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MANAGEMENT
UNIT 1
UNIT – I INVESTMENT SETTING
1.Return
On a security refers to the total gain or loss to the
investor over a period. The dividend or interest
received from the investment is the yield
2.Risk
The possibility of suffering or loss. It is related to loss
of capital , delay in repayment , non payment of
interest , variability of returns
3.Safety
The safety of an investment implies the certainty of
return of capital without loss of money or time
4.Liquidity (Easily Convert into cash)
An investment which is easily saleable or
marketable without loss of money and without loss
of time
5.Tax Benefits
Some investment provide tax benefits , other do not
(Initial Tax Benefits , Continuing Tax Benefits , Terminal
Tax Benefits)
6. Purchasing power
It refers to the buying capacity of investment in
market
7. Capital Growth
It refers to appreciation of investment. Investors
and advisers are seeking growth stock in the right
industry and bought at the right time
8. Stability of Income
It refers to constant return from an investment
Objectives of Investment
1.Maximize Current Income
This objective emphasizes on current yield over
other factors
2.Preservation of Capital
It means declines in the overall value of the portfolio
is within tolerable limits
3.Long term Capital Growth
The investor do not need current investment income
to meet their living expenses
4.Aggressive Capital Growth
It seeks maximum capital growth and implies
making riskier investment
5.Tax Benefits
Some investments are Tax free or Tax sheltered
benefits
6.Maximisation of return and Minimization of risk
Need and Importance of Investment
1.Longer Life Expectancy
Retire between the ages of 56 to 60
2.To Save Tax
Savings by tax payer (PF , LI, MF )
3.To Earn Interest
4.Fear of Inflation
5.Future need expectation
Children’s Higher education , marriage , house
6.Income
Speculation
“Speculation is the purchase or sale of anything in the
hope of profit from anticipated change in price”
Investments Vs Speculation
Basis of Investment Speculation
Distinction
Planning An Investor has a relatively Very short planning
Horizon longer planning horizons horizon
Risk Not willing to take high risk Normally willing to take
disposition high risk
Return Only expect limited return Expect high rate of return
Expectation with limited risk with high risk
Leverage They use his own funds and Majority to use borrowed
avoid borrow funds funds
Decision Follow fundamental factors Using market psychology
making
Gambling
“It is an act of creating artificial and unnecessary risks
for expected increased returns”
Investment Vs Gambling
Basis of Investment Gambling
Distinction
Duration Long time More quickly
Purpose People invest for income not Gamble for fun not for
for fun income
Risk taking Risk takers as well as risk Mainly a risk takers
Capacity avoiders
Legal It was done within four It is not regulated by
aspect corners of Law any Law
Investment Alternatives/Types
Financial Form Non Financial Form
Security/Marketable Non Security / Non
Financial assets Mak Financial assets
Debentures Insurance
Agri Land
Holiday resort
1.FINANCIAL FORMS OF INVESTMENT
A)SECURITY/MARKETABLE FINANCIAL ASSETS
1.EQUITY SHARES
The holders of equity shares are the real owners of the company
Equity share holders get dividends if the company earns profits
Features of Equity Shares
1.Permanent capital
There is no maturity for equity share capital
2.Right to Dividend
The equity shareholders are paid dividends out of profits earned by
the company
3.Control
Equity shareholders are the real owners of the company, they have
the voting right power
4.Limited Liability
Liability of the shareholders is limited to the price of shares
5.Pre-emptive Right
The existing shareholders have a right to purchase new shares
2.PREFERENCE SHARES
Dividend on these shares is to be paid prior to any
dividend on equity shares
Preference shares are to be redeemed before any
payment is made to the equity shareholders at the
time of liquidation
Features of Preference Shares
1.Maturity
Preference shares are may be redeemable or
irredeemable
2.Fixed Dividend
Its carry a fixed rate of dividend , say 7 to 9%
3.Control
Not a owner of the company
4.Claim on Assets
At the time of liquidation, preference shares have a
preference in the repayment of capital
3.DEBENTURES OR BONDS
Debentures or Bonds are financial securities issued by companies
to raise long-term loans from the public
They are generally redeemable after the stipulated period
Its carry fixed rate of interest which is payable periodically – say
half yearly or quarterly
Features of Debentures
1.Maturity
Debentures are to be repaid after the stipulated period , say 5 years
of 7 years
2.Fixed rate of Interest
Debentures carry a fixed rate of interest
3.Charges on Assets
Debentures are generally secured
4.Tax Deductibility of Interest
It is allowed as a deduction in the computation of income tax
5.Control
They are lenders- not to have voting rights
4.DERIVATIVES
“A contract which derives its value from the
prices or index of prices to underlying
securities “
Types
1. Forwards Contract
2.Futures Contract
3.Swaps
4.Options
B. Non-Security / Non Marketable Financial Assets
1.Bank Deposit
Opening a bank account and depositing money in it
can make a bank deposit
Types
1.Current Accounts
Mainly used by businessmen
No limits for number of transactions
No interest is paid by bank
2.Fixed Deposit / Term Deposit
Periods from 7 days to 10 years
Closing 1% penalty
Interest will paid by the bank
3.Savings Bank Account
To promote the habit saving among the
people
Bank will pay interest 4.5 % pa
Connect with ATM and internet
4.Recurring Deposits
To save small amount every month
Maturity 6 to 120 months
2.Other Deposits
1)Post Office Deposit
a. Savings Deposits
50k to 1 lac , interest 5.5 to 6%
Tax free
b. Fixed Deposit
1 to 5 years , 8 to 10.5 %
c. Recurring Deposit
Up to 5 years monthly savings
Fixed amount of Rs,5 or multiple of Rs,5 for 60
months
Interest 10.5%
2.Public Provident Fund
Monthly installments Rs,100 to 60k pa
Cumulative interest 11%
Maturity 15 years
3.National Savings Scheme
Tax free
Interest 10% pa
Multiples of Rs,100 till 40k pa
4.Kisan Vikas Patra
Denomination of 1000 , 5000 , 10000 will double in 6
years
Compound interest 12.25%
Maturity 2 years
5.Employee Provident Fund Scheme
3.Insurance
To reduce or eliminate risk of loss to life and
property
Insurance
Life General
Endowment Whole Life Fire
Health
Automobile
1.Life Insurance
Amount of policy paid either death or maturity
LIC has a monopoly
2.General Insurance
Loss is indemnified
4.Money Market Instruments
Maturity less than 1 year
Issued by Government , Financial institutions ,
Banks
Highly liquid and have negligible risk
a) Treasury Bills
Represent Government of India
Maturity 91 days to 364 days
Sold on an auction basis every week
b) Commercial Paper
Short term unsecured promissory note
Maturity 90 to 180 days
Sold at discount rate
5.Mutual Funds
Professionally managed
Collect the money from various investors and Invest it in
stocks , bonds , short term money market instruments
Mutual funds
Balanced schemes
2.Non Financial Forms of Investment
A. Real Estate
Tangible Assets
1.Residential House
Rental savings and capital appreciation
Loans are available
2.Commercial Property
Buying office or shop space in a commercial
complex
Regular rental income
Capital appreciation
3.Agricultural Land
Income not taxable
Loans are available
Living in a farmhouse
4.Holiday Resort
B. Precious Objects
1.Gold & Silver
Good hedges against inflation
Highly liquid
High degree of monetary value
2.Art Objects ( Paintings , Antiques )
Require skill , taste , creativity , talent and
imagination
Risk Concept
The possibility of suffering or loss
The possibility that the actual return may not be
same as expected
Causes of Risks
Wrong Decision
Wrong timing
Nature of Investments
Maturity period
Amount of Investment
National and international factors
Nature of Industry
Types / Classification / Sources of Risks
Risk
Systematic Unsystematic
Risk Risk
Business Financial
Risk Risk
Internal External
Risk Risk
1.Systematic Risk
Uncontrollable risk
Associated with Economic , Sociological ,
Political and legal considerations
a. Market Risk
It will affect the stock market in tangible and
intangible events
Tangible – earthquake , war , political
uncertainty and fall in currency
Intangible – Market psychology
b. Interest Rate Risk
It will affect the price of bonds , debentures
and stocks
Caused of interest rate -government monitory
policy and interest rates of T-bill and
government bonds
c. Purchasing power risk
Inflation is the reason behind the loss of
purchasing power
2.Unsystematic Risk
Controllable risk
Technology changes , availability of raw materials
, labor problems , change in consumer preference
a. Business Risk
Poor earnings and failure results
It affect bonds and stock holders due to unable
pay of dividend and interest
(i) Internal Risk (ii) External Risk
b. Financial Risk
Unable to meet financial obligations
Higher proportion of debt increase
Managing Risk
Avoidance of Risk
Prevention of Risk
Retention of Risk
Transfer of Risk
Return Concept
The objective of any investor to maximize
expected returns from his investments
Return is the motivating force and inspiring the
investors
Types
1.Realized Returns
Returns that was
Eg: Bank Deposit (10%)
2.Expected Return
The return from an asset that investors expect to
earn over some future period
It may or may not occur
Components of Return
1.Current return
Dividend or interest
2.Capital Return
Price change called the capital return
7 .05
8 .10
9 .20
10 .30
11 .20
12 .10
13 05
Different methods in measurement of
risks-cont
RETURN(%)(1) PROBABILTY (2) (3)=(1)X(2)
7 .05 .35
8 .10 .80
9 .20 1.80
10 .30 3.00
11 .20 2.20
12 .10 1.20
13 .05 .65
Total 60 60
Arithmetic mean=60/5=12
Stocks of X and y ltd
Return( X ltd Weighted Return y ltd Weighted average
1) probabilit average (1) probability( return
y(2) return 2)
8 0.15 1.20
9 0.20 1.80