SUCCESSFUL INVESTOR Part-16 16.0 IMPORTANCE OF INVESTMENT MANAGAMENT

CONCLUSION

PART-1.0 What is Investment?

In its broadest sense, An Investments is a sacrifice of current money Or other resources for future benefits.

DEFINITION 1
In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money.

DEFINITION 2
In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business.

Definitions of Investment management

Investment management is the professional management of various securities (Shares, bonds etc.) And assets (e.g., real estate), Also called portfolio management and money management, the process of managing money. The main reason for the publication of this report, is to make you (the reader) aware of the investment world and how to manage your way around it. We have observed that on an average most individuals believe (with much conviction) that they know it all. However, when it comes to real time investing and decision making, they are prone to making grave errors. Then to compound the matter further, due to their ego they carry these errors for many years into the future. Thereby causing much harm to themselves, their immediate environment and financial well-being

PART 2.0

INVESTMENT ALTERNATIVES

NON- MARKETABLE FINANCIAL ASSETS

EQUITY SHARES

BONDS

MONEY MARKET INSTRUMENTS

MUTUAL FUND SCHEMES

LIFE INSURANCE POLICIES

REAL ESTATE

PRECIOUS OBJECTS

FINANCIAL DERIVATIVES

2.1 NON MARKETABLE FINANCIAL ASSETS:A good portion of the Financial assets of individuals investors is held in the 9

Form of Non marketable financial assets. A distinguishing feature of these assets Is that they represents personal transaction between the investors and the issuer. For example, when you open a saving bank account at a bank, you deal with the Bank personally. In contrast, when you buy equity shares in the stock market you do not know who the seller is and you do not care.

These can be classified into the following broad categories:-

Bank deposits Post office deposits

Post office time deposits Monthly income scheme Kisan vikas patra National savings certificate

Company deposits Provident fund deposits

2.2 EQUITY SHARES:Equity Capital represents ownership capital. Equity shareholders collectively own the Company. They bear the risk and enjoy the reward of ownership of all the form of Securities. While fixed income investment avenues may be more important to most of 10

The investors, Equity shares seem to capture their interest the most. As an equity share Holder, you have an ownership stake in the company.

Stock Market Classification of Equity Shares:Blue chip shares Growth shares Income shares Cyclical shares, Speculative shares

2.3 BONDS & DEBENTURES:-

Bonds and Debentures represent long term debt instruments. The issuer of a bond to pay a stipulated stream of cash flow. This generally comprises of periodic Interests payments over the life of the instrument and principal payment at the time Of redemption.

Bonds may be classifieds into the following categories:Government Securities Saving bonds Debentures of private sector companies Preference shares Public sector undertaking bonds

2.4 MONEY MARKET INSTRUMENTS:11

Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments. These instruments are highly liquid and have Negligible risk. the money market is dominated by the government, financial institutions, banks, and corporate. Individual investors scarcely participate in the Money market directly.

A brief description of money market instruments is given below:-

Treasury bills Commercial Paper Certificate of Deposits

2.5 MUTUAL FUNDS:What's a mutual fund?

A mutual fund, also referred to as an open-end fund, is an investment company that spreads its money across a diversified portfolio of securities including stocks, bonds, or money market instruments. Shareholders who invest in a fund each own a representative portion of those investments, less any expenses charged by the fund. Mutual fund investors make money either by receiving dividends and interest from their investments, or by the rise in value of the securities. Dividends, interest and profits from the sale of any securities (capital gains) are passed on to the shareholders in the form of distributions. And shareholders generally are allowed to sell (redeem) their shares at any time for the closing market price of the fund on that day. Mutual fund in India are comprehensively regulated under the SEBI (mutual funds) Regulations, 1996. Some of the important provisions of this regulation are as follows: 12

A mutual shall be constituted in the form of a trust executed by the Sponsor in favor of the trustees. The sponsor or if so authorized the trust deed, the trustees shall Appoint an asset management company (AMC). The mutual fund shall appoint a custodian. No schemes shall be launched by the AMC unless it ties approved By the trustees and a copy of the offer document has been filed With SEBI.

The offer document and advertisement materials shall not be mis -leading

2.6 LIFE INSURANCE:In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice and the assured sum, Policies provide protection benefits are designed to protect The policy holder (or his dependents) for the financial consequence Of unwelcome events such as death or long term sickness/ disability. The common types of insurance policies are:Endowment assurance Money back plan Whole life insurance Unit linked plan Term assurance Immediate annuity Differed annuity Riders

Some of the big life insurance companies are

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Life insurance Corporation (LIC) ICICI Prudential HDFC Standard Life Bajaj Allianz Birla Sun Life Max newyork Ing vsya Kotak mahindra TATA Aig

2.7 REAL ESTATE:-

Unlike financial assets

For the bulk of the investors the most important asset in their Portfolio is a Residential house. In addition to a Residential house, the more affluent investors are likely to be interested in the followings types of real estate:-

Agriculture Land Semi-urban land Commercial Property Residential house Time share in a holiday resort

2.8 PRECIOUS OBJECTS:-

Precious objects are items that are generally small in size but highly valuable in monetry terms. Some important Precious Objects are:14

Gold and Silver Art Objects Precious stones

2.9 FINANCIAL DERIVATIVES:A financial derivatives is an instrument whose valued is derived from the Value of an underlying asset. It may be viewed as a side bet on the asset. the Most important financial derivatives from the point of view of investors are:-

Options Futures

2.10 What are Options?

Most people remain puzzled by Options. The truth is that most people have been using options for some time now, as options are built into everything from mortgage to insurance. In the stock markets, an option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date. "Option", as the word suggests, is a choice given to the investor to either honor the contract; or if he chooses not to, walk away from the contract. To begin with there are two kinds of options; namely, the "Call" option and the "Put" option . Which we shall explain presently.

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A "Call Option", is an option to buy a stock at a specific price on or before a certain date . In this way, call options are like security deposits. If for example, you want to rent a certain property and left a security deposit for it. The money would be used to insure that you could in fact rent the property at the price agreed upon when you returned. However, if you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument rises.

When you buy a Call option, the price you pay for it called the option premium, secures your right to buy that certain underlying stock at a specified price called the strike price on or before a specified date. If you decide not to use the option to buy the stock and you are not obliged to, your only cost is the option premium. A "Put Option", is an option to sell a stock at a specific price on or before a certain date. In this way, put options are like insurance policies

For a better understanding of options, we would suggest that the investor read about role of options and futures; types of options; option styles, class and series and option concepts . We would strongly recommend that the investor first study these investment instruments; conduct dry runs with pen and paper; understand the nuances of the dynamics of the underlying security and the connectivity between the various risks that he or she would be taking on during the pendency of a futures or options position held by him.

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PART-3.0

THE INVESTMENT MANAGEMENT PROCESS

The starting point would be an understanding of the investment management process. This process has 5 steps:

1. SETTING THE INVESTMENT OBJECTIVE 1. ESTABLISHING INVESTMENT POLICY. 2. SELECTING THE PORTFOLIO STRATEGY. 3. SELECTING THE ASSETS. 4. MEASURING AND EVALUATING PERFORMANCE

3.1 SETTING THE INVESTMENT OBJECTIVE

The first step for the investor is to set the investment objective. Which would vary for individuals, pension and mutual funds, banks, financial institutions, insurance companies, etc. For instance the objective for a pension or mutual fund or insurance company maybe to have a cash flow specification to satisfy liabilities at different dates in the future. These liabilities would include redemption, dividends or claim settlement payouts.

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For a bank it maybe to lock in a minimum interest spread over their cost of funds. For the individual investor the objective maybe to maximize return on investment. A more appropriate word would be optimize. As the individual would achieve optimum return at optimum risk. To maximize return would imply the maximization of risk, which would not be practical or sustainable.

3.2 ESTABLISHING INVESTMENT POLICY

Setting policy begins with asset allocation amongst the major asset classes available in the capital market. Which range from equities, debt, fixed income securities, real estate, and foreign securities to currencies. While setting the investment policy the constraints of the environment and that of the investor have to be kept in perspective. The environment would include: government rules and regulations (or restrictions); another would be the operating system of the market place. Individual constraints would include financial capability, availability of time to undertake the exercise, risk profile and the level of understanding the investor has of the investment environment

3.3 SELECTING THE PORTFOLIO STRATEGY

The portfolio strategy selected would have to be in conformity with both the objectives and policy guidelines. Any contradiction here would result in a systems break down and losses. Lets consider a person with a job that keeps him busy for 10-12 hours a day, five days of the week. On Saturday he helps the family with household chores. On Sunday he takes the day off and enjoys himself. Now with such a busy life, we cannot expect him to obtain optimal returns from investments in the equity market. Where is the time for thought, analysis and action? He would at best be playing a game of Russian roulette.

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For a person with such a busy life schedule it would be best to invest in fixed income securities. These would include RBI bonds, Bank deposits, insurance, etc. Where there is a lower but assured return. However, if this average, hard working and successful person still wants to invest in the equity market for a relatively higher rate of return. Then he would have to create the time for the thought, analysis and action required for success in this endeavor. Portfolio strategies are mainly of two types: Active strategies and Passive STRETEGIES . Active strategies have a higher expectation about the factors that are expected to influence the performance of the asset class. While Passive strategies involve a minimum expectation input. The latter would include indexing which would require the investor to replicate the performance of a particular index. Between these two extremes we have a range of other strategies which have elements of both active and passive strategies. In the fixed income segment, structured portfolio strategies have become popular. Here the aim would be to achieve a predetermined performance in relation to a benchmark. These are frequently used to fund liabilities.

3.4 SELECTING THE ASSETS

It is of importance for the investor to select specific assets to be included in the portfolio. It is here that the investor or manager attempts to construct an optimal or efficient portfolio. Which would give the expected return for a given level of risk, or the lowest risk for a given expected return. The asset classes he can choose from are: Equity Fixed income securities (which would include RBI bonds and bank deposits) Debt instruments Real estate

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Art objects Rare stamps Currencies The investor would ideally have all the above in his investment portfolio. This would then require the investor to rebalance the various components of his overall portfolio from time to time, depending on his objectives with respect to this portfolio. These objectives may be time based or asset price based or a combination of both

3.5 MEASURING AND EVALUATING PERFORMANCE

This step would involve the measuring and evaluating of portfolio performance relative to a realistic benchmark. We would measure portfolio performance in both absolute and relative terms , against a predetermined, realistic and achievable benchmark. Further, we would evaluate the portfolio performance relative to the objective and other predetermined performance parameters.

The investor or manager would consider two main aspects; namely risk and return. He would measure and evaluate, whether the returns were worth the risk, or whether the risk was worth the return. The issue here is, whether the portfolio has achieved commensurate returns, given the risk exposure of the portfolio.

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PART-4.0

INTRODUCTION TO THE INVESTMENT ENVIRONMENT

To study the investment environment would be of importance to the investor, as it would also encompass the demand supply match/mismatch. Let us visualize the world and its economy. There are many countries with their many economies in this environment. We see the interaction between countries at different stages in their development. We see the many markets to enable this interaction between the various countries. Each of these markets has its regulator, the trading platform and its system, its agents (or brokers), and the participants. Here it is a question of demand and supply of various commodities, products & services and trading instruments. And the analysis would encompass the demand-supply match/mismatch.

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PART 5.0
INVESTMENT ATTRIBUTES
To enable the evaluation and a reasonable comparison of various investment avenues, the investor should study the following attributes: 1. Rate of return 2. Risk 3. Marketability 4. Taxes 5. Convenience Each of these attributes of investment avenues is briefly described and explained below. 5.1 Rate of return: The rate of return on any investment comprises of 2 parts, namely the annual income and the capital gain or loss. To simplify it further look below: Rate of return = Annual income + (Ending price - Beginning price) / Beginning price The rate of return on various investment avenues would vary widely. 5.2 Risk: The risk of an investment refers to the variability of the rate of return. To explain further, it is the deviation of the outcome of an investment from its expected value. A further study can be done with the help of variance, standard deviation and beta. 5.3 Marketability: It is desirable that an investment instrument be marketable, the highe the marketability the better it is for the investor. An investment instrument is considered to be highly marketable when:

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It can be transacted quickly. The transaction cost (including brokerage and other charges) is low. The price change between 2 transactions is negligible. Shares of large, well-established companies in the equity market are highly marketable . While shares of small and unknown companies have low marketability. To gauge the marketability of other financial instruments like provident fund (which in itself is non-marketable). Then we would consider other factors like, can we make a substantial withdrawal without much penalty, or can we take a loan against the accumulated balance at an interest rate not much higher than our earning rate of interest on the provident fund account. 5.4 Taxes: Some of our investments would provide us with tax benefits while other would not. This would also be kept in mind when choosing the investment avenue. Tax benefits are mainly of 3 types: Initial tax benefits. This is the tax gain at the time of making the investment, like life insurance. Continuing tax benefit. Is the tax benefit gained on the periodic return from the investment, such as dividends. Terminal tax benefit. This is the tax relief the investor gains when he liquidates the investment. For example, a withdrawal from a provident fund account is not taxable. 5.5 Convenience: Here we are talking about the ease with which an investment can be made and managed. The degree of convenience would vary from one investment instrument to the other.

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PART-6.0 COMPARISON OF INVESTMENT AVENUES

Rate of return Annual Income

ROR Capital Appreciation RISK MKTABILITY TAX BENIFIT Convenience

Financial Securities Equity Non-convertible Debentures Financial Securities (Nonsecuritized) Bank deposits Low Nil Low High Yes Provident fund Nil High Nil Average Yes Life insurance Mutual funds Growth/equity Income/debt Real assets Real estate Gold/silver Low Nil High Average Low Average Low Average Limited Nil Average Average Low High High Low High Low High High Yes Yes High High Nil High Nil Average Yes High High High Low High High Low High Low High Average Yes Nil High High

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PART 7.0 INVESTMENT DECISION MAKING: APPROACHES

As investors we would have diverse investment strategies with the primary aim to achieve superior performance, which would also mean a higher rate of return on our investments. All investment strategies can be broadly classified under 4 approaches, which are explained below. Fundamental approach: In this approach the investor is concerned with the intrinsic value of the investment instrument. Given below are the basic rules followed by the fundamental investor. There is an intrinsic value of a security, which in turn is dependent on the underlying economic factors. This intrinsic value can be ascertained by an in-depth analysis of the fundamental or economic factors related to an economy, industry and company. At any point in time, many securities have current market prices, which are different from their intrinsic values. However, sometime in the future the current market price would become the same as its intrinsic value. We as fundamental investors can achieve superior results by buying undervalued securities and selling overvalued securities. As investors we would have diverse investment strategies with the primary aim to achieve superior performance, which would also mean a higher rate of return on our investments. All investment strategies can be broadly classified under 4 approaches, which are explained below.

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Psychological approach: The psychological investor would base his investment decision on the premise that stock prices are guided by emotions and not reason. This would imply that the stock prices are influenced by the prevalent mood of the investors. This mood would swing and oscillate between the two extremes of greed and fear. When greed has the lead stock prices tend to achieve dizzy heights. And when fear takes over stock prices get depressed to lower than lower levels. As psychic values seem to be more important than intrinsic values, it is suggested that it would be more profitable to analyze investor behavior as the market is swept by optimism and pessimism. Which seem to alternate one after the other? This approach is also called Castle-in-the-air theory. In this approach the investor uses some tools of technical analysis, with a view to study the internal market data, towards developing trading rules to make profits. In technical analysis the basic premise is that price movement of stocks has certain persistent and recurring patterns, which can be derived from market trading data. Technical analysts use many tools like bar charts, point and figure charts, moving. Average analysis, market breadth analysis amongst others. Academic approach: Over the years, the academics have studied many aspects of the securities market and have developed advanced methods of analysis. The basic rules are: The stock markets are efficient and react rationally and fast to the information flow over time. So, the current market price would reflect its intrinsic value at all times. This would mean "Current market price = Intrinsic value".

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Stock prices behave in a random fashion and successive price changes are independent of each other. Thus, present price behavior cannot predict future price behavior. In the securities market there is a positive and linear relationship between risk and return. That is the expected return from a security has a linear relationship with the systemic or non-diversifiable risk of the market. Eclectic approach: This approach draws upon all the 3 approaches discussed above. The basic rules of this approach are:

Fundamental analysis would help us in establishing standards and benchmarks. Technical analysis would help us gauge the current investor mood and the relative strength of demand and supply. The market is neither well ordered nor speculative. The market has imperfections, but reacts reasonably well to the flow of information. Although some securities would be mispriced, there is a positive correlation between risk and return. .

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PART 8.0 INVESTMENT AND SPECULATION

There is a very thin and blurred line between investing and speculating (or gambling). To have a clearer understanding of this, we would differentiate between the two. There is a tendency for investors to be speculative when the markets are bullish and buoyant. However, for long term and profitable survival in the markets we must try and control this urge to speculate. After all, we are here to learn and apply investment management and not speculation management. To be part of the speculative herd in a bull market situation has been the waterloo of many participants in the financial markets across the globe. This participant maybe an individual investor, a NBFC, a financial institution, a pension fund, a bank, or a brokerage. Some are responsible corporate citizens while others are not.
Investors

Relatively long, holding period of at least 1 year. Planning horizon

Very short, holding period few days or months.

Moderate, rarely high risk. Risk disposition

Normal to assume high risk.

Moderate returns at limited risk. Return expectation

High return at high risk exposure.

Fundamental factors, careful evaluation of proposed investment.

Relies on hearsay, tips, technical charts and market psychology.

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PART 9.0

INVESTMENT WISDOM: ONE LINER

Listed below are wisdom one liners which would give an investor an insight to what he or she is up against:
o o o o o o o o

The market is a discounting machine. A cynic knows the price of everything and the value of nothing. Investment management is 10% inspiration and 90% perspiration. To err is human, to hedge divine. No stock is good or bad, it is the price that makes it so. No price is too high for a bull or too low for a bear. Somebody is wrong every time a trade is made. Ride the winners and sell the losers.

o o o o o o o o o o o

You never understand a stock unless you are long or short in it. Be long term but watch the ticks. Never throw good money after bad. To achieve superior performance, you have to differ from the majority. Two things cause stocks to move the expected and the unexpected. No tree grows to the sky. A pie doesnt grow through its slices. Never confuse brilliance with a bull market. Successful investment managers have brains, nerves and luck. All generalizations are false, including this one. The market makes mountains out of molehills. 29

o o o

Investigate, and then invest. The memory of people in the stock market is very short. Open-mindedness and independent thinking will pay big dividends in the stock market.

o o

It is only a step from the sublime to the ridiculous. It is only a step from common stock investment to common stock speculation.

The market is a pendulum that swings back and forth through the median line of rationality. The only way to beat the market is to discover and exploit other investors mistakes.

No investment manager can perform successfully in all kinds of markets. There is no man for all seasons.

Better is one forethought than two after

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PART 10.0 THE SECURITIES MARKET

The term securities markets enclose a number of markets in which securities can be bought and sold. These securities markets can be classified into four types of markets: 1. Primary market: Corporate entities offer new issues to the investing public through the issue of equity shares. After the initial issue, the securities are subsequently shifted to the secondary market, where they can be traded. 2. Secondary market: Have securities of corporate entities that are already outstanding and owned by investors. These securities can be traded (i.e. bought and sold) in the secondary market. 3. Money market: Enables trading of securities with maturity of one year or less. 4. Capital market: Securities with a maturity period of more than one year are traded in the capital market The existence of these markets is advantageous to both the issuer of the security and the investor. The issuers, i.e. business entities and government need to raise funds or capital at competitive rates for productive and improvement activities, respectively . The markets allow the transfer of funds from the surplus to the deficit sectors both efficiently and at low cost. The investors also benefit, as they are able to invest their excess funds or savings through the market in the expectation of a future return on their investments. The investors are also able to trade (i.e. buy and sell) these securities through the markets. 31

PART 11.0

THE BROKER
As investors we are not able to deal with the market directly. It would be like entering and trying to find our way through an unending maze. The markets on their part, are too large, to attend to every single investor directly. This would be a Herculean task and a management nightmare for it. So, the markets introduce and authorize the middleman to act on its behalf. This middleman is also called the Broker. To reinforce this point, consider the following: 1. We want an insurance policy; we would deal with the insurance companys agent. 2. We want to buy a car or motor cycle or scooter; we would deal with the dealer of the automobile manufacturer 3. We want to buy a pair of trousers or shirt or a dress, we would go to the retail store which sells these products. The retail store would be the representatives of Raymond Ltd. or Reliance or Bombay Dyeing. 4. We want to buy the shares of a company traded in the NSE or BSE. We would have to deal with the broker of these exchanges. Agents, dealers, representatives and brokers mean the same thing, and they perform the same function. Which is that of a middleman? They do this function as they would be receiving commissions in return for the services they provide. For instance, whether an investor buys or sells a stock in the stock exchange the middleman or broker would receive a commission either ways. Which is a percentage of the value traded by the investor? 32

For investors it is very important to choose a broker correctly. Also that the broker is able to provide the services that the investor requires. In this selection of a broker, the investor would be well advised to consider the following: 1. Is the brokerage well established and known in the market? 2. is the representative of the brokerage house able to attend to him or is he overloaded with too many accounts?

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PART-12.0

THE FIVE QUESTION

12.1 WHY TO INVEST? 12.2 WHAT TO INVEST? 12.3 WHERE TO INVEST? 12.4 WHEN TO INVEST? 12.5 HOW TO INVEST?

12.1 WHY TO INVEST?

The investor would want to invest mainly to increase the rate of return on his assets. Through our need to create a source of income, an additional source of income or to further creates an asset base to fund future requirements (like a personal pension fund). Let us consider why people invest. A person does a job of work to earn an income. At the end of the month he manages to save a residual amount of his income. Which after a period of time would add up to a substantial amount (given the added advantage of interest on bank balances)? The person may have received an inheritance or a legacy. This too is lying in the bank. All this money which is lying in his bank account is earning only the savings bank rate, which would be 4% to 6% per annum.

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The person is rational and knows that today even inflation ranges from 5% to 7%. He realizes that leaving the money in a savings bank account would tantamount to losing the value of money over time. To stop this loss of value, he decides to shift the money not required for current expenses into a 3-5 year fixed deposit. Here he is able to get an interest rate of 7% to 8% per annum. By definition this person has invested his money. As he has employed the money in the present, to increase the rate of return in the future. The aim is clear (to obtain a higher rate of return that is above the inflation rate), the financial instrument is available (Fixed deposit), the investment risk is known (which in this case is zero) and the person goes ahead and invests. Let us consider another situation. The person reads many news papers In each of them he sees a business section. Which has a whole page dedicated to the equity price movement of the previous day, for all the stocks traded in the equity markets? With graphs depicting the movement of the index over the duration of the previous day. He looks through this page every morning and starts monitoring a particular stock, let's say ACC. He sees the stock at INR 220.00 per share. Over, the next 3 months, he sees it move up to INR 260.00 per share. Now the stock is at a price INR 40.00 higher. This sounds good. He does a little moths and sees that if he had bought 100 shares of ACC at INR 220.00 per share, he would have invested INR 22,000.00. In three months time he would have brought home a profit of INR 4,000.00, that is a 18.18% return on investment over a 3 month period. This is fantastic!! No bank is going to give this kind of return!

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A month later he buys 100 shares of ACC at INR 280.00 per share, investing INR 28,000.00. In the next two months he sees the stock down at INR 250.00 per share. Disillusioned, he sells his 100 shares and books a loss of INR 3,000.00. Promising never to gamble again. After another three months ACC was trading at over INR 350.00 per share. What went wrong? Well, in this case the person had not considered the 5 questions. He did not have an aim to start with. There was only temptation and probably greed. The point I am trying to make here is that when we expect a higher rate of return on our investment, we are also exposed to a higher level of risk. That we must respect this risk and take appropriate steps to manage and control it. Given the situation in our country today, with the ongoing liberalization and globalization process. It would be rational to expect that interest rates would remain at a lower level when compared to earlier years. This lower interest rate (or cost of capital) would enable our industry and services sector to be more globally competitive. Thus, given a lower level of return to individuals from bank deposits and other debt instruments, more funds would be deployed in equity and other financial instruments to increase the rate of return on our asset

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12.2 WHAT TO INVEST?

The investor would mainly invest his time, effort and financial resources (including savings and reserves) in this endeavor of investment management. As individuals, what do we have that we can invest? Well, at the individual level, we only have time which we can invest. The rest, whether it be a job, an expertise, a hobby, money, etc. are only the mediums through which we invest or employ or deploy our time.

Lets consider a person working in a large corporation. He is given a job description and further a job specification. He knows exactly what the job requires and further what is expected of him. While doing his job, he is investing his time in thought, analysis and action to accomplish the job at hand. For doing this, which is also called contribution; the corporation compensates him for his valuable time through the payment of pay and perks to him.

This person has invested his time in doing a job of work in a corporation, and his return on investment is the pay, perks and other facilities the corporation gives him every month. Similarly, the person wants a higher rate of return on his financial investments (may they be in equity, debt, bonds, deposits, real estate, art objects, rare stamps and coins). Well, for starters he would have to invest his time in thought, analysis and action to accomplish it.

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12.3 WHERE TO INVEST?

There are many financial investment avenues available today to the investor, ranging from bank deposits and bonds, to investments in equity, debt, commodities, currencies, etc., to real estate, to doing a job of work. However, in India due to our past we do not have many markets to trade in. Luckily, we have the equity market, which has a fully functional trading platform. Not so long ago a commodities exchange has been established in India. But lets get specific here. Our discussion at present is restricted to the investment or employment or deployment of our financial resources from our bank to a financial instrument and back to the bank. We expect that in all probability there would be a positive return on our investment the quantum of return would depend on the risk profile of the financial instrument and the level of risk adopted by the person.

12.4 WHEN TO INVEST?

Here the investor would decide when to invest (or buy) and when to divest (or sell) a financial instrument, keeping the return on investment in mind. There is no Holy Grail, which would guide you to this decision. It is safest to set in advance the parameters for investment and divestment decisions. A starting point would be an introspection and self-evaluation to access our strengths and weaknesses and also our capacity for risk. Risk here would mean reasonable and rational risk and definitely not wonton risk.

We would have to quantify the results we expect, and when those results are achieved would be the right time to invest or divest. In a sense we would be detached from the day to day fluctuations of the financial instruments, given that the larger parameters 38

of our investment plan are intact. By which we would have to set the parameters for when to invest and when to divest. We would now like to add another dimension to the equation. That is when an Individual can and should start investing his or her hard earned resources in financial instruments. 1. The investor should have a roof over his head. That is to say that the individual's place of residence should be owned and without any mortgage. 2. The investor should have a steady source of income to enable the provision for current expenses. Through: A monthly pay package. Or a pension.

Or a passive income (through rental income from another real estate asset owned or mortgaged. Dividend income from investments in financial instruments already made. There are other sources of passive income, and we can safely conclude that this list is not exhaustive). We shall add to this list in due course.

3. The investor should have the time available every day to undertake this exercise in investment and its management. Most of all, to be able to study, do research and take action on his leads. Lets put it this way, if the investor wants to create wealth from the investment environment, he should have the knowledge to put his best foot forward. 4. The investor should have control over his emotions. Emotions like anger, sadness, happiness, fear and greed have caused much harm to investors across the globe. An investor may have the best systems in place, but if he himself is not in the best (that is balanced) frame of mind. The results too would not be the best. 39

Further, we have observed and can safely conclude that errors made by investors have been caused by factors that have nothing to do with their investment t environment. There are other qualifications to help an investor decide when he is able to or would be able to start investing. We shall add to the list in due course. However, we expect that you would have enough food for thought at this stage.

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12.5 HOW TO INVEST?

This would require the investor to have in place an investment system with all its checks and balances. This would include investment strategy and tactics with all their accompanying rules. Fundamental and technical analysis and their relevance to the financial instrument targeted for investment.

In conclusion, from the why we get the aim. From the what, we are able to think, analyze and act. From the where we see the financial instruments available for investment. From the when we have an understanding when to invest or divest. And from the how we get our investment system.

I must caution you at this stage. That whichever the financial instrument chosen for investment, there will be ups and there will be downs. Good and bad decisions will be made. Investment and its management are not gambling; it is an art, which is as interesting or as boring as you make it to be. It is an ongoing process and would require adjustments from time to time to optimize and maintain the expected rate of return on our investments. The main aim being to be ahead and above of inflation.

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PART 13.0 INVESTMENT MANAGEMENT AND THE FIRST POSITION

A position in a stock or financial instrument is built over a period of time, while purchasing the same stock over various price levels. However, to begin with we would initiate a position only when we have a confirmation of oversold levels and that there is a reasonable margin of safety available to us.

We expect that, you have understood the various aspects of the first trade. However, before we proceed to the rules of trading, it would be appropriate to have an understanding of how to build a position in a particular stock or financial instrument.

Let's say we have INR 3, 00,000/= in our equity trading account. Given our initial requirement to diversify our risk exposure over more than one stock, we would apportion this initial capital into 10 equal risk segments. Each of these risk segments would be a position in a stock. Thus, we have allocated INR 30,000/= per position

Please note, that we may change this allocation to a larger amount depending on market action and news flow with regard to that particular stock. However, we must realize that we do this at the expense of increased risk exposure; as the stock (or stocks) may not perform as expected.

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Let us explain this with an example. We have observed a stock (XYZ Ltd.) with good fundamentals and reasonable growth projections. It has a reasonable EPS and P/E. However, due to adverse market action, this stock has given an oversold price level confirmation. Further, its price is quoting near its 52 week low. When we check current news flow with regard to this stock, there is nothing alarming. In fact, they are taking action to expand capacity to meet future export demand for their products.

Let's say that XYZ Ltd. has given an oversold signal at INR 100/=. So, we mark this with the purchase of 50 equity shares of this stock. By this action we have initiated our position in XYZ Ltd.

Depending on the volatility of the stock and its Beta, the price down move from here would be 6% to 9 %, and in some cases may expand to 12%. As it would be difficult to purchase the stock at rock bottom prices, we can reasonably invest our remainder of INR 25,000/= in the next 6% down move. Over the next few days we find the stock quoting at a price of INR 97/=. Here we would purchase 100 equity shares of this company. So, now we have invested INR 9,700/= and have added another 100 equity shares to our position in XYZ Ltd. Over, the next few weeks the stock price meanders down to INR 93/=. At this point we would invest the remainder with the purchase of 150 equity shares. Here we have invested INR 13,950/=. At this point we have invested a total of INR 28,650/=, and are holding a position of 300 equity shares at an average purchase price of INR 95.50.

Now, as our overall purchase price is INR 4.50 below the initial oversold price level; we have built a certain margin of safety in this position under normal market conditions (or moves). Further, we have pyramided correctly. Still, to provide for a further 43

adverse market action usually caused by an unobserved larger trend that maybe Against our expectations we would apply a stop loss at 8% below our purchase price at INR 87.85. It would be relevant to observe that this stop loss is a good 12.15% below the initial oversold price of INR 100/=.

Thus, a fall below this price would mean that we have built a position that has a longer down move to cover, and it would be reasonable to sell this position at this price. Of course, we could invest again in this stock at a lower price at a later date; and by then there would be more clarity with relevant news flow in this regard. For instance, there maybe certain government regulatory changes which effect the profitability of all companies in this industry or sector or certain clarifications maybe need with regard to certain policy decisions.

However, under normal market conditions; the stock price would make one bottom and then retest it after a few days or weeks. Better still it may make a head and shoulder bottom formation. These are all signals for an impending up move in the price of the stock. So, it would be advisable to hold on to the position while it starts its upward journey. We must await the confirmation of an overbought price level confirmation, before initiating the sale of our position in XYZ Ltd.

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PART 14.0

INVESTMENT MANAGEMENT AND INVESTOR PREPARATION

At this stage we expect that the investor has done the preliminary preparation to undertake his investment management exercise. 1. The investor realizes that he is on his own. We are our own boss, and are both the employer and the employee. In a matter of speaking we are reporting to ourselves. If the sequence of steps and actions we implement is correct we are justly rewarded and if they are wrong we are punished. This is to bring to your attention that, we cannot indulge in a blame game. Of course, there are no free lunch tickets. If an error is observed it must be corrected immediately.

2. Are we up to the challenge? It is advisable to do a SWOT analysis on ourselves and our present circumstances. We are to consider whether we: # is secure in our present circumstances. # has the frame of mind to take on risk and wait long enough to achieve profitable returns. # has gained an understanding of investment management and the processes involved. # has a documented plan of action available. # have done a what if analysis to know in advance what we would do given the various circumstances and situations the equity and other allied markets would put us through.

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3. Do we have the commensurate resources available? Given our present secure circumstances, we should have commensurate personal free reserves available to start the investment management exercise to develop a profitable portfolio of stocks and other financial instruments. 4. Have we a good association with a trustworthy market intermediary (broker)? As individual investors we cannot deal directly in the equity and other markets. We would have to take a broker alongside.

The selection of the broker is of importance. We must realize that a brokerage is a business entity in itself; and profits from the brokerage that we investors pay them to execute our transactions on the trading floor of the exchange. In fact some banks (like in India) have developed fully functional brokerage arms.

We as investors have a choice, and there is nothing personal or emotional about the selection of this broker we would be dealing through. We must always go for the best (optimal) deal available. 5. Have we prepared a project report? The investor must prepare a project report, and may avail the services of a consultant to do so. The individual investor must also do periodic reviews to ensure that the integrity of the objective is maintained in all his transactions. Any deviation from the objective must be corrected. However, in certain circumstances we may consider modifying the objective to include the deviant action as it may have proved profitable over a period of time.

Using the brief list above as a guide, the investor may use his or her own initiative to increase this list of things to do for their prepared 46

PART 15.0

QUALITIES OF THE SUCCESSFUL INVESTOR

Given the potential rewards, the risks being reasonable and given a method of well-defined risk management the equity markets across the globe (to our thinking) are the best game in town. However, the investor would require qualities of head and heart to achieve this success. These qualities of the successful investor listed and described below, would also be relevant to the other financial markets.

Winners and Losers: Vast fortunes can be made and lost during brief periods of trading in the equity markets. Now, what separates the winners from the losers?

The key to successful trading in the equity markets are not only attainable, they can also be learnt and taught. The successful investor exudes self-confidence , self-assurance and singleness of purpose. His handshake is solid, purposeful and firm. He looks you straight in the eye. He is well groomed and dressed.

Attitude verses Luck: The winners realize and recognize the importance of a positive mental attitude. They know that the power to achieve comes from within ; and that positive motivation overcomes all obstacles to success. They are of the view that, one must have the correct attitude to recognize the opportunity for success.

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We do realize that, a positive attitude cannot be replaced by the concepts of luck, positioning or political influence. Though these methods mentioned earlier also have their place in the scheme of things; and can and should be utilized to reinforce our positive mental attitude, but not replace it. In our struggle for success, a negative attitude can easily spell ruin, just as the lack of a positive attitude easily inhibits success.

Think, See and Do: To be successful, you need to emphasize on these elements. First, you must think. You must think about what you want to do and how you will do it. Next, you must see an opportunity as it develops. And lastly, you must act when the opportunity presents itself. You must think, see and do, as these are the important elements to success.

A counter view, comforting to most people: The investor hopes for success in vague terms, he organizes for it. But, when it came to visualizing a plan of attack (or action plan), he was sorely lacking. Then, he did not visualize opportunities when they presented themselves. Also, because he was so intent on not missing opportunities and unsure about what opportunities he is looking for. So, he did not see the opportunities when they did present themselves.

As the investor had failed to see opportunities, he could not act in order to get a successful result.

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Success follows: Success will tend to take care of itself, if you provide the proper psychological and behavioral background for it to occur. Goals are wonderful, without them we would be lost. Yet, the road to success must be paved with behavior, attitude, opinions and visualization. Each person has his own personal psychology and response style. There are four elements that comprise the essence of success theory:

The way in which, we as investors deal with loss and failure is just as important, if not more important, than the way in which we deal with success.

Effectively controlling and channeling emotions are two very important issues in the equation for success.

Those who have been successful and continue to be successful as investors recognize the importance of market psychology and incorporate it in their work to a certain extent.

To be successful as an investor, you need to develop and maintain similar attitudes, behaviors and opinions.

Allure: It is said that we learn more from our mistakes than our successes. Although success is important, it is equally important to understand failure and its role in shaping investor behavior. The idea is not to punish or ridicule something done or gone wrong. But to understand it, correct it and do it right in the future, so that the rewards of being right may reinforce the winning behavior. The weak link: The markets offer fortunes without limit to those who master the few simple rules of profitable investing. However, the weakest link in the chain is, has been and always will be the investor himself.

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The investor would be well advised not to fall prey to the belief that a better investment and/or trading system will make you a better investor. The world's best investment or trading system in the hands of an incompetent, undisciplined and unsophisticated investor will prove to be a vehicle for consistent losses and disaster. It does not matter how good your investment or trading system is, as it is you and only you who can make that system work as it is intended to. To put it into perspective, "It is not the gun that counts, but the man holding that gun".

Consider an investment or trading system that is so profitable that it makes thousands in a short period of time. Now, consider a period of "drawdown", which is a necessary part of the system. This drawdown is what really makes or breaks an investment or trading system.

If the investor were to limit the drawdown to what they should be, based on the trading signals generated by the system, then the system would recoup and move on to bigger and better things. On the other hand, if the investor is undisciplined and unwilling to accept losses when they should be taken according to the system; then the drawdown period will either be longer than intended. Further, the investment or trading system would deteriorate because of the investors lack of action.

Thus, the ability of an investor to cope with such periods of drawdown and paper losses will either make or break a system. No matter how good the system is, the investor himself is the weakest link in the chain. This lack of action on the part of 50

the investor will break the back of the system and of the investor himself quicker that any unexpected adverse market event. At this point the psychology of the investor becomes most important; and attitudes, behavior, perceptions and experience become important factors for success.

Finally, by correctly applying experience and coping with losses, the investor will either make or break the investment or trading system. There is no predetermined formula to deal with such adverse situations, but there are methods and procedures to minimize the degree of investor error; or in other words to maximize dependence on the investor's response style. Short-cut to learning: You can learn the various aspects and elements of successful investing in many ways.

You may undergo a long drawn psychiatric treatment that may or may not have the desired result.

You could enroll in a success motivation course that may be of some help. You can read extensively about investment theory and practice; and develop your own system, which would include both method and procedure.

You may read autobiographies of the great investors and speculators to reinforce your investment or trading system.

You could also undertake a course to discover the perfect investment or trading system for yourself, only to discover later that it does not suit your style.

Whichever way you look at it, your focus should be on technique and investor psychology, as against market methodology or investment system which are secondary. A good investment or trading system is only 20% of the input for success. The rest of the 80% would include the following:

Effective risk management tools. 51

A positive mental attitude. A personal investor style or psychology. Discipline and structure. Consistency and persistence.

Winning attitudes and behavior: Every signal generated by your investment or trading system must be considered to be the signal that will produce a vast fortune. If however, you do not look upon each investing opportunity as a significant opportunity for profit, then you would allow yourself the liberty to be dissuaded from acting on the opportunity.

No individual or course or tape or lecture or article can do for you what you can do for yourself. To develop this winning attitude and behavior you have to work with yourself and develop your skills by yourself with your own effort. However, time is at a premium due to its limited availability, so you would have to be selective in what you study and learn. You should focus on your personal

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PART 16.0

IMPORTANCE OF INVESTMENT MANAGEMENT

1. PREVENTING BLACK MONEY.

2.

SECURITY FROM FUTURE UNCERTAINITY.

3.

INCREASE CAPITAL FORMATION.

4.

INCREASE LIVING STANDARD OF THE SOCIETY.

5.

BENEFIT OF TAX REBATES.

6.

INFRASTRUCTURAL DEVELOPMENT.

7.

ECONOMIC DEVELOPMENT.

8.

FULLFIL THE NEEDS OF THE INDIVIDUAL.

9.

GROWTH OF SHARE MARKET.

10. SOCIAL WELFARE.

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CONCLUSION :-

The game of investments, as any other games, requires certain qualities and virtues on the part of the investors, to be successful in the long run. While the list prescribed by various co- -mentators tends to vary the following qualities are found on most. Contrary thinking, patience, composure, flexibility and openness, Decisiveness.

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