K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

INVESTMENT MANAGEMENT OU –MBA IV SEM - Finance Minor

Unit I –a) Investments – concept, sources, Investment vs Speculation, investment process b) Risk & Return – concept, sources and types, measurement (Theory & Problems) c) Investment analysis – Fundamental and Technical Analysis d) Efficient Market Hypothesis Unit II – Bond Valuation (Theory & Problems) Unit III – Equity Valuation (Theory & Problems) Unit IV – Portfolio Theories or Models (Theory & Problems) a) Harry Markowitz Model b) Sharpe Single Index Model, Capital c) Asset Pricing Model (CAPM) d) Arbitrage Pricing Theory Unit V – a) Mutual Funds b) Performance Evaluation (Theory & Problem)

K. HARI KRISHNA

MBA TUITIONS, FINANCE LIVE PROJECTS

MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

UNIT – 1 MEANING OF INVESTMENT Investment means employment of funds in a productive manner so as to create additional income. The word investment means many things to many persons. Investment in financial assets leads to further production and income. It is lending of funds ffor income and commitment of money for creation of assets, producing further income. Investment also means purchasing of securities, financial instruments or claims on future income. Investment is made out of income and savings credit or borrowings and out of wealth. It is a reward for waiting for money. There are two concepts of investment: 1) Economic Investment: The concept of economic investment means additions to the capital stock of the society. The capital stock of society is the goods which are used in the production of other goods. The term investment implies the formation of new and productive capital in the form of new construction and producer’s durable instrument such as plant and machinery, inventories and human capital are also included in this concept. Thus, an investment, in economic terms, means an increase in building, equipment, and inventory. 2) Financial Investment: This is an allocation of monetary resources to assets that are expected to yield some gain or return over a given period of time. It is a general or extended sense of the term. It means an exchange of financial claims such as shares and bonds, real estate, etc. in their view; investment is a commitment of funds to derive future income in the form of interest, dividends, rent premiums, pr pension benefits and the appreciation of the value of their principal capital. The economic and financial concepts of investment are related to each other because investment is a part of the savings of individuals which flow into the capital market either directly or through institutions. Thus, investment decisions and financial decisions interact with each other. Financial decisions are primarily concerned with the sources of money where as investment decisions are traditionally concerned with uses or budgeting of money. CHARACTERISTICS OF INVESTMENT Investment refers to invest money in Financial physical assets and Marketable assets. Major investments features such as risk, return, safety, liquidity, marketability conceivability,, capital growth, purchasing power, stability and the benefits. Figure 1.1 indicates that an important characteristics of investments is outlined as:

Tax Benefits Stability of Income

Safety Investment

Conceivability

Return

Capital Growth

Marketability

Risk

Liquidity

Purchasing Power Stability

• Risk • Return • Safety • Liquidity

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• Marketability • Conceivability • Capital growth • Purchasing power stability • Stability of income • Tax benefits. Risk Risk refers to the loss of principal amount of an investment. It is one of the major characteristics of an investment. The risk depends on the following factors: • The investment maturity period is longer, in this case, investor will take larger risk. • Government or Semi Government bodies are issuing securities which have less risk. • In the case of the debt instrument or fixed deposit, the risk of above investment is less due to their secured and fixed interest payable on them. For instance Debentures. • In the case of ownership instrument like equity or preference shares, the risk is more due to their unsecured nature and variability of their return and ownership character. • The risk of degree of variability of returns is more in the case of ownership capital compare to debt capital. • The tax provisions would influence the return of risk.

Return Return refers to expected rate of return from an investment • Return is an important characteristics of investment. Return is the major factor which influences the pattern of investment that is made by the investor. Investor always prefers to high rate of return for his investment. Safety Safety refers to the protection of investor principal amount and expected rate of return. • Safety is also one of the essential and crucial elements of investment. Investor prefers safety about his capital. Capital is the certainty of return without loss of money or it will take time to retain it. If investor prefers less risk securities, he chooses Government bonds. In the case, investor prefers high rate of return investor will choose private Securities and Safety of these securities is low. Liquidity Liquidity refers to an investment ready to convert into cash position. In other words, it is available immediately in cash form. Liquidity means that investment is easily realisable, saleable or marketable. When the liquidity is high, then the return may be low. For example, UTI units. An investor generally prefers liquidity for his investments, safety of funds through a minimum risk and maximisation of return from an investment. Marketability Marketability refers to buying and selling of Securities in market. Marketability means transferability or saleability of an asset. Securities are listed in a stock market which are more easily marketable than which are not listed. Public Limited Companies shares are more easily transferable than those of private limited companies. Concealability Concealability is another essential characteristic of the investment. Concealability means investment to be safe from social disorders, government confiscations or unacceptable levels of taxation, property must be concealable and leave no record of income received from its use or sale. Gold and precious

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

stones have long been esteemed for these purposes, because they combine high value with small bulk and are readily transferable. Capital Growth Capital Growth refers to appreciation of investment. Capital growth has today become an important character of investment. It is recognising in connection between corporation and industry growth and very large capital growth. Investors and their advisers are constantly seeking ‘growth stock’ in the right industry and bought at the right time. Purchasing Power Stability It refers to the buying capacity of investment in market. Purchasing power stability has become one of the import traits of investment. Investment always involves the commitment of current funds with the objective of receiving greater amounts of future funds. Stability of Income It refers to constant return from an investment. Another major characteristic feature of the Investment is the stability of income. Stability of income must look for different path just as security of principal. Every investor always considers stability of monetary income and stability of purchasing power of income. Tax Benefits Tax benefits is the last characteristic feature of the investment. Tax benefits refer to plan an investment programme without regard to one’s status may be costly to the investor. There are actually two problems: • One concerned with the amount of income paid by the investment. • Another is the burden of income tax upon that income. INVESTMENT AVENUES The alternative investment avenues for the investor are to be considered first so as to satisfy the above objectives of investors. The following categories of investors are open to investors as avenues for savings to flow in financial form: (a)Investment in Bank Deposits – Savings And Fixed Deposits: This is the most common form of investment for an average Indian and nearly 40% of funds in financial savings are used in this form these are least risky but the return is also low. (b)Investment in P.O. Deposits, National Savings Certificates and other Postal Savings Schemes: Many people in villages and some urban areas are investors in these schemes due to lower risk of loss of money and greater security of funds. But returns are also lower than in Stocks & Shares. (c) Insurance Schemes of LIC/GIC etc. and Provident and Pension Funds: About 20- 25% of financial savings of the household sector are put in these forms and P.F., Pension and other forms of contractual savings. (d)Investment in Mutual Fund Schemes or UTI Schemes as and when announced: These are less risky than direct investment in stocks and shares as these enjoy the expert management by the Portfolio Manager or Professional experts. They also have the advantage of diversified Portfolio involving the reduction of risk and economies of scale reducing the cost of investment. (e)Investment in New Issues Market: A new entrant in the Stock Market should preferably invest in New Issues of existing and well reputed companies either in equity or debentures. Incidentally the instruments in which investment can be made in the new issues market are: 1. Equity issues through prospectus or rights announced by existing shareholders.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

2. Preference shares with a fixed dividend either convertible into equity or not. 3. Debentures of various categories – convertible, fully convertible, partly convertible and nonconvertible debentures. 4. P.S.U. Bonds – taxable or free-taxed with interest rates. (f) Investment in gold, silver, precious metals and antiques. (g) Investment in real estates. (h)Investment in gilt-edged securities and securities of Government and Semi-Government organizations (e.g. Relief bonds, bonds of port trusts, treasury bills, etc.). The maturity period is varying generally upto10 to20 years. Gilt-edged securities market constitutes the largest segment of the Indian capital market. These are fully secured as they have government backing. Tax benefits are available to these securities. The following figure indicates alternative avenues for Investment:

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

INVESTMENT AND SPECULATION SPECULATION According to the Oxford Dictionary, definition of speculation includes the following meanings: “A message expressing an opinion based on incomplete evidence.” Speculation is the buying, holding and selling of stocks commodities, collectibles real estate or any valuable thing to profit from fluctuations in its price as opposed to buying it to use. Sometimes speculative purchasing can cause particular prices to rise above their “real value” simply because the speculative purchasing is artificially increasing the demand. Speculative selling can also cause prices to fall below “true value” in a similar fashion. In some situations price rises due to speculative purchasing cause further speculative purchasing in the hope that the price will continue to rise. Speculation Functions • Smoothen operating of price fluctuation process • It maintains temporary equilibrium between capital supply and demand • Consideration of future business prospects in determining the business value of existing capital funds • Equating the risk to return in the infinitely varied utilisations of the social capital fund Difference between Speculation and Investment Basis Speculation Investment Meaning • A message expressing an • The investing of money opinion based on incomplete evidence Types of contract • Speculator is a owner of • Investor is a creditor of the speculation the Investment Length commitment • In the case speculation • In the case of investment the length of commitment the length of is a short term only commitment is a long term Source of Income • The source of income is • The source of income fluctuated and changes in is earning from the market price enterprise Quantity of Risk • Quantity of risk is the high • Quantity of risk is the low Stability of Income • Income is uncertain and • Income is very stable erratic Psychological attitude of Participants • Speculator psychological • Investor psychological attitude is a daring and attitude is a cautious careless and conservative Reasons for Purchase • It is unscientific analysis • It is scientific analysis of intrinsic worth of intrinsic worth

“Speculation is an activity, quite contrary to its literal meaning, in which a person assumes high risks, often without regard for the safety of his invested principal, to achieve large capital gains.” The time span in which the gain is sought to be made is usually very short. The investor sacrifices some money today in anticipation of a financial return in future. He indulges in a bit of speculation. There is an element of speculation involved in all investment decisions. However it does not mean that all investments are speculative by nature. Genuine investments are carefully

K. HARI KRISHNA

MBA TUITIONS, FINANCE LIVE PROJECTS

MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

thought out decisions. On the other hand, speculative investments are not carefully thought out decisions. They are based on tips and rumo rumours. An investment can be distinguished from speculation in three ways – Risk, capital gain and time period. Investment involves limited risk while speculation is considered as an investment of funds with high risk. The purchase of a security for earning a stable return over a period of time is an investment whereas the primary motive is to earn high profits through price changes is termed as speculation. Thus, speculation involves buying a security at low price and selling at a high price to make a capital gain. The truth is that any investment is a speculation if the investor uses his judgement and forecast the probable course of events in order to reap the returns on his investment. THE INVESTMENT PROCESS/STAGES Investment process refers to investment pol policy, investment analysis, valuation of securities and proper portfolio construction in this way achieve to investment process. Stage - I

Investment Policy

Stage - II

Investment Analysis

Stage - III

Valuation of Securities

Stage - IV

Portfolio Construction

Stage - V

Portfolio Revision

The Investment Process/Stages Investment Policy Investment policy is the first stage of the investment process. It determines the following aspects of the investor: • Determination of Investable Wealth • Determination of Portfolio Objectives • Identification of Potential Investment Assets • Consideration of Attributes of Investment Assets • Allocation of Wealth to Asset Categories. Investment Analysis Investment analysiss is the second stage of the investment process. Investor analysis of the investment is made on the following grounds: • Equity Stock Analysis • Screening of Industries • Analysis of Industries • Quantitative Analysis of Stocks • Analysis of the Economy • Debentures and Bond Analysis • Analysis of Yield Structure

K. HARI KRISHNA

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

• Consideration of Debentures • Quantitative Analysis of Debentures • Other Asset Analysis • Qualitative Analysis • Quantitative Analysis Valuation of Securities Valuation of the securities is the third stages of the investment process. This stage involves • Valuation of Stocks • Valuation of Debentures and Bonds • Valuation of Other Assets Portfolio Construction Portfolio construction is the last stage of the investment process. It involves the following areas as outlined below that: • Determination of Diversification Level • Consideration of Investment Timing • Selection of Investment Assets • Allocation of Investable Wealth to Investment Assets • Evaluation of Portfolio for Feedback RISK UNDER INVESTMENT MANAGEMENT Risk can be defined as the chance that the expected or prospective advantage, gain, profit or return may not materialize that the actual outcome of investment may be less than the expected outcome. The greater the variability or dispersion rsion of the possible outcomes, or the broader the range of possible outcomes, the greater the risk. Risk suggest that the decision maker knows that there is some possible consequence of an investment decision, but uncertainty involves a situation, where the outcome is not known to the decision maker. But basically, investment involve both risk and uncertainty. The word risk used to consist of all elements certainty, uncertainty, variability of the return and income. CLASSIFICATION OF RISKS Types of Risk There are a number of sources or factors behind risk and depending upon the source. The following are the major types of risk: According to the Oxford dictionary definition of risk includes the following meanings: “The possibility of meeting danger or of suffering harm or loss.” This conforms to the connotations put on the term by most investors. Risks

Market Risk

Systematic

Unsystematic

Risk Interest

Purchasing

Business

Risk Financial

Rate Risk

Power Risk

Risk

Risk

Other Risk Default or Insolvency Risk Marketability Management Risk Risk

Political Risk

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Figure 6.2 has indicates the classification of risks. Risks may be classified as: • Systematic risk • Unsystematic risk • Other risk Systematic risks are market risk, interest rate risk and purchasing power risk. Unsystematic risks are business risk, financial risk and default or insolvency risk. Other risks are marketability risks, management risks and political risks. Systematic Risks Market Risk Market risk arises out of changes in Demand and Supply of goods and service in the markets. Market risk is unpredictable. It is not controllable. It is uncontrollable factors of the risk. Investors have failure due to lack of knowledge of market. Interest Rate Risk Investment always expected to return in terms of interest rate. Interest rate changes from time to time. The loan borrowed by companies and stock brokers generally depend on interest rates. When interest rate is changed, while the market activity and investor perceptions change with the changes in interest rates. The monetary and fiscal policy that is not controllable by the investor affects the riskness of investment due to their effects in terms of returns, expectations and total principal amount. Purchasing Power Risk Purchasing power risk is the uncontrollable risk. Inflation means it rises the prices of the commodities and service. Cost push inflation is caused by due to wage rise or rise in input prices. Price of the commodities increased due to inadequate supplies and rising demand. Unsystematic Risks Business Risk Business risk refers to the variability of the business, sales, income, profits etc. It can depend on the market conditions for the product mix, input supplies, strength of competitors etc. Business risk is internal risk due to fall in production, labour problems, raw material problems or inadequate supply of electricity etc. It leads to fall in revenues and in profit of the company. Financial Risk Financial risk refers to the method of financing, adopted by the company, high leverage leading to larger debt servicing problems or short term liquidity problems due to bad debts, delayed receivables and fall in current assets or rise in current liabilities. Financial problems in terms of earnings, profits, dividends. Default or Insolvency Risk The borrower/issuer of securities may become insolvent due to default or delay the payment in terms of installments or principal repayments. Other Risks Political Risks Political risks refers to changes in the government, tax rate, monetary policy, fiscal policy, impositions control and administrative regulations etc. Management Risk Management risk refers to error and inefficiencies of management, causing losses to the company. Marketability Risks It refers to involve loss of liquidity or loss of value in conversions from one asset to another.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

RISK RETURN ANALYSIS: All investment has some risk. Investment in shares of companies has its own risk or uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices, losses of liquidity etc The risk over time can be represented by the variance of the returns while the return over time is capital appreciation plus payout, divided by the purchase price of the share. Normally, the higher the risk that the investor takes, the higher is the return. There is, however, a risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long term, yielded on government securities at around 13% to 14%. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. But other risks such as loss of liquidity due to parting with money etc., may however remain, but are rewarded by the total return on the capital. Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risk by choosing an appropriate portfolio. Traditional approach advocates that one security holds the better, it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding more securities expensive. MEASUREMENT & EVALUATION OF RISK How does we Measure Risk? Understanding the nature of the risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms. Expressing the risk of a stock in quantitative terms makes it comparable with other stocks. Measurement cannot be assures of percent accuracy because risk is caused by numerous factors as discussed above. Measurement provides an approximate quantification of risk. The statistical tool often used to measure is the standard deviation. Standard Deviation: It is a measure of the values of the variables around its mean or it is the square root of the sum of the squared deviations from the mean divided by the number of observances. The arithmetic mean of the returns may be same for two companies but the returns may vary widely. This can be illustrated with an example. FUNDAMENTAL ANALYSIS IN INVESTMENT MANAGEMENT Fundamental analysis refers to an examination of the intrinsic worth of the company. This is done by studying the various aspects of the company in terms of the background and performance of the industry at which the belongs and the general economic and socio-political scenario of the country. However, the fundamental analysis of the investment management involves three major steps. They are as outlined below that: • Economic Analysis • Industry Analysis • Company Analysis Economic Analysis Economic factors play a crucial role in any investment decisions that is made for taking a gain and better return to investor. Economic analysis and company performance forecasting is necessary for making investment management. If any decision is so risk, it can be very difficult to implement in the investment by the investor. Economic analysis involved in micro level and macro level of the company’s performance. Micro economics is refers to study in a small problems of the investment company. In another sense, the macro economics refers to study of overall problems of the investment company. Economic Factors Influenced to Investment Management

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Exhibit 6.1 Economic Factors influenced to Investment Management • Demand of security from the investor. It has created a heavy demand for security. If demand, the price value of the securities is increased in the market. • Demand and supply is also influenced to investment in terms of supply of securities is greater, the result is the price of securities is reduced. • If demand for security, there is no supply, in this circumstance, the price of such companies shares is high. • Economic factors has help to creation of savings. • Economy tells something about how to effective way to earn income and then how to convert a successful saving avenues to the common people. • Economical factors are favour with investment decisions. If inflation, the result is price increased for commodities. At the same time, business earn more profit that will convert as saving. If deflation the commodities price is reduced. At the same time, common people save money and then will investment companies. Population: Population is the important study aspects for economist. In the case of population growth, its created huge investment opportunities, avenues to the investor. Therefore, the vast population is the expected high demand for commodities. This result is a new source of investment formation by the investor. If the population is slowdown, that final effect is investment activities and opportunities reduced because of slowdown of population growth. Consequently, investment activities are not growth. Government spent funds for establishment of Research and Technological Development. Investor largely invest in funds and shares. It is growth for investment activity. This result is growth of industries in the country. Investment avenues are generated savings. Small savings made by individual investors are ready to invest in company shares, debenture and securities in terms of investor created huge capital formation. Discovery of natural resource which is brings development and growth of investment management. Effective utilisation of raw materials that needed investments. Developed countries are invested unnatural resource products and earning yield from their investment. And discovery of energy power influence to technology. Technology is focus on lot of changes in investment area. Forecasting Investor should make an economic forecasting for taking a decision on securities and financial market. Forecasting is an important to forecast economic environment. Therefore, in the case of investor purchases or selling of the securities in the market at the right time. They can expect high yield from their investment. If economic conditions are fluctuated at the time the investor to take care for investment avenues. When economic conditions are favourable that benefited to the investor. They are expected good return from the investment. The company’s profit depends on the factors of production such as land, labour, capital, technology, finance, government and political climate. Economic Indicators Economic indicators are helpful to determine the future course of action. An important economic indicators in terms of fiscal policy, monetary policy, GDP, stock prices, financial market. These factors influence to investor for investment activity. • Rise in saving • Create employment opportunities • High interest rate Above are the positive indications of the economy.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Economic Forecasting India has a mixed economy, where the public sector plays a vital role. It means, the government being the biggest investor and spender. Investor forecasting economic trends such economic and political stability in the form of stable and long term economic policies. Its result is heavy investment in the economy. Political uncertainty and adverse changes in government policy do adversely affect industrial growth. This effect is that the investor are not investing projects. At any stage in the economy, there are some industries that are growing while other industries are declining. Different Phases of Economy There are difficult phases of economy. They are as outlined below: • Boom • Depression • Recession The Indian economy depends basically on the monsoon and the growth rate of agriculture. ECONOMIC FORECASTING TECHNIQUES Economic Forecasting Techniques are as notified below: • Surveys • Economic Indicators • Diffusion Indexes • Economic Modeling • Opportunistic Model Building Surveys Survey means personal contact of the respondent to obtain information about the price of the share, investment trends, performance and efficiency of the organisations. This type of forecasting help to research. Research to conduct empirical studies with regarding to economic conditions and its impact on stock exchange. Economic Indicators Economic indicators indicated that economy process in the country. This method is planned to get indications in future selecting to business growth and prosperity. Economic indicators help to investor to different phases of economy like boom, depression and rescission. Diffusion Indexes Diffusion indexes is also known as a census or a composite index. It is identified the weakness and strength of a specific time serious of data. In this techniques both micro and macro economic tools are combined. This method is a extremely difficult to draw out a proper understanding of the forecasting methods. Economic Model Building Economic model building is a mathematical and statistical application to forecast the future trend of the economy. This technique used only by those are trained and it is used to draw out conclusions between two or more variables. This process technique specifies a particular system and calculates the results from two variables. Opportunistic Model Building It is also called as sectoral analysis of the gross national product model building. This method uses the national accounting data to be able to forecast for a future short term period. This method should be

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

added to gross domestic investment, government purchases of goods in services, consumption expenses and net exports. INDUSTRY ANALYSIS Meaning of Industry Industry refers to manufacturing activity concerned with the conversion of raw materials or semifinished goods into finished goods. In another meaning, it refers to that branch of business activity which is concerned with the raising, production, processing or fabrication of products. Types of Industries Industries or Industrial activities can be further classified into four categories. They are as mentioned below: • Extractive Industries • Genetic Industries • Construction Industries • Manufacturing Industries Extractive Industries Extractive industries refer to those activities which are concerned with the extraction or production of wealth from soil, air, water or from beneath the surface of the earth. They include as: • Agriculture • Mining • Fishing • Lumbering • Hunting • Fruit gathering Genetic Industries Genetic industries refer to those activities which are undertaken for reproducing or multiplying plants and animals with the object of earning profit from their sale. Examples are: • Nurseries raising seedlings and plants • Cattle breeding • Poultry farming etc. Construction Industries Construction industries refer to those activities which are concerned with the creation of infrastructure necessary for economic development. Examples are: • Construction of buildings, roads, bridges, lines, dams, canals etc. Manufacturing Industries Manufacturing industries refer to activities with the creation of form utility. It means that, raw material converted into finished goods. Examples are: • Conversion of raw cotton into cotton textiles. • Conversion of raw jute into jute manufactures. • Production of sugar from sugarcane. • Production of iron and steel from iron ore etc. Types of Manufacturing Industry Manufacturing industries may be sub-divided into four types. They are:

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• Analytical Industries • Synthetic Industries • Processing Industries • Assembly Line Industries Analytical industries Analytical industries refers to those manufacturing industries which produce many types of products by analysing and separating the same basic raw materials into different products. For example: Oil refining is an analytical industry. In oil refining, the same crude oil is analysed and separated into different products like petrol, diesel oil, kerosene, lubricating oil etc. Synthetic industries Synthetic industries refer to all those manufacturing industries where various materials are combined together in the manufacturing process to manufacture a new product. For example: • Cement industry is a synthetic industry. i.e., cement is produced by a cement industry by combining many materials like as concrete, gypsum, coal etc. Processing industries Processing industries refer to those manufacturing industries where the raw materials are processed through different stages/process into finished goods. For example: • Textile Industry • Paper Industry Assembly line industries Assembly line industries refer to those manufacturing industries where different component parts already manufactured are assembled into final products. For example: • Automobile Industry • Television Industry Fundamental Analysis of Investment Management 141 INDUSTRY LIFE CYCLE Industry should analyse and interpret through its life cycle. Industry Life Cycle Range of Industries Sunrise Industries Grow th In du strie s B luechip Industries De clin in g Growing S tagnan t Fastest Growing Fig. 6.1 Industry Life Cycle Figure 6.1 has shows the relationship between the cycle of growth and range of industries. Different cycles of growth process/stages are outlined below: • Fastest growing companies • Growing companies

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• Stagnant companies • Declining stages of the companies Different range of industries are: • Sunrise Industries • Growth Oriented Industries • Blue Chip Companies This figure 6.1 clearly notified that if industry is prosperous, the companies within the industries may also be growth, if the economy is also doing well. Fastest Growing Companies/The Pioneering Stage According to fastest growing companies/the pioneering stage, when the new inventions and technological developments take place. Exhibit 6.2 Features of Fastest Growing/Pioneering Companies • In this stage, Active Investor will notice a great increased in the activity of the company. • Production can raise and there will be great demand for the product. • In this stage, profit is high. • A heavy competition from competitors. • The competitive pressures keep on increasing with the entry of new firms and the prices keep on declining and then ultimately the companies profits fall. • A few efficient companies are run the business and most of the other companies are wiped out in the growing or pioneering stages of the companies. Exhibit 6.3 Features of Growing/Expansion Stage • In this stage, further investment is needed. • Product and services price is stabilised. • Companies are earn huge profits. • Investor yield on good return from investment. • Companies are internally generated funds to keep financial requirement of the organisation. • This stages also known as maturity stages for companies. • Companies are started expansion and diversification of products. • During this stage, companies introducing different variety of products. Exhibit 6.4 Features of Stagnant Industries • Increase in sales. • Profits of the company is some extent to reduced. • During this stage, growth is also reduced. • Company has spent huge amount for advertisement for promotion of goods and service. • Investors are plan and careful about their investment avenues in the business. • Investors cautious about future plan and ready to sell their securities in the financial market. Stagnant Industries/Stagnant Stage Growing/Expansion Stage INDUSTRY GROUPS Industry groups can be classified: • On the basis of normal sizewise classification • On the basis of proprietory based classification • On the basis of use based classification • On the basis of input based classification On the Basis of Normal Sizewise Classification It can be further classified into as follows:

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• Small scale units • Medium scale units • Large sized industries On the Basis of Proprietory Based Classification Industries have been classified on the basis of proprietary. • Private Sector Industries • Public Sector Industries • Joint Sector (Jointly owned by private and public) Industries. On the Basis of Use Based Classification Industries have also been classified on the basis of use based. • Basic Industries • Capital Goods Industries • Intermediate Goods • Consumer Goods Industries Exhibit 6.5 Features of Declining Stages of Industries • Companies are continuously making loss in the business. • Investor has not received yield in terms of dividend. • Customers are rejected to declining companies product. • Even investors are lost their principal amount. • Expenditure is increased and revenues is decreased. • Companies are closed their business units. • Investor looks for new investment opportunities. Declining Stages of Industries 144 Investment Management On the Basis of Input Based Classification • Agro based products • Forest based products • Marine based products • Metal based products • Chemical based products SOURCES OF INFORMATION FOR ANALYSIS Exhibit 6.6 Sources of Information for Analysis An important sources of information for industry analysis as outlined below that: • RBI Reports on currency and finance bulletin. • Monthly bulletin of RBI on industrial production, prices etc. • Data on industries which are published by the Ministry of Industry and Commerce. • Many Industry Associations has been published data. • FICCI and Associations shall also publish Industry data. • RBI data relating to industries. Exhibit 6.7 Key Factors to be Examined for Sources of Data Major key factors are: • Looks for past, present and future trends of the industry • Analyse the past sales and earning performance of the industry • To know the stage of growth of the industry • Government rules and regulation towards the industry • To know the present labour conditions

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• To analyse the competitive conditions and industry share prices in market • To analyse industry life cycle and its effect. Key Factors to be Examined for Sources of Data Influencing Factors of Industry Analysis Influencing factors of Industry Analysis as mentioned below: • Product line • Raw material and output Fundamental Analysis of Investment Management 145 • Capacity installed and utilised • Industry characteristic • Demand and market • Government policy with regard to industry • Labour and other industrial problems • Management • Future prospects Product Line Product line refers to in terms of the product life cycle like introduction, growth, maturity, saturation and decline stages of the product. Product line influenced to industry. Therefore, industry depends on product or service which is offered by company. Raw Materials Industry refers to raw material convert into finished goods/products. Companies always look for raw material from different suppliers and select supplier who is supplying raw material at less and competitive price. When raw materials are scarce, this time, companies are ready to pay more price to suppliers and get raw materials. Some times companies are importing same materials and pay more price. Those things are directly influenced to profit the companies. Capacity Installed and Utilised Industrial products demand estimating by the Planning Commission and Government. Whenever industry is utilised full installed capacity, it will earn huge profit and even produced goods at low manufacturing cost. If under utilisation of plant, therefore, the product price is increased. Industry will estimate future demand and how to meet future requirements then they are installed full capacity of the plant and machinery. Industry Characteristics Industry characteristics are: • Cyclical Industry • Fluctuate Industry • Stability Industry • Decline Industry Demand and Market High demand from customer that creates increased the price of the product if supply of the product is less. Low demand which creates decreased the price of the product, if the supply product is more. In market, a heavy competition to sell identical goods. It’s result is very less profit, therefore, competition created similar industries the market. Government Policy with Regard to Industry • Industrial policies • Government rules and regulations • Licence

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• Granting of clearances • Reservation for small scale industry products Labour and Other Industrial Problems Whether industry either capital or labour intensive has to utilise labour effectively and efficiently. Power, Infrastructure, Labour, Transportation, Communication, Raw materials, Finance and poor productivity problems are Industry. Management If Industry well planned, organised, monitored and controlled in a complex and difficult situations, management are efficient and capable to face and run into successful way of industry. The management has appraised in terms of their capabilities, popularity, honesty and integrity. Future Prospectus Future prospectus such as: • Capacity utilisation • Demand and markets • Government policy • Availability of inputs • Infrastructure etc. Future prospectus means to study of overall these problems and prospectus of Industry. Above factors are helpful to industry analysis and interpretations of past, present and future trends of the industry. COMPANY ANALYSIS Company analysis is a study of the variables which influence the future of a company both qualitatively and quantitatively. Qualitative Factors Exhibit 6.8 Qualitative Factors Qulitative factors are as identified below: • Management efficiency • Rating of promoters • Rating of collaborators • Uniqueness of the product • Location of government policy and patronage etc. Management Efficiency Management efficiency is the most important variable influencing the company’s performance, management efficiency namely in terms of: • The quality of the product • Capability of the administration • Popularity of the company image • Close integrity of the management Rating of Promoters Rating of promoters and management looks for: • Their planning • Financial management of the company • Growth orientation programme of the company • Company’s expansion plans • Effective tax planning management • A well equipped R&D and technology of the company

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

• The company popularity is known from track record, retention policy, distribution of yield (Dividend) and bonus and liquidity position. Rating of Collaborators A company collaboration of foreign companies and Indian companies. Collaboration stands for accomplishment of long term objectives of the companies. Collaboration is the agreement between one company to another company. Both companies are necessary to cooperate for accomplishing the short and long term benefits from each other. Uniqueness of the Product Company data are to be examined from the point of view of the installed capacity and its utilisation of raw materials, components, processing, cost production, profit margins, demand and supply. These factors are analyse the uniqueness of the product. Location of Government Policy and Patronage etc. Government policy like Industrial Policy and special privileges for small scale industry and large scale industries. Now a days, Government encourages to companies to start industrialisation and also patronage in terms of incentives, subsidies, is given to companies for growth of the economy. Quantitative Factors Quantitative factors are as identified below: • Capital efficiency • Sales Turnover • Profitability margins Quantitative factors are important from the point of view of company analysis, quantitative factors are highlights of the financial position of the companies. These factors are influenced by the industry and economy, quantitative factors are influenced to the capacity utilisation, demand, cost and margins. The fundamentals of the company are to be analysed in terms of its financial structure, leverage, liquidity and profitability and financial viability etc. For this purpose, the information is to be secured from the annual reports of the company, balance sheets, press reports, AGMs reports, management’s press releases and publications of the industry and commerce associations. FINANCIAL STATEMENT ANALYSIS Financial statements are an important source of information for evaluating the performance and growth of a firm. In the case of properly analysed and interpreted to financial statements which can provide valuable insights into a firm’s performance. Analysis of financial interest is to interest of short term and long term investors, security analysts, managers, government, financial institution and others. Financial statement analysis in terms of variety of purposes to assess short term and long term liquidity position of the firm to detail assessment of the strengths and weakness of the farm in various areas. It is helpful to assess corporate excellence, judging, creditworthiness, forecasting bond ratings, evaluating intrinsic value of equity shares, predicting bankruptcy and assessing market risk. An Accountant prepares two principal statements as outlined below: • The Balance Sheet • The Profit and Loss Account In additionally, an accountant prepares an ancillary statement like as: • Cash flow statement Balance Sheet The balance sheet shows the financial position of a business at a given specific point of time. As per the Companies Act, the balance sheet of a company shall be either the account horizontal form or the report (vertical) form. Exhibit 6.9 shows that these forms; Part A of this exhibit the account Form and Part B the report Form.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Exhibit 6.9 Balance Sheet Structure A. Account Form Liabilities Assets • Share Capital • Fixed assets • Reserves and Surplus • Investments • Secured Loans • Current assets, loans and advances • Current liabilities and provisions • Current assets • Current liabilities • Loans and advances • Provisions • Miscellaneous expenditure and losses B. Report Form I. Sources of Funds (1) Shareholder’s Funds (a) Share capital (b) Reserve and Surplus (2) Loan Funds (a) Secured Loans (b) Unsecured Loans II. Application of Funds (1) Fixed Asset (2) Investments (3) Current assets, loans and advances Less: Current liabilities and provisions Net: Current assets (4) Miscellaneous expenditure and losses

Technical Analysis: Introduction The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor. I’ll introduce you to the subject of technical analysis. It's a broad topic, so we'll just cover the basics, providing you with the foundation you'll need to understand more advanced concepts down the road. What Is Technical Analysis? Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns, others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

FACULATY & DIRECTOR - 91 77 567 568 future. The field of technical analysis is based on three assumptions: 1. 2. 3.

The market discounts everything. Price moves in trends. History tends to repeat itself.

1. The Market Discounts Everything A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market. 2. Price Moves in Trends In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption. 3. History Tends To Repeat Itself Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. Not Just for Stocks Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex, etc. In this tutorial, we'll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is more frequently associated with commodities and forex, where the participants are predominantly traders. Technical Analysis: Fundamental Vs. Technical Analysis Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities. The Differences Charts vs. Financial Statements At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements) for the purposes of this tutorial, this

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568 simple tenet holds true.

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts. Time Horizon Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. (For more insight, read Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?) Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts. Trading Versus Investing Not only is technical analysis more short term in nature that fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.

Charting: The basic tool of Technical AnalysisIt has already been noted that in technical analysis, the basic motive is to identify the price trend on the basis of historical data. The trend is then used to forecast the future behaviour. The price and volume data on securities are the basic raw material used by a technical analyst and the charts and graphs are used as the basic tools to identify the trends in prices. The technical analysts may also be called chartists because they use charts and records of historical prices and volumes to identify the trend and pattern in prices. It may be noted that the technical analysis can be used either for a specific share or for the market in general. In either case the relevant information is used, i.e., the price and volume data are studied simultaneously. Dow Theory Is considered to be the first theory of technical analysis and is still regarded as the basis of all other techniques used by technical analysts. In fact, it is the Dow Theory from which much of the substance of the technical analysis has branched out. Dow Theory is based on the hypothesis that the stock market does not perform on a random basis. Rather, it is guided by some specified trends. The likely market trend in future can be predicted by

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

FACULATY & DIRECTOR - 91 77 567 568 following these trends. Three types of specific trends have been named in Dow Theory: (a) Primary Trend: It is the long-range trend in price and may carry on even for number of years. It takes the entire market up or down.

(b) Secondary Trend: or trends appear within a primary trend and may last for a few days or few weeks or few months. Secondary trends show interruptions in primary trend and act as restraining force on the primary trend. The secondary trends tend to correct deviations from primary trend boundaries of price movements. (c) Minor Trend: refer to day-to-day trend or movements in prices over few days. The minor trends, being of very short duration, have little analytical value.

Figure shows that there are day-to-day movements, secondary movements (prices falling over a period of say, a month), and the primary trend (the prices) are increasing over time. It also shows that secondary downtrend (decrease in prices) will be of shorter duration then the following secondary upswing (increase in prices). In terms of Dow Theory, the upward trend is known as the bull market, and the downtrend primary trend is known as bear market.

The secondary trend or movement in prices is also known as technical correction. In case of bull market, after a secondary correction, there is an upwards movement and it penetrate previous heights. The dayto-day movements in prices, also known as ripples, depend upon the instant demand and supply forces and the TA’s do not pay attention to these minor trends.

The Dow Theory helps in indicating a primary trend but it fails to tell us as and when the trend will come to an end or will reverse. Elliot Wave Theory Basic propositions of this theory is that the stock prices in the market can be described as a set of wave patterns. It states that the long-term major patterns may consist of five successive steps or five waves. In the case of the bull market, the set of five waves is as follows: The first wave is upward, The second downward, The third upward, The fourth downward, and the fifth is upward. Trend Lengths Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend. Technical Analysis: Chart Types There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart, the candlestick chart and the point and figure chart. In the following sections, we will focus on the S&P 500 Index during the period of January 2006 through May 2006. Notice how the data used to create the charts is the same, but the way the data is plotted and shown in the charts is different. Line Chart The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.

K. HARI KRISHNA

MBA TUITIONS, FINANCE LIVE PROJECTS

MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Figure 1: A line chart Bar Charts The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open).

Candlestick Charts The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to

K. HARI KRISHNA

MBA TUITIONS, FINANCE LIVE PROJECTS

MBA,MCOM, M.Phil,(PhD),(ICWAI)

NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

FACULATY & DIRECTOR - 91 77 567 568 explain what has happened during the trading period. A major problem with the candlestick color configuration, however, is that different sites use different standards; therefore, it is important to understand the candlestick configuration used at the chart site you are working with. There are two color constructs for days up and one for days that the price falls. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the stock's price has closed above the previous day’s close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day. (To read more, see The Art Of Candlestick Charting - Part 1, Part 2, Part 3 and Part 4.)

Figure 3: A candlestick chart Point and Figure Charts The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis. (For further reading, see Point And Figure Charting.)

Figure 4: A point and figure chart When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

FACULATY & DIRECTOR - 91 77 567 568 the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change. Conclusion Charts are one of the most fundamental aspects of technical analysis. It is important that you clearly understand what is being shown on a chart and the information that it provides. Now that we have an idea of how charts are constructed, we can move on to the different types of chart patterns. Technical Analysis: Chart Patterns A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. Head and Shoulders This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend.

Cup and Handle A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

FACULATY & DIRECTOR - 91 77 567 568 continue in an upward direction once the pattern is confirmed.

Double Tops and Bottoms This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.

Figure 3: A double top pattern is shown on the left, while a double bottom pattern is shown on the right. Triangles Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trendline is flat and the upper trendline is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout. Flag and Pennant These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

FACULATY & DIRECTOR - 91 77 567 568 As you can see in Figure 5, there is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trendlines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trendlines. In both cases, the trend is expected to continue when the price moves above the upper trendline. Wedge The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months.

The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In Figure 6, we have a falling wedge in which two trendlines are converging in a downward direction. If the price was to rise above the upper trendline, it would form a continuation pattern, while a move below the lower trendline would signal a reversal pattern. Technical Analysis: Moving Averages Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor. Types of Moving Averages There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

UNIT - II BOND/DEBT VALUATION Debt instruments promise to pay a stipulated stream of cash flows. This generally comprises periodic interest payments over the life of the instrument and principal payment at the time of maturity. A vast menu of debt instruments exists. They may be classified into two groups according to maturity, where maturity is defined as the length of time between the issue date and the redemption date. Debt instruments which have a maturity of one year or less are called money market instruments. Debt instruments which have a maturity of more than one year are called bonds (or debentures). The debt market in India has registered an impressive growth particularly since 1993 and, not surprisingly, has been accompanied by increasing complexity in instruments, interest rates, methods of analysis, and so on. It is instructive to compare the characteristics of pre-liberalization scenario with those of the post-liberalization scenario. This comparison is given in Exhibit Since debt instruments loom large in the world of finance, a basic understanding of certain analytical concepts and methods used in debt valuation is essential for students of finance. Types and Features of Debt Instruments The variety of debt instruments may be classified as follows : · Money market instruments · Government securities and government-guaranteed bonds · Corporate debentures Money Market Instruments Debt instruments which have a maturity of less than 1 year at the time of issue are called money market instruments. The important money market instruments in India area Treasury bills, certificates of deposits, and commercial paper. Treasury Bills Treasury bills represent short-term obligations of the Government which have maturities like 91 days, 182 days, and 364 days. They do not carry an explicit interest rate (or coupon rate). They are instead sold at a discount and redeemed at par value. Hence the implicit interest rate is a function of the size of the discount and the period of maturity. Though the yield on Treasury bills is somewhat low, they have appeal for the following reasons : (i) They can be transacted readily as they are issued in bearer form. (ii) There is a very active secondary market for Treasury bills and the Discount and Finance House of India is a major market maker. (iii) Treasury bills are virtually risk free. Certificates of Deposit A certificate of deposit (CD) represents a negotiable receipt of funds deposited in a bank for a fixed period. It may be in a registered form or a bearer form. The latter is more popular as it can be transacted more readily in the secondary market. Like Treasury bills, CDs are sold at a discount and redeemed at par value. Hence the implicit interest rate is a function of the size of the discount and the period of maturity. CDs are a popular form of short-term investment for companies for the following reasons : (i) Banks are normally willing to tailor the denominations and maturities to suit the needs of the investors. (ii) CDs are fairly liquid. (iii) CDs are generally risk-free. (iv) CDs generally offer a higher rate of interest than Treasury bills or term deposits. Commercial Paper Commercial paper represents short-term unsecured promissory notes issued by firms that are generally considered to be financially strong. Commercial pape usually has a maturity period of 90 days to 180 days. It is sold at a discount and redeemed at par. Hence the implicit rate is a function of the size of

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

discount and the period of maturity. Commercial paper is either directly placed with investor of sold through dealers. Commercial paper does not presently have a well developed secondary market in India. The main attraction of commercial paper is that it offers an interest rate that is typically higher than offered by Treasury bills or certificates of deposit. However, its disadvantages is that it does not have an active secondary market. Hence, it makes sense for firms that plan to hold till maturity. Government Securities and Government-Guaranteed Bonds The largest borrowers in India are the central and state governments. The Government of India periodically sells central government securities. These are essentially medium to long term bonds issued by the Reserve Bank of India on behalf of the Government of India. Interest payments on these bonds are typically semi-annual. State governments also sell bonds. These are also essentially medium to long-term bonds issued by the Reserve Bank of India on behalf of state governments. Interest payments on these bonds are typically semi-annual. Apart from the central and state governments, a number of governmental agencies issue bonds that are guaranteed by the central government of some state government. Interest payments on these bonds are typically semi-annual. Corporate Debt Bonds (or debentures) are issued frequently by public sector companies, financial institutions, and private sector companies. A wide range of innovative debt securities have been created in India, particularly from early 1990s. This innovation has been stimulated by a variety of factors, the most important being the increased volatility of interest rates and changes in the tax and regulatory framework. A brief description of various types of corporate bonds is given below. Straight Bonds The straight bond (also called plain vanilla bond) is the most popular type of bond. It pays a fixed periodic (usually semi annual) coupon over its life and returns the principal on the maturity date. Zero Coupon Bonds A zero coupon bond (or just zero) does not carry any regular interest payment. It is issued at a steep discount over its face value and redeemed at face value on maturity. For example, the Industrial Development Bank of India (IDBI) issued deep discount bonds in 1996 which have a face value of Rs. 200,000 and a maturity period of 25 years. The bonds were issued at Rs. 5,300. These bonds carry call and put options. Floating Rate Bonds Straight bonds pay a fixed rate of interest. Floating rate bonds, on the other hand, pay an interest rate that is linked to a benchmark rate such as the Treasury bill interest rate. For example, in 1993 the State Bank of India came out with the first ever issue of floating interest rare bonds in India. It issued 5million (Rs 1000) face value) unsecured, redeemable, subordinated floating interest rate bonds carrying interest at 3 percent per annum over the bank’s maximum term deposit rate. Bonds with Embedded Options Bonds may have options embedded in them. These options give certain rights to investors and/or issuers. The more common types of bonds with embedded options are : Convertible Bonds Convertible bonds give the bond holder the right (option) to convert them into equity shares on certain terms. Callable Bonds Callable bonds give the issuer the right (option) to redeedm them prematurely on certain terms. Puttable bonds give the investor the right to prematurely sell them back to the issuer on certain terms. Commodity-Linked Bonds

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

The payoff from a commodity linked bond depends to a certain extent on the price of a certain commodity. For example, in June 1986 Standard Oil Corporation issued zero coupon notes which would mature in 1992. The payoff from each note was defined as : $1,000 + 200 [Price per barrel of oil in dollars - $25]. The second term of the payoff, however, was subject to a floor of 0. Bond Features Bonds tend to be confusing because of complex provisions attached to them. The financial contract between the issuer and the holder of bonds is called the bond indenture which spells out the features of the bond in terms of collateral, sinking fund, call provision, protective covenants, and so on. Collaterla Collateral represents a pledge of assets in favour of the bond holders. If serves as an insurance against any possible default by the borrower. Sinking Fund A sinking fund provision requires the issuing firm to retire a certain percentage of the bond issue at stipulated points of time. Protective Covenants The bond indenture often contains several covenants to protect the interest of lenders. These convenants impose restrictions on management and give bondholders greater confidence that the firm will honour its commitments. For example, convenants may put limits on dividend payment, managerial compensation, and total borrowings. Bond Pricing The value of a bond – or any asset, real or financial – is equal to the present value of the cash flows expected from it. Hence determining the value of a bond requires: · An estimate of expected cash flows. · An estimate of the required return. To simplify our analysis of bond valuation we will make the following assumptions: The coupon interest rate is fixed for the term of the bond. The coupon payments are made every year and the next coupon payment is receivable exactly a year from now. The bond will be redeemed at par on maturity. Given these assumptions, the cash flow for a noncallable bond comprises an annuity of a fixed coupon interest payable annually and the principal amount payable at maturity. Hence the value of bond is :Where P = value (in upees) n = number of years C = annual coupon payment (in rupees) r = periodic required return M = maturity value t = time period when the payment is received Since the stream of annual coupon payments is an ordinary annuity, we can apply the formula for the present value of an ordinary annuity. Hence the bond value is given by the formula : To illustrate how to compute the price of a bond, consider a 10- year, 12% coupon bond with a par value of 1,000. Let us assume that the required yield on this bond is 13%. The cash flows for this bond are as follows :· 10 annual coupon payments of Rs. 120 · Rs. 1000 principal repayment 10 years from now The value of the bond is :

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

P = 120 × PVIFA 13%, 10yrs + 1,000 × PVIF 13%,10 yrs = 120 × 5.426 + 1,000 × 0.295 = 651.1 + 295 = Rs. 946.1 Bond Values with Semi-annual Interest Most of the bonds pay interest semi-annually. To value such bonds, we have to work with a unit period of six months, and not one year. This means that the bond valuation equation has to be modified along the following lines : · The annual interest payment, C, must be divided by two to obtain the semi-annual interest payment. · The number of years to maturity must be multiplied by two to get the number of half-yearly periods. 98 11.621.3 · The discount rate has to be divided by two to get the discount rate applicable to half-yearly periods. With the above modifications, the basic bond valuation becomes : Where p = value of bond C/2 = semi-annual interest payment r/2 = discount rate applicable to a halfyear period M = maturity value 2n = maturity period expressed in terms of half-yearly periods. As an illustration, consider a 8-year, 12% coupon bond with a par value of Rs. 1,000 on which interest is payable semiannually. The required return on this bond is 12 percent. Applying Eq(10.3), the value of the bond is : · Price-Yield Relationship A basic property of a bond is that its price varies inversely with yield. The reason is simple. As the required yield increase, the present value of the cash flow decreases ; hence the price decreases. Conversely, when the required yield decreases, the present value of the cash flow increase; hence the price increases. The graph of the price-yield relationship for any callable bond has a convex shape as shown in Exhibit 10.2 · Relationship between Bond Price and Time Since the price of a bond must equal its par value at maturity (assuming that there is no risk of default), bond prices change with time. For example, a bond that is redeemable for Rs. 1000 (which is its par value) after 5 years when it matures, will have a price of Rs. 1,000 at maturity, no matter what the current price is. If its current price is, say, Rs, 1000, it is said to be a premium bond. If the required yield does not change between now and the maturity date, the premium will decline over time as shown by curve A in Exhibit 10.3. On the other hand, if the bond has a current price of say Rs. 900, it is said to be a discount bond. The discount too will disappear over time as shown by curve B in Exhibit 10.3. Only when the current price is equal to par value – in such a case the bond is said to be a par bond – there is no change in price as time passes, assuming that the required yield does not change between now and the maturity date. This is shown by the dashed line in Exhibit 10.3. Bonds are generally traded on the basis of their prices. However, they are usually not compared in terms of price because of significant variations in cash flow patterns and other features. Instead, they are typically compared in terms of yield. In the previous section we learned how to determine the price of a bond and discussed how price and yield were related. We now discuss various yield measures. The commonly employed yield measures are: current yield, yield to maturity, yield to call, and realized yield to maturity. Let us examine how these yield measures are calculated.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

· Current Yield The current yield relates the annual coupon interest to the market price. It is expressed as : For example, the current yield of a 10 year, 12 percent coupon bond with a par value of Rs. 1000 and selling of Rs. 950 is 12.63 percent. The current yield calculation reflects only the coupon interest rate. It does not consider the capital gain (or loss) that an investor will realize if the bond is purchased at a discount (or premium) and held till maturity. It also ignores the time value of money. Hence it is an incomplete and simplistic measure of yield. · Yield to Maturity The yield to maturity (YTM) of a bond is the interest rate that makes the present value of the cash flows receivable from owning the bond equal to the price of the bond. Mathematically, it is the interest rate ® which satisfies the equation : Where p = price of the bond C = annual interest (in rupees) M = maturity value (in rupees) n = number of years left to maturity The computation of YTM requires a trial and error procedure. To illustrate this, consider a Rs. 1,000 par value bond, carrying a coupon rate of 9 percent, maturing after 8 years. The bond is currently selling of Rs. 800. What is the YTM on this bond ? The YTM is the value of r in the following equation : Let us begin with a discount rate of 12 percent. Putting a value of 12 percent for r we find the right-hand side of the above expression is Rs 90 (PVIFA 12%,8yrs) + Rs 1,000 (PVIF12%,8yrs) = Rs. 90(4.968) + Rs. 1,000(0.404) = Rs. 851.0 Since the value is greater than Rs 800, we may have to try a higher value of r. Let us try r= 14 percent. This makes the right hand side equal to : Rs. 90 (PVIFA 14%,8yrs) + Rs 1,000 (PVIF14%,8yrs) = Rs 90 (4.639) + Rs,1000 (0.351) = Rs.768.1 Since this value is less than Rs 800, we try a lower value for r. Let us try r = 13percent. This makes the right-hand side equal to : Rs 90 (PVIFA 13%,8yrs) + Rs. 1,000 (PVIF13%,8yrs) = Rs 90 (4.800) + Rs 1,000 (0.376) = Rs 808 Thus r lies between 13 percent and 14 percent. Using a linear interpolation1 in the range 13 percent ot 14 percent, we find that r is equal to 13.2 percent. An Approximation If you are not inclined to follow the trial-and-error approach described above, you can employ the following formula to find the approximate YTM on a bond : Where YTM = yield to maturity C = annual interest payment M = maturity value of the bond P = present price of the bond n = years to maturity To illustrate the use of this formula, let us consider the bond discussed above. The approximate YTM of the bond works out to : The procedure for linear interpolation is as follows :

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

a. Find the difference between the present value for the two rates, which in this case is Rs. 39.9 (Rs 808 – Rs 768.1). b. Find the difference between the present value corresponding to the lower rate (Rs. 808 at 3 percent) and the target value (Rs. 800), which in this case is Rs. 8.0. c. Divide the outcome of (b) with the outcome of (a), which is 8.0/39.9 or 0.2. Add this fraction to the lower rate, i.e. 13 percent. This gives the YTM of 13.2 percent. Thus, we find theat this formula gives a value which is very close to the true value. Hence it is very useful. The YTM calculation considers the current coupon income as well as the capital gain or loss the investor will realize by holding the bond to maturity. In addition, it takes into account the timing of the cash flows. · Yield to Call Some bonds carry a call feature that entitled the issuer to call (buy back) the bond prior to the stated maturity date in accordance with a call schedule (which specifies a call price for each call date). For such bonds, it is a practice to calculate the yield to call (YTC) as well as the YTM. The procedure for calculating the YTC is the same as for the YTM. Mathematically the YTC is the value of r in the following equation: where M* = call price (in rupees) n* = number of years until the assumed call date · Realised Yield to Maturity The YTM calculation assumes that the cash flows received through the life of a bond are re-invest at a rate equal to the yield to maturity. This assumption may not be valid as reinvestment rate/s applicable to future cash flows may be different. It is necessary to define the future reinvestment rates and figure out the realized yield to maturity. How this is done may be illustrated by an example. Consider a Rs 1000 par valuue bond, carrying an interest rate of 15 percent (Payable annually) and maturing after 5 years. The present market price of this bond is Rs 850. The re-investment rate applicable to the future cash flows of this bond is 16 percent. The future value of the benefits receivable from this bond, calculated in Exhibit 10.4, works out to 2032. The realized yield to maturity is the value of r * in the following equation. Present market price (1+ r*) 5 = Future value 850 (1+ r*) 5 = 2032 (1+ r*) 5 = 2032/850 = 2.391 r* = 0.19 for 19 percent

It is a Problematic paper. So try to solve more problems and concentrate more on problems. Important problems are available in separate file. Check the site for the file.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

UNIT - III EQUITY VALUATION Stock Valuation is more difficult than Bond Valuation because stocks do not have a finite maturity and the future cash flows, i.e., dividends, are not specified. Therefore, we use different techniques for stock valuation as mentioned as; 1. Balance- Sheet Valuation 1. Dividend discount models 2. Price earning method 3. CAPM Balance-Sheet Valuation Analysts often look at the balance sheet of the firm to get a handle on some valuation measures. Three measures derived from the balance sheet are: book value, liquidation value, and replacement cost. 1. Book Value The most common valuation measure is book value. The book value per share is simply the net worth of the company (which is equal to paid up equity capital plus reserves and surplus) divided by the number of outstanding equity shares. For example, if the net worth of Zenith Limited is Rs 37 million and the number of equity shares of Zenith is 2 million; the book value per share works out to Rs 18.50 (Rs 37 million divided by 2 million). How relevant and useful is the book value per share as a measure of investment value? The book value per share is firmly roofed in financial accounting and hence can be established relatively easily. Due to this, its proponents argue that it represents an ‘objective’ measure of value. A closer examination, however, quickly reveals that what is regarded as ‘objective’ is based on accounting conventions and policies which are characterised by a great deal of subjectivity and arbitrariness. An allied and a more powerful criticism against the book value: measure, is that the historical balance sheet figures on which it is based are often very divergent from current economic value. Balance sheet figures rarely reflect earning power and hence the book value per share cannot be regarded as a good proxy for true investment value. 2. Liquidation Value Value realized from liquidating Amount to be paid to all the creditors all the assets of the firm and preference shareholders Number outstanding equity shares To illustrate, assume that Pioneer Industries would realize Rs 45 million from the liquidation of its assets and pay Rs 18 million to its creditors and preference shareholders in full settlement of their claims. If the number of outstanding equity shares of Pioneer is 1.5 million, the liquidation value per share works out to: Rs 45mn- Rs 18mn = Rs 18 1.5 mn While the liquidation value appears more realistic than the book value, there are two serious problems in applying it. a. It is very difficult to estimate what amounts would be realised from the liquidation of various assets b. The liquidation value does not reflect earning capacity. Given these problems, the measure of liquidation value seems to make sense only for firms, which are ‘better dead and alive’ - such firms are not viable and economic values cannot be established for them. 1. Replacement Cost Another balance sheet measure considered by analysts in valuing a ‘firm is “the replacement cost of its assets less liabilities. The use of this measure is based on the premise that the market value of a firm cannot deviate too much from its replacement cost. If it did so, competitive pressures will tend to align the two.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

This idea seems to be popular among economists. The ratio of market price to replacement cost is called Tobin q, after James Tobin a Nobel Laureate in economics. The proponents of replacement cost believe that in the long run Tobin’s q will tend to 1. The empirical evidence, however, is that this ratio can depart significantly from 1 for long periods of time. There is a major limitation of the replacement cost concept. The organisational capital, a very valuable asset, is not shown on the balance sheet. (Organisational capital is the value created by bringing together employees, customers, suppliers, managers, and others in a mutually beneficial and productive relationship. An important characteristic of organisational capital is that it cannot be easily separated from the firm as a going entity.) Although balance sheet analysis may provide useful information about book value, liquidation value, or replacement cost, the analyst must focus on expected future dividends, earnings, and cash flows to estimate the value of a firm as a going entity. As we have already discussed in our previous lectures, the intrinsic value of corporate security is equal to the present value of the payment stream on the security discounted at an appropriate discount rate (capitalisation rate). Symbolically, V = C1/(1+k) + C2/(1+k)2 + C3/(1+k)3 +—————+ Cn/(1+k)n n = S C/(1+k) t t=1 Where: V is the present value Ct is Payments at time t k is the Discount or capitalisation rate Now we will examine the quantitative models used for this purpose Model 1: Dividend Discount Model Dividend discount models are designed to compute the intrinsic value of a share of common stock under specific assumption as to the expected growth pattern of future dividends and the appropriate discount rate to employ. Merrill Lynch, CS First Boston, and a number of other investment banks routinely make such calculations based on their own particular models and estimates. What follows is an examination of such models, beginning with the simplest one. According to the dividend discount model, the value of an equity share is equal to the present value of dividends expected from its ownership plus the present value of the sale price expected when the equity share is sold. For applying the dividend discount model, we will make the following assumptions: i. Dividends are paid annually-this seems to be a common practice for business firms in India; and ii. The first dividend is received one year after the equity share is bought. I. Single Period Valuation Model Let us begin with the case where the investor expects to hold the equity share for one year. The price of the equity share will be: Po = D1/(1+r) + P1 (1+r) Where: Po is the current price of the equity share D1 is the expected dividend expected next year P1 is the price expected next year r is the rate of return required on the equity share. Lets take an example. Assume that the equity share of a company is expected to provide a dividend of Rs 2 and fetch a price of Rs 18 a year hence. What price would it sell for now if investors’ required rate of return is 12%. Po = 2.0/(1.12)+18(1.12) = Rs 17.86 If I ask you, change in the price of the equity share if the company is expected to grow at a rate of g every year!

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

If the current price, Po becomes Po (1+g) s, a year hence, we get: Po = D1/(1+r) + Po (1+g)/(1+r) Or Po = D1/(r-g) Lets take another example. Suppose that the expected dividend per share of a company is Rs 2. The dividend per share has grown over the past years @ 5% per year. This growth rate is expected to continue in future. Further, the market price of the equity share is expected at the same rate. We want to know the fair estimate of the intrinsic value of the equity share if the required rate is 15%. Lets apply the above equation. Po = 2/(0.15-0.5) = Rs 20 Exercise: The equity stock of Rax Ltd. Is currently selling for Rs 30 per share. The dividend expected next year is Rs 2. The investors’ required rate of return on this stock is 15%. If the constant growth model applies to Rax Ltd. What is the expected growth rate? You have just learnt how to compute the intrinsic value of the equity, if the forecast values of dividend, share price and the required rate of return are given. Now, if I turn the question the other way round ad ask you to compute the expected rate of return, given the current market price and forecast values of dividend and share price. In that case, the expected rate of return equal to: r = D 1/(P0+g) Taking the help of the example. Suppose that the expected dividend per share of a company is Rs 5.The dividend is expected to grow at the rate of 6^per year. If the price share now is Rs 50, what is the expected rate of return? If we put the values in the above-defined equation, we get 16%. I hope I am making you clear at every step. Ok! Lets move to another model of valuation i.e. Multi-period valuation model II Multi-Period Valuation Model Now that we have already covered the basics of equity share valuation in a single period framework, we will now discuss the more realistic, and also a bit complex, case of multi-period valuation. Since equity shares have no maturity period, they may be expected to bring a dividend stream of infinite duration. Hence the value of an equity share may be put as: Po = D1/(1+r) + D2/(1+ r)2 + D3/(1+ r)3 +—————+ Dn /(1+ r)n? = S D/(1+ r)t t=1 Where:Po is the price of the equity share today D1 is the dividend expected a year hence D2 is the dividend expected two years hence DÜ is the dividend expected at the end of infinity r is the expected rate of return on the equity share. We know that the equation above presents the valuation model for an infinite horizon. Lets now see whether it is applicable to a finite horizon also. Lets consider how an equity share would be valued by an investor who plans to hold it for n years and sell it thereafter for a price of Pn. The value of the equity share to him would be:Po = D1/(1+r) + D2/(1+ r) 2 + D3/(1+ r)3 +—————+ Pn /(1+ r)n ? = S Dt/(1+r) t + Pn/(1+r) n t=1 If you notice, we have got the same equation as a generalize multi period valuation formula. This equation is general enough to permit any dividend pattern- constant, rising, declining, or randomly

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

fluctuating. For practical applications we make simplifying assumptions about the pattern of dividend growth. The most commonly used assumptions are as follows: 1. The dividend per share remains constant forever, implying that the growth rate is nil (the zero growth model). 2. The dividend per share grows at a constant rate per year forever (the constant growth model). 3. . The dividend per share grows at a constant extraordinary rate for a finite period, followed by a constant normal rate of growth forever thereafter (the two-stage model). 4. The dividend per share, currently growing at an above normal rate, experiences a gradually declining rate of growth for a while. Thereafter, it grows at a constant normal rate (the H model). Lets now discuss the Zero growth Model Zero growth Model A special case of the constant growth model calls for an expected growth rate, g, of zero. Here the assumption is that dividends will be maintained at their current level forever. The dividend per share is expected on the current market price per share. The amount of dividend does not grow. This is the fixed amount of dividend. D0 = D1 = D2 = D = Constant In this case, the model reduces to perpetuity. If we assume that the dividend per share remains constant year after year at a value of D, the equation becomes Po = D/r It means that the present value interest factor of perpetuity is simply 1 divided by the interest rate expressed in decimal form. Hence, the present value of the perpetuity is simply equal to the constant annual payment divided by the interest rate. For example, the present value of a perpetuity of Rs 10,000 if the interest rate is 10%will be equal to: 10,000/0.10 = Rs 1,00,000. The reason is that an initial sum if invested at a rate of interest of 10%, provide a constant annual income of Rs 10,000 forever without any impartment of the capital value. The no-growth case is equivalent to the valuation process for preferred stock because dividend amount remains unchanged. Note: This is a straightforward application of the present value of perpetuity formula. Lets take an example: Hindustan Manufacturing Ltd. Has distributed a dividend of Rs. 30 on each Equity share of Rs 10. The expected rate of return is 35%. Calculate current market price of share Substituting in the formula; 30/0.35 = Rs 85.71 Constant Growth Stock Valuation (Gordon Model) A constant growth stock is a stock whose dividends are expected to grow at a constant rate (g) in the foreseeable future. This condition fits many established firms, which tend to grow over the long run at the same rate as the economy, fairly well. Lets take another example to understand the constant growth model. Assume that you have purchased the shares of a company, which is expected to grow at the rate of 6% per annum. The dividend expected on your share a year hence is Rs 2.What price will you put on it if your required rate of return for this share is 14%. The price for your share can be calculated as: Po = 2.00/(0.14-0.06) = Rs 25 Lets move to the extension of constant growth model i.e. two Stage Growth Model Two Stage Growth Model

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

The simplest extension of the constant growth model assumes that the extraordinary growth (good or bad) will continue for a finite number of years and thereafter the normal growth rate will prevail infinitely. The constant growth model is extended to two-stage growth model. Here, the growth stages are divided into two, namely, a period of extraordinary growth (or decline) and a constant growth period of infinite nature. The extraordinary growth period will continue for some period followed by the constant growth rate. The information technology industry is at present experiencing an extra-ordinary growth rate, it may continue for some time and afterwards it may maintain constant growth rate. Present value of the dividend during the above normal growth period The present value of the stock /price = Present value of stock price at the end of the above normal growth period Lets try a practical application of the two-stage growth model Assume that the current dividend on an equity share of ABC Ltd. Is Rs 2. The company is expecting to enjoy an above normal growth rate of 20% for a period of 6 years. Thereafter the growth rate will fall and stabilise at 10%. Equity investors require a return of 15%. Lets discuss the last and a bit complicated model of equity valuation i.e. H-model H-Model We will keep some assumptions for this model before starting the discussions: 1. While the current dividend growth rate, ga, is greater than gn, the normal long run growth rate, the growth rate declines linearly for 2H years. 2. After 2H years, the growth rate becomes gn. 3. After H years, the growth rate become exactly halfway between ga and gn Lets study the graphical representation of the dividend growth rate through this model. Growth Rate While the derivation of the H model is quite complicated but the valuation is quite simple. Lets work on the valuation Positive or negative.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

UNIT - IV PORTFOLIO MANAGEMENT INTRODUCTION Stock exchange operations are peculiar in nature and most of the Investors feel insecure in managing their investment on the stock market because it is difficult for an individual to identify companies which have growth prospects for investment. Further due to volatile nature of the markets, it requires constant reshuffling of portfolios to capitalize on the growth opportunities. Even after identifying the growth oriented companies and their securities, the trading practices are also complicated, making it a difficult task for investors to trade in all the exchange and follow up on post trading formalities. Investors choose to hold groups of securities rather than single security that offer the greater expected returns. They believe that a combination of securities held together will give a beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element. That is why professional investment advice through portfolio management service can help the investors to make an intelligent and informed choice between alternative investments opportunities without the worry of post trading hassles. MEANING OF PORTFOLIO MANAGEMENT Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. This however requires financial expertise in selecting the right mix of securities in changing market conditions to get the best out of the stock market. In India, as well as in a number of western countries, portfolio management service has assumed the role of a specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high net worth clients, who have little time to manage their investments. The idea is catching on with the boom in the capital market and an increasing number of people are inclined to make profits out of their hard-earned savings. Portfolio management service is one of the merchant banking activities recognized by Securities and Exchange Board of India (SEBI). The service can be rendered either by merchant bankers or portfolio managers or discretionary portfolio manager as define in clause (e) and (f) of Rule 2 of Securities and Exchange Board of India(Portfolio Managers)Rules, 1993 and their functioning are guided by the SEBI. According to the definitions as contained in the above clauses, a portfolio manager means any person who is pursuant to contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be. A merchant banker acting as a Portfolio Manager shall also be bound by the rules and regulations as applicable to the portfolio manager. DEFINITIONS OF PORTFOLIO Investor’sWords.com A collection of investments (all) owned by the same individual or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors that are invested by professionals or according to indices. 1) Financial Dictionary and WikiAnswers.com A collection of various company shares, fixed interest securities or money-market instruments. People may talk grandly of 'running a portfolio' when they own a couple of shares but the characteristic of a

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

serious investment portfolio is diversity. It should show a spread of investments to minimize risk brokers and investment advisers warn against 'putting all your eggs in one basket'. 2) YourDictionary.com a) All the securities held for investment as by an individual, bank, investment company, etc. b) A list of such securities. DEFINITIONS OF PORTFOLIO MANAGEMENT 1) Investor’swords.com The process of managing the assets of a mutual fund, including choosing and monitoring appropriate investments and allocating funds accordingly. 2) Investor Glossary Determining the mix of assets to hold in a portfolio is referred to as portfolio management. A fundamental aspect of portfolio management is choosing assets which are consistent with the portfolio holder's investment objectives and risk tolerance. The ultimate goal of portfolio management is to achieve the optimum return for a given level of risk. Investors must balance risk and performance in making portfolio management decisions. Portfolio management strategies may be either active or passive. An investor who prefers passive portfolio management will likely choose to invest in low cost index funds with the goal of mirroring the market's performance. An investor who prefers active portfolio management will choose managed funds which have the potential to outperform the market. Investors are generally charged higher initial fees and annual management fees for active portfolio management. 3) Financial Dictionary Managing a large single portfolio or being employed by its owner to do so. Portfolio managers have the knowledge and skill which encourage people to put their investment decisions in the hands of a professional (for a fee). MEANING OF PORTFOLIO MANAGERS Portfolio manager means any person who enters into a contract or arrangement with a client. Pursuant to such arrangement he advises the client or undertakes on behalf of such client management or administration of portfolio of securities or invests or manages the client’s funds. A discretionary portfolio manager means a portfolio manager who exercises or may under a contract relating to portfolio management, exercise any degree of discretion in respect of the investment or management of portfolio of the portfolio securities or the funds of the client, as the case may be. He shall independently or individually manage the funds of each client in accordance with the needs of the client in a manner which does not resemble the mutual fund. A non discretionary portfolio manager shall manage the funds in accordance with the directions of the client. A portfolio manager by virtue of his knowledge, background and experience is expected to study the various avenues available for profitable investment and advise his client to enable the latter to maximize the return on his investment and at the same time safeguard the funds invested. SCOPE OF PORTFOLIO MANAGEMENT: Portfolio management is an art of putting money in fairly safe, quite profitable and reasonably in liquid form. An investor’s attempt to find the best combination of risk and return is the first and usually the foremost goal. In choosing among different investment opportunities the following aspects risk management should be considered: a) The selection of a level or risk and return that reflects the investor’s tolerance for risk and desire for return, i.e. personal preferences.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

b) The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. The very risk-averse investor might choose to invest in mutual funds. The more risk-tolerant investor might choose shares, if they offer higher returns. Portfolio management in India is still in its infancy. An investor has to choose a portfolio according to his preferences. The first preference normally goes to the necessities and comforts like purchasing a house or domestic appliances. His second preference goes to some contractual obligations such as life insurance or provident funds. The third preference goes to make a provision for savings required for making day to day payments. The next preference goes to short term investments such as UTI units and post office deposits which provide easy liquidity. The last choice goes to investment in company shares and debentures. There are number of choices and decisions to be taken on the basis of the attributes of risk, return and tax benefits from these shares and debentures. The final decision is taken on the basis of alternatives, attributes and investor preferences. For most investors it is not possible to choose between managing one’s own portfolio. They can hire a professional manager to do it. The professional managers provide a variety of services including diversification, active portfolio management, liquid securities and performance of duties associated with keeping track of investor’s money. NEED FOR PORTFOLIO MANAGEMENT: Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investor’s objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combination of securities under constraints of risk and returns. OBJECTIVES OF PORTFOLIO MANAGEMENT: The major objectives of portfolio management are summarized as below:1) Security/Safety of Prinicpal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact. 2) Stability of Income: So as to facilitate planning more accurately and systematically the reinvestment consumption of income. 3) Capital Growth: This can be attained by reinvesting in growth securities or through purchase of growth securities. 4) Marketability: i.e. is the case with which a security can be bought or sold. This is essential for providing flexibility to investment portfolio.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

5) Liquidity i.e Nearness To Money: It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market. 6) Diversification: The basic objective of building a portfolio is to reduce risk of loss of capital and / or income by investing in various types of securities and over a wide range of industries. 7) Favorable Tax Status: The effective yield an investor gets form his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved. BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT: There are two basic principles for effective portfolio management which are given below:I. Effective investment planning for the investment in securities by considering the following factors) Fiscal, financial and monetary policies of the Govt. of India and the Reserve Bank of India. b) Industrial and economic environment and its impact on industry. Prospect in terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects etc. II. Constant Review of Investment: It requires to review the investment in securities and to continue the selling and purchasing of investment in more profitable manner. For this purpose they have to carry the following analysis: a) To assess the quality of the management of the companies in which investment has been made or proposed to be made. b) To assess the financial and trend analysis of companies Balance Sheet and Profit and Loss Accounts to identify the optimum capital structure and better performance for the purpose of withholding the investment from poor companies. c) To analyze the security market and its trend in continuous basis to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If so the timing for investment or dis-investment is also revealed.

PORTFOLIO THEORIES I. DOW JONES THEORY: The DOW JONES THEORY is probably the most popular theory regarding the behavior of stock market prices. The theory derives its name from Charles H. Dow, who established the Dow Jones & Co. and was the first editor of the Wall Street Journal – a leading publication on financial and economic matters in the U.S.A. Although Dow never gave a proper shape to the theory, ideas have been expanded and articulated by many of his successors. The Dow Jones theory classifies the movement of the prices on the share market into three major categories: 1. Primary Movements, 2. Secondary Movements and 3. Daily Fluctuations. 1) Primary Movements: They reflect the trend of the stock market and last from one year to three years, or sometimes even more. If the long range behavior of market prices is seen, it will be observed that the share markets go through definite phases where the prices are consistently rising or falling. These phases are known as bull and bear phases. During a bull phase, the basic trend is that of rise in prices. Graph 1 above shows the behavior of stock market prices in bull phase. You would notice from the graph that although the prices fall after each rise, the basic trend is that of rising prices. As can be seen from the graph that each trough prices reach, is at a higher level than the earlier one. Similarly, each peak that the prices reach is on a higher level than the earlier one. Thus P2 is

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

higher than P1 and T2 is higher than T1. This means that prices do not rise consistently even in a bull phase. They rise for some time and after each rise, they fall. However, the falls are of a lower magnitude then earlier. As a result, prices reach higher levels with each rise. Once the prices have risen very high, the bear phase in bound to start i.e., price will start falling. Graph 2 shows the typical behavior of prices on the stock exchange in the case of a Graph 2 Bear phase. It would be seen that prices are not falling consistently and, after each fall, there is a rise in prices. However, the rise is not much as to take the prices higher than the previous peak. It means that each peak and trough is now lower than the previous peak and trough. The theory argues that primary movements indicate basic trends in the market. It states that if cyclical swings of stock market prices indices are successively higher, the market trend is up and there is a bull market. On the contrary, if successive highs and low are successively lower, the market is on a downward trend and we are in bear market. This theory thus relies upon a behavior of the indices of share market prices in perceiving the trend in the market. 2) Secondary Movements: We have seen that even when the primary trend is upward, there are also downward movements of prices. Similarly, even where the primary trend is downward, there is upward movement of prices also. These movements are known as secondary movements and are shorter in duration and are opposite in direction to the primary movements. These movements normally last from three weeks to three months and retrace 1/3 to 2/3 of the previous advance in a bull market of previous fall in the bear market. 3) Daily Movements : There are irregular fluctuations which occur every day in the market. These fluctuations are without any definite trend. Thus is the daily share market price index for a few months are plotted on the graph it will show both upward and downward fluctuations. These fluctuations are the result of speculative factor. An investment manger really is not interested in the short run fluctuations in share prices since he is not a speculator. It may be reiterated that anyone who tries to gain from short run fluctuations in the stock market, can make money only be sheer chance. The investment manager should scrupulously keep away from the daily fluctuations of the market. He is not a speculator and should always resist the temptation of speculating. Such a temptation is always very attractive but must always be resisted. Speculation is beyond the scope of the job of an investment manager. Timing of investment decisions on the basis of Dow Jones Theory: Ideally speaking the investment manage would like to purchase shares at a time when they have reached the lowest trough and sell them at a time when they reach the highest peak. However, in practice, this seldom happens. Even the most astute investment manager can never know when the highest peak or the lowest through have been reached. Therefore, he has to time his decision in such a manner that he buys the shares when they are on the rise and sells then when they are on the fall. It means that he should be able to identify exactly when the falling or the rising trend has begun. This is technically known as identification of the turn in the share market prices. Identification of this turn is difficult in practice because of the fact that, even in a rising market, prices keep on falling as a part of the secondary movement. Similarly even in a falling market prices keep on rising temporarily. How to be certain that the rise in prices or fall in the same in due to a real turn in prices from a bullish to a bearish phase or vice versa or that it is due only to short run speculative trends? Dow Jones Theory identifies the turn in the market prices by seeing whether the successive peaks and troughs are higher or lower than earlier. II. RANDOM WALK THEORY: The first specification of efficient markets and their relationship to the randomness of prices for things traded in the market goes to Samuelson and Mandelbrot. “Samuelson has proved in 1965 that if a

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

market has zero transaction costs, if all available information is free to all interested parties, and if all market participants and potential participants have the same horizons and expectations about prices, the market will be efficient and prices will fluctuate randomly.” According to the Random Walk Theory, the changes in prices of stock show independent behavior and are dependent on the new pieces of information that are received but within themselves are independent of each other. Whenever a new price of information is received in the stock market, the market independently receives this information and it is independent and separate from all the other prices of information. For example, a stock is selling at Rs. 40 based on existing information known to all investors. Afterwards, the news of a strike in that company will bring down the stock price to Rs. 30 the next day. The stock price further goes down to Rs. 25. Thus, the first fall in stock price from Rs. 40 to Rs. 30 is caused because of some information about the strike. But the second fall in the price of a stock from Rs. 30 to Rs. 25 is due to additional information on the type of strike. Therefore, each price change is independent of the other because each information has been taken in, by the stock market and separately disseminated. However, independent pieces of information, when they come together immediately after each other show that the price is falling but each price fall is independent of the other price fall. The basic essential fact of the Random Walk Theory is that the information on stock prices is immediately and fully spread over that other investors have full knowledge of the information. The response makes the movement of prices independent of each other. Thus, it may be said that the prices have an independent nature and therefore, the price of each day is different. The theory further states that the financial markets are so competitive that there is immediate price adjustment. It is due to the effective communication system through which information can be disturbed almost anywhere in the country. This speed of information determines the efficiency of the market. III. CAPITAL ASSETS PRICING MODEL (CAPM): CAPM provides a conceptual framework for evaluating any investment decision. It is used to estimate the expected return of any portfolio with the following formula: E (Rp) = Rf +Bp (E( Rm) – Rf ) Where, E(Rp) = Expected return of the portfolio Rf = Risk free rate of return Bp = Beta portfolio i.e. market sensitivity index E(Rm) = Expected return on market portfolio [E(Rm)-Rf] = Market risk premium The above model of portfolio management can be used effectively to:_ Estimate the required rate of return to investors on company’s common stock. _ Evaluate risky investment projects involving real Assets. _ Explain why the use of borrowed fund increases the risk and increases the rate of return. _ Reduce the risk of the firm by diversifying its project portfolio. IV. MOVING AVERAGE: It refers to the mean of the closing price which changes constantly and moves ahead in time, there by encompasses the most recent days and deletes the old one. V. MODERN PORTFOLIO THEORY: Modern Portfolio Theory quantifies the relationship between risk and return and assumes that an investor must be compensated for assuming risk. It believes in the maximization of return through a combination of securities. The theory states that by combining securities of low risks with securities of high risks success can be achieved in making a choice of investments. There can be various combinations of securities. The modern theory points out that the

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

risk of portfolio can be reduced by diversification. Harry Markowitz and William Sharpe have developed this theory. VI. MARKOWITZ THEORY: Markowitz has suggested a systematic search for optimal portfolio. According to him, the portfolio manager has to make probabilistic estimates of the future performances of the securities and analyse these estimates to determine an efficient set of portfolios. Then the optimum set of portfolio can be selected in order to suit the needs of the investors. The following are the assumptions of Markowitz Theory: _ Investors make decisions on the basis of expected utility maximization. _ In an efficient market, all investors react with full facts about all securities in the market. _ Investors’ utility is the function of risk and return on securities. _ The security returns are co-related to each other by combining the different securities. _ The combination of securities is made in such a way that the investor gets maximum return with minimum of risk. _ An efficient portfolio exists, when there is lowest level of risk for a specified level of expected return and highest expected return for a specified amount of portfolio risk. _ The risk of portfolio can be reduced by adding investments in the portfolio. VII. SHARPE’S THEORY: William Sharpe has suggested a simplified method of diversification of portfolios. He has made the estimates of the expected return and variance of indexes which are related to economic activity. Sharpe’s Theory assumes that securities returns are related to each other only through common relationships with basic underlying factor i.e. market return index. Individual securities return is determined solely by random factors and on its relationship to this underlying factor with the following formula: Ri = ai + Bi I + ei Where, Ri refers to expected return on security ai = the intercept of a straight line or alpha coefficient Bi = slope of straight-line or beta coefficient I = level of market return index ei = error, i.e. residual risk of the company.

EFFICIENT MARKET HYPOTHESIS Financial Markets are influenced by money flows and information flows. In free and highly competitive markets, demand and supply pressures determine the prices or interest rates. In a theoretical sense, markets are said to be efficient, if there is a free flow of information and market absorbs this information fully and quickly. James Lorie has defined the efficient security market as follows :@ “Efficiency...means the ability of the capital market to function, so that prices of securities react rapidly to new information. Such efficiency will produce prices that are appropriate in terms of current knowledge, and investors will be less likely to make unwise investments.” In the above context, what will happen is that market making mechanism is free and unfettered. There are no pockets withholding information or interested parties making undue gains by insider information by manipulation of supply and demand forces. There will be no monopoly elements and malpractices or corruption etc. are not prevalent. Information flow is free and costless. In the normal course, capital or money flows into areas which are most profitable which in turn depends on their efficiency and competitiveness. Money flows also from less profitable to more profitable avenues if information flow is

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

free, fast and costless. In such market scenario, all investors will have the same information, which is immediately reflected in the stock prices and nobody can gain extra profits. Al instruments in the market will be correctly priced, as all the available infomration is perectly absorbed and any investor entering the market any time will have the same advantage or returns. No excess profits are possible in this scenario. As the demand and supply forces are playing their role freely, the emerging prices are fair and move in a randon manner. Prices of today are no more a function of the prices in the past as the day-today forces move in an independent and random manner. This concept of randomness has led to the theory of random Walk in the determination of prices. This Random Walk hypothesis is thus a special case of the Efficient Market Theory. Assumptions For the capital market efficiency theory to operate, the following assumptions are made 1. Infomration is free and quick to flow. 2. All investors have the same access to information. 3. Transaction costs, taxes and any bottlenecks are not there and not hampering the free forces of market. 4. Investors are rational and beahve in a cost effective competitive manner for optimization of returns. 5. Every investor has access to lending and borrowing at the same rate. 6. Market prices are not stickly and absorb the market information quickly and the market responds to new technology, new trends, changes in tastes, habits of consumers etc., efficiently adn quickly.

Efficient Market Hypothesis As referred to earlier, there are three forms of the Hypothesis, namely, weak form of EMH discussed under Random Walk Theory, semi strong from and strong form. In the words of Fama, efficient market is defined as the market where there are a large number of rational profit maximisers actively competing with each trying to predict the future market and where the current information is almost freely and equally available to all participants. Analysis of the Research studies done so far confirm partly the weak form of EMH. But the other two forms of the Theory are found not really realistic in the Practical Market Scene. Semi Strong Form of EMH This form of EMH postulates that the market absorbs quickly and efficiently not only the price information but all publicly available information. Examples of this public information are found in the Financial reports, Balance Sheets and Profit and Loss Accounts, Earnings and Dividend Reports, financial results etc. In addition to financial data, any material information affecting the financial position, such as financial structure, liquidity, solvency etc. is also found relevant and absorbed by the market in the price formation. Some data and information may be contradictory and biased information, rumours etc. would also flow in as news affecting the market. Revision of data or changes in conditions of the company also affect the price. Studies on the time lag involved in the impact of any change of fundamentals on the company share price showed varied time lags, some being discounted even before the event is announced and some before the event took place. Such matters like earnings reports, bonus, and rights affect the market even in anticipation before the formal announcement. The studies on the semi strong form of market efficiency related to the effect of any public information released, on the share price. The tests are invariably based on pricing models, as under the CAPM or some econometric models. These studies showed that the absorption of this information on share prices was inefficient and varied from scrip to scrip, and the time period studied. The inefficiency in the market

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

mechanism absorbing this data is found to be corrected over a time period as investors take time to analyse and conclude the effect of any public information. Thus, the semi strong form is empirically not well supported, but in many foreign markets, the semi strong form is found to be applicable and markets quickly absorb all published information. This is possible in those markets due to strict law enforcement, bu the market authorities, instantaneous display of all market information through electronic media and investor awareness of their impact and their quick absorption of the data. The revolution in informatics and communication technologies has made it possible for the application of the semi strong form of the EMH to these markets in developed Countries. Strong Form of EMH Under this hypothesis markets are so perfect that all information including private information, insider information and unpublished data, affecting the market are absorbed in the stock prices. Any investor can then gain the same average returns, whenever he entres the market. The information of all types is flashed to all investors simultaneously and all players have the same information at the same item. This means that only superior analysis and interpretation can give better market returns. This is possible for inside traders, floor brokers and institutional investors who have highly efficient market research component. The acumen with which price movements can be forecast can only result in superior return and not otherwise. Studies made in developed markets have showed that strong form of efficient market does not exist there also. Investors have not shown consistently higher returns seen with all the information available to them. It was also found that average investor could do better by picking up securities in a random fashion. Markets in India It will thus be seen that the EMH in its strong form is not realistic in the actual markets. In India, in particular, despite all best efforts of SEBI, market prices are rigged up, and it is common to notice various price behavioral patterns and manipulation of prices. Information is costly and time consuming. No unqualified empirical support is found for efficient market hypothesis, even in its weakest form in India. In the case of institutional investors, equity market research is a tool used for forecasting prices and identification of undervalued scrip’s through fundamental analysis and determining the timings for purchase and sale by technical analysis, Although the followers of Technical’s or Chartist methods are very few in India, the major component of market research revolves around both fundamental and technical factors. In practice, therefore many of these Theories, including the random walk theory are inapplicable to Indian conditions. Speculation is as high as 70-80% in Indian markets and markets are not perfect and the absorption of all types of information is also not timely and efficient. The investors in India go by research into fundamentals and select the scrips on the basis of their assessment of the extent of overvaluation and under valuation. Investment analysis therefore only involves the market research, fundamental analysis to a great extent and technical analysis to lesser extent with a view to select the undervalued scrip’s in the context of market conditions; reflect in the sentiment and psychology of the market. Critique of EMH Opinion is divided as to the validity of the EMH particularly in the strong form. In weak form Random Walk hypothesis holds good, as per some studies. The semi strong form has found less support from the empirical studies. The perfect markets do not exist, as the stocks as a rule do not sell at the best price based on intrinsic values. Many times, speculative fervor sentiment and expectations play a greater role on the stock prices than the fundamental factors.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Similarly news does not spread evenly among all segments of the market and among all investors. Institutional investors gain through market equity research and through economic of scale and better expertise. But individual investors do not gain by speedy spread of information and the absorption of the same by market. To gain, superior advantage, there was no adequate evidence from any of the empirical studies, based on prices or information. There is thus a controversy on the validity of Efficient Market Theory. In real market operations, this theory did no find support, as portfolio managers did not perform better based on the results of this theory. This theory posed a challenge to both the chartist school and the fundamentalist school. If Random Walk or Weak Market Efficiency holds good, chartist school finds its tools are not of real value to gain superior returns. Similarly if random walk holds good, chartist school finds its tools are not of real value to gain superior returns. Similarly if random walk holds good, following the study of fundamentals will not secure better returns, unless additional information and insights into the company or better insider knowledge are available to investors.

It is a Problematic paper. So try to solve more problems and concentrate more on problems. Important problems are available in separate file. Check the site for the file.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

UNIT - V MUTUAL FUNDS
Introduction: Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions. With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information which may help the investors in taking investment decisions. What is a Mutual fund? Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investment in securities is spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not may move in the same direction in the same proportion at the same time. Mutual fund issues unit to the investors in accordance with quantum of money invested by them. Investors of mutual fund are known as unit holders. The profit or loss are by the investors in proportion to their investments. The mutual fund normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. The SEBI (Mutual Funds)Regulations, 1996 defines a mutual fund as “a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. These M.Fs are referred to as Unit Trust in the U.K, and as open end investment companies in the U.S.A. HISTORY OF MUTUAL FUNDS IN INDIA The mutual fund industry in India started in 1963 with the formation of unit trust of India, at the initiative of the government of India and reserve bank. The history of mutual funds in India can be broadly divided into four distinct phases. FIRST PHASE-1964-87: Unit trust of India(UTI) was established on 1963 by an act of parliament. It was up the reserve bank of India and functioned under the regulatory and administrative control of the reserve bank of India. In 1987 UTI was de-linked from the RBI and the industrial development bank of India(IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was unit scheme 1964. at the end of 1988 UTI has Rs.6700crores of asset under management. SECOND PHASE-1987-93: (ENTRY OF PUBLIC SECTOR FUNDS)

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

In 1987 marked the entry of non-UTI, public sector mutual fund setup by public sector banks and life insurance Corporation of India (LIC) and general insurance corporation of India (GIC). SBI mutual fund was the first non UTI mutual fund established in june 1987 followed by can bank mutual fund in DEC87, Punjab national bank mutual fund AUG89, Indian bank mutual fund NOV89, bank of India JUNE90, bank of baroda mutual fund OCT92.LIC established it’smutual fund in june 1989 while GIC had set up it’s mutual fund DEC90.at the end of 1993 the mutual fund industry had assets under management of Rs.47, 004 cores THIRD PHASE 1999-2003(ENTRY OF PVT SECTOR FUNDS) With the entry of PVT sector funds in 1993 a new era started in the Indian mutual fund industry giving the Indian investor a wide choice of fund families also 1993 was the year in which the first mutual fund regulation came into being under which all mutual fund except UTI were to be registered and governed. The erstwhile kotare pioneer (now merged with Franklin Templeton) was the first PVT sector mutual fund registered in July 1993. The 1993 SEBI mutual fund regulation were substituted by a more comprehensive and revised mutual fund regulation in 1996. The industry now functions under the SEBI mutual fund regulation 1996. The no. Of mutual fund hoses went on increasing with many foreign mutual funds setting up funds in India and also the industry has witnessed several merges and acquisition as the end of JAN2003 there were 33 mutual fund with total asset of Rs.1, 21,805crores. The unit trust of India with Rs.44,541crores of assets under management was way ahead other mutual funds FOURTH PHASE-SINCE FEB2003: In FEB2003 following the repeal of the unit of India ACT1963 UTI was bifurcated in to separate entities. One is the specific undertaking of the unite trust of India with assets under management of Rs.29, 835 crores as 31st end of Jan2003, representing broadly the assets of US 64 scheme, assured return and certain other schemes. The specified undertaking of unit trust of India, functioning under an administrator and under the rules framed by gut of India and does not come under the purview of the mutual fund regulations. The second is UTI mutual fund LTD; Sponsored by SBI, PNB, BOB and LIC it is registered with SEBI and functions under the Mutual Fund regulations. With the bifurcation of the erstwhile UTI mutual fund, conforming to the SEBI MUTUAL FUND regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As the end of October 31,2003 there were 31 funds which manage assets of Rs.126726 crores under 386 schemes. What is Net Asset Value (NAV) OF A Scheme? The performance of a particular scheme of a mutual fund is denoted by NET ASSET VALUE Mutual fund invest the money collected from the investor in securities market. In simple words NAV is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of the scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total no of units of the schemes on any particular date. For ex. If the market value of securities of a mutual fund scheme is Rs.200 lacs and the mutual fund has issued 10 lacs units of Rs.10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual fund on a regular basis daily or weekly depending on the types of the scheme. What are the different types of mutual fund schemes? Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Open-ended Fund/Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. The key feature of open-ended schemes is liquidity. Close-ended Fund/Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the schemes. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Types of Schemes 1. Equity/growth oriented Funds: Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns. 2. Balanced Funds: The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. 3. Index Funds: An Index Fund is a mutual fund that tries to mirror a market index, like Nifty or BSE Sensex , as closely as possible by investing in all the stocks that comprise that index in proportions equal to the weight age of those stocks in the index. 4. Income/debt oriented Funds: These schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings. 1) Equity FundsAs explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are: a) Index fundsThese funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Index funds don’t need fund managers, as there is no stock selection involved.Investing through index funds is a passive investment strategy, as a fund’s performance will invariably mimic the index concerned, barring

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

a minor "tracking error". Usually, there’s a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unit holders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, lower the tracking error, the better are the index funds. b) Diversified funds: Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund manager’s picks languish, the returns will be far lower. Returns from a diversified fund depend a lot on the fund manager’s capabilities to make the right investment decisions. A portfolio concentrated in a few sectors or companies is a high risk, high return proposition. Tax-saving funds Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, one can claim a tax exemption of 20 per cent from his taxable income. One can invest more than Rs 10,000, but then he won’t get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that one has to lock into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions. c) Sector funds The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector fund’s NAV will zoom if the sector performs well; however, if the sector languishes, the scheme’s NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch these cycles–get in when the sector is poised for an upswing and exit before it slips back.


Reasons to invest in mutual funds: • Selection: You can select from thousands of funds (you’ll find one to suit your needs) and you can get information on them easily. Magazines like “Money” are easy to find.

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

Most credit unions have information, and your local library is a goldmine – and there’s the Internet. You Can Start Small: Most mutual funds will let you start with less than 1000, and if you set it up for automatic deposits, some will let you start with only 50. Simplicity: You deposit 10% of your income every month. Just pay yourself first, then pay the mortgage, then pay everyone else.

•

Professional management: You don’t always have time to research, select, and monitor individual stocks. A good fund manager will make you rich! Compound interest: Depending on what index you pick, the U.S. stock market has gone up an average of over 12% per year for the past 10 years, and it’s been almost that high for the past 20 years. The market fluctuates, but the beauty of this is, you don’t care! Over 10, 20, or 30 years, the system works every time! Rupee-cost-averaging: The details are complicated, but by investing every single month, whether the market is up or down, you get a tremendous boost from the mathematics. Your “average cost” will always be less than the “average price” you paid! And that is money in your pocket! Diversification: A broad-based growth fund typically invests in dozens of companies in different industries, sometimes even in different countries around the world. If one stock goes down, hopefully dozens of others will go up. There is excellent protection and sound risk management built-in to these funds. Specialization: If you prefer, and if you do the research, there are funds that invest in only a very small number of companies. If you can accept the additional risk, you can invest in one particular industry, or one country, or in companies of a certain size or that are environmentally responsible. This specialization offers the potential for even greater profits, but it can also bring greater potential risk. Study before you invest! Fund “Families”: Most mutual funds are offered by management companies that sponsor several different funds, with different objectives. They make it easy to move your money between funds, so as your goals change, you can adjust your investments with a quick phone call, or on the Internet Momentum: Once you get started, your enthusiasm builds. Once you have money “in the market”, you’ll track it, manage it, and in all probability, your desire to save will increase. If you’ve had difficulty saving in the past…START! Those monthly statements will be positive reminders to do even more. Yes, you should invest in tax-sheltered retirement plans first, and yes, there are other investment possibilities. And yes, there is some risk, because the market can go down. But to retire wealthy, pick a great, longterm growth fund, invest regularly, and let the system work for you!

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

ORGANISATION OF THE FUNDS The structure of M.F operations in India envisages a four tier establishment namely: l

The Sponsor

l

The Trustees

l

The Custodians

l Asset Management Companies (AMC) 1. The Sponsor Any corporate body, which initiates the launching of a mutual fund, is referred to as “sponsor”. According to SEBI norms, the sponsor should have professional competence, financial soundness and a general reputation for fairness and integrity in business transactions There must be a minimum contribution by the sponsor to the tune of 40% of the net worth of the Asset Management Company. The sponsor appoints trustees, an asset management company and custodians in compliance with the regulations. 2. The Trustees Persons who hold the property of the mutual fund in trust for the benefit of the unit holder are called trustees. Trustees look after the mutual fund. A Minimum of 75% of the trustees must be independent of the sponsors so as to ensure fair dealing Functions of Trustees l Furnish information to unit holders as well as SEBI about the M.F l Appoint an AMC for floating M.F schemes l Evolve an investment management agreement to be entered into with AMC l Observe and ensuring that AMC is managing schemes in accordance with the trust deed. l Dismiss the AMC appointed by the Trustees l Supervise collection of any income due to be paid to the scheme 3. The Custodian An agency that keeps custody of the securities that are bought by the mutual fund under the various schemes is called “the custodians”. According to SEBInorms, the custodian who is so appointed should in no way be associated with AMC and cannot act as sponsor or trustee to any mutual fund. A custodian is supposed to act only for a single mutual fund unless otherwise approved by SEBI. Some of the important functions of the custodians are:

K. HARI KRISHNA MBA,MCOM, M.Phil,(PhD),(ICWAI)

FACULATY & DIRECTOR - 91 77 567 568

MBA TUITIONS, FINANCE LIVE PROJECTS NCFM, AMFI CERTIFIACATIONS, JOB ORIENTED TRAINING IN FINANCE ACCOUNTS WITH 100% PLACEMENT ASSISTANCE

l Safe keeping of the securities l Collecting income/dividends on the securities depending on the terms of agreement l Carrying out regular reconciliation of assets with accounting records l Ensuring timely resolution of discrepancies l Arranging for proper registration or recording of securities 4. Asset Management Company (AMC) AMC is the technical name for the investment manager of a M.F and is appointed by the sponsor or trustees. The AMC manages the affairs of the M.F. it is responsible for operating all the schemes of the fund, and can act as the AMC of only one M.F. AMC can undertake activities which are in the nature of management and advisory services to ¡Offshore funds ¡Pension funds ¡Provident Funds ¡Venture capital funds ¡Management of insurance funds ¡Financial consultancy ¡Exchange of research on commercial basis. Functions of AMC l Registration and Transfe rAgents l Fund Accountants l Lead Managers ¡ Carries out extensive campaigns about the schemes and focuses on investor attraction ¡ Assisting AMC to approach potential investors through meetings, exhibitions, contacts, advertising, publicity, and sales promotion l Investment Advisors l Legal Advisors l Auditors