Investment Management

Investment vs Speculation
An Investment operation is one which, upon through analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative Investment Objectives
Safety Regularity of income Capital gain Tax savings Liquidity

Speculation
Some speculation is necessary and unavoidable for in many common stock situations there are substantial possibilities of both profit and loss, and the risk therein must be assumed by someone. Speculation is unintelligent when Speculating when you are thinking you are investing Speculating when you lack proper knowledge and skill for it Risking more money than you can afford to lose. Speculation beneficial on two levels For untested new companies to raise capital Risk is exchanged but never eliminated every time a stock is bought or sold (buyer has primary risk of prices going down and seller has a residual risk the chances of prices going up)

Investment Decision
An Investment is a commitment of funds for a period of time to derive a rate of return that would compensate the investor for the time during which the funds are invested, for the expected rate of inflation during the investment horizon and for the uncertainty involved. If estimated intrinsic value of the security is more than prevailing market price --- Buy or hold the security

Asset Classes
Stock Bonds Real Estate Commodities Currency

Security Valuation
Two general approaches to the valuation process : The Top Down Approach The Bottom up Approach

Economic indicators
1. 2. 3. 4. GNP -Growth -Decline Price Conditions - Stable - Inflation Economy - Boom - Recession Housing Construction Activity - Increase in activity - Decrease in Activity Employment - Increase - Decrease Accumulation of Inventories

Impact on the stock market

-Favourable -Unfavourable -Favourable -Unfavourable -Favourable -Unfavourable -Favourable -Unfavourable -Favourable -Unfavourable - Favourable under inflation - Unfavourable under deflation -Favourable -Unfavourable - Favourable under inflation - Unfavourable under deflation -Favourable -Unfavourable

5. 6.

7.

8.

Personal Disposable Income - Increase - Decrease Personal Savings

9. 10.

Interest Rates - low - high Balance of trade - Positive - Negative Strength of the Rupee in Forex market - Strong - Weak Corporate Taxation (Direct & Indirect - Low - High

-Favourable -Unfavourable
-Favourable -Unfavourable -Favourable -Unfavourable

11.

12.

The Industry Analysis

Every industry has to go through a life cycle with four distinct phases i) Pioneering Stage ii) Expansion (growth) Stage iii) Stagnation (mature) Stage iv) Decline Stage
These phases are dynamic for each industry. You as an investor is advised to invest in an industry that is either in a pioneering stage or in its expansion (growth) stage. Its advisable to quickly get out of industries which are in the stagnation stage prior to its lapse into the decline stage. The particular phase or stage of an industry can be determined in terms of sales, profitability and their growth rates amongst other factors. The Company Analysis There may be situations were the industry is very attractive but a few companies within it might not be doing all that well; similarly there may be one or two companies which may be doing exceedingly well while the rest of the companies in the industry might be in doldrums. You as an investor will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company. Some of the factors are History of the company and line of business Product portfolio's strength Market Share Top Management Intrinsic Values like Patents and trademarks held Foreign Collaboration, its need and availability for future Quality of competition in the market, present and future Future business plans and projects Tags - Like Blue Chips, Market Cap - low, medium and big caps Level of trading of the company's listed scripts EPS, its growth and rating vis--vis other companies in the industry. P/E ratio Growth in sales, dividend and bottom line

India investment pattern

ASSET CLASS BANK DEPOSITS INSURANCE & SMALL SAVINGS GOLD SHARES MUTUAL FUND OTHERS ALLOCATION 20% 27% 10% 2% 2% 39% (source : SEBI,NCAER)

Equity
In the short run the market is a voting machine, in the long run it is a weighing machine. Benjamin Graham More risky More demanding in terms of time Higher returns Very exciting Better hedge to inflation Participation in growth opportunities Two Principles Choosing the right company i) Profitable (superior returns <=20% on RONW) ii) Sustainable & superior growth (<=20%) Getting investment perspective right Performance of equity shares is driven more by market sentiments than by companys fundamentals in the short run (3-6 months) iii) Undervalued

Investment in equity by different ways

I) II) III) IV) V) Primary Market Secondary Market Through Mutual Funds Through ULIPs Futures and Options

Evaluate each option with respect to process, tax implications and cost of investing. Primary Market IPO (Book building process) Capital gain tax, dividend tax Secondary Market through broker STT on delivery based and on intraday sale (0.125% & 0.025%)

How to invest in Equity MF

Identify funds whose investment objectives match with your asset allocation need Evaluate past performance, look for consistency Diversity 60:40 or 50:30:20 Consider fund cost No demat a/c required Invest, Monitor review (sell if) change investment plan Fund changes strategy Funds poor result persist

Tax implication
Capital Gain Tax Dividend Tax Tax deductions

Types of Equity Mutual Funds

Equity Diversified fund Index fund Dividend yield fund Equity tax saves (ELSS) Sector fund Thematic fund Exchange traded fund (ETFs)

Methods of Investing in MF
Systematic Investment Plan (SIPs) Systematic Withdrawal Plan (SWPs)
Fixed Appreciation

Systematic Transfer Plan (STP) one fund to another

Fixed Appreciation

DEBT
Debt schemes are popular for following reasons Low Risk Tolerance Need for returns in the short term Predictable vs uncertain returns Credit Ratings on debt instruments
Risk Levels Highest safety High Safety Adequate Safety Moderate Safety Inadequate Safety Risk prone Substantial risk CARE CARE AAA CARE AA CARE A CARE BBB CARE BB CARE B CARE C CRISIL AAA AA A BBB BB B C ICRA LAAA LAA LA LBBB LBB LB LC FITCH AAA AA A BBB BB B C

Default

CARE D

LD

ISSUER
Central Govt
Central Govt State Gove PSUs Corporate Corporate, PDs Scheduled Commercial banks Financial Institutions Scheduled Commercial banks PSUs

INSTRUMENT
Dated Securities
T-Bills Dated Securities Bonds, Structured obligations Debentures Commercial papers FD CDs Bank Bond Municipal Bonds

MATURITY
2-30 yrs
91/365 days 5-13 years 5-10 years 1-25 years 15 days to 1 yr 15 days to 1 yr 1 10 years 1-10 year 0-7 years

WHO INVESTS?
RBI, Banks, MFs, insurance co, PFs, PDs, Individuals
RBI, Banks, MFs, insurance co, PFs, PDs Banks, Insurance cos, PFs Banks, Insurance cos, PFs MFs, Individuals Banks, MFs, Corporate, Individuals Banks, corporate, Fis, MFs, Individuals, FIIs Banks, Corporations, individuals Companies, Trusts, Fund, Associations, FIIs, NRIs Corporations, individuals, Cos, Trusts, Funds, Asso., FIIs, NRIs Corporations, individuals, Cos, Trusts, Funds, Asso., FIIs, NRIs

Evaluation of debt instruments

Evaluate your needs from the three key perspectives RISK
Evaluate credit risk Diversify

Returns
Calculate effective yield (IRR) Consider interest rate (and inflation) expectations Dont forget taxes

Liquidity

Different Debt instruments available in Indian market

Bank Deposits Flexible FD Sweep Account or Savings plus account Central Govt and T-bills State government securities Public sector undertaking bonds Company Fixed deposits Small savings / Postal Savings Post office saving schemes Kisan Vikas Patra (KVP) Post office monthly income scheme National saving certificate Post office time deposits RBIs Savings Bonds Provident Funds Debt Mutual funds Floating Rate fund Gilt Fund MIPs Pension Fund Balanced fund

Gold
Risk mitigation by investing in gold
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Return % Portfolio Returns % Gold Sensex 5% in Gold 15% in Gold 25% in Gold 10.26 3.22 3.57 4.28 4.98 -8.43 -0.18 -0.59 -1.42 -2.24 -14.39 15.83 14.32 11.30 8.27 4.67 -3.93 -3.50 -2.64 -1.78 3.92 33.75 32.26 29.28 26.29 -2.27 -27.93 -26.65 -24.08 -21.52 16.05 -3.75 -2.76 -0.78 1.20 12.22 -12.11 -10.89 -8.46 -6.03 4.46 81.31 77.47 69.78 62.10

Why Invest in gold

Portfolio diversification Inflation hedge Currency hedge (specifically dollar)

Risk Management (less volatile)

Demand & supply

Real Estate
Benefits of investing in Real estate
Higher, risk adjusted returns as compared to various asset classes Assured, regular income Capital Appreciation Inflation Hedge Portfolio Diversification

Precautions while investing Illiquid investment When & how to invest to suit your needs (land/house)

Real Estate Venture Capital Fund

Fund HDFC Property fund Kotak Realty Fund DHFL Venture Capital Fund Anand Rathi Realty Fund ILF&S Realty Fund Indiareit Fund Kshitij Venture Capital Fund UVF Private Equity Trust Floated By HDFC and SBI Kotak Mahindra Dewan Housing Finance Ltd Anand Rathi IL&FS Ltd and Punjab National Bank Piramal Enterprises Pantaloon Retail India Ltd UTI Group

Diversification across various geographies and property types. Targeted at HNWI (min investment 5 Cr) Expected return of 15-20% Close ended funds with lock-in period of usually 5-7 years

Comparison between different asset classes

Investment Avenues Returns Volatility Very High Liquidity High Risk Very High

Stock Market High

Bond/Notes
Bank Deposits Precious Metal Real Estate

Moderate
Moderate High High

Moderate
Low Moderate Low

High
High Moderate Low

Low
Low Low Low