Investment Analysis &

Portfolio Management

By Gautham Shashangan
99% Training, Business & Investment Solutions
 What is an Investment
• Investment is the investing of money or capital in order to
gain profitable returns, as interest, income, or appreciation
in value.

• An investment involves the choice by an individual or an

organization such as a pension fund, after some analysis or
thought, to place or lend money in a vehicle, instrument
(securities, loans, deposits, derivatives) or asset.

• It can be a property, commodity, stock, bond,

financial derivatives (e.g. futures or options), or the foreign
asset denominated in foreign currency, that has certain
level of risk and provides the possibility of generating
returns over a period of time.
• Investment comes with the risk of the loss
of the principal sum

• The investment that has not been

thoroughly analyzed can be highly risky
with respect to the investment owner
because the possibility of losing money is
not within the owner's control.

• Investments can be of No Risk, Low Risk

or High Risk.
 Basic Investment Concepts
• Whether you make or lose money in the market
depends on how your investments perform. That's
what the risk in investing is all about. You can lose
money because of the "downs" in the market, but
you can also make money on the "ups."

• Knowing how different products perform and the

risks they represent can greatly increase your
chances of choosing good investments. This means
you need to take time to understand the various
investment products. You need to understand their
goals and risks.

• Never invest in something you don't understand.

 Investment Objective/ Goal
Ask yourself "What is my objective?“

• Is it conservative, with safety of principal most

important?

• Is it income-oriented, in which regular payments from the

investment will be used for living expenses?

• Are you investing for long-term growth, which may carry

more risk than either income or safety?

• Are you comfortable with a higher risk in hopes of higher

gain, or is some mix of these objectives right for you?
The following investment objectives, or some
combination of them, can provide an answer.

• Safety is a conservative investment goal that carries

minimal risk of loss of principal.

• Income reflects an investment goal that provides

income through regular payments to the investor.

• Growth investments are for long-term investing.

Growth investments usually carry a higher risk than
either safety or income investments.

• Speculation is the riskiest investment. With the high

risk usually comes the possibility of higher gains.
 Tax-Deferred Investing
• If you want your investments to compound more quickly, you
don't have to take more risks. What you can do is put money
into tax-deferred investments, including individual retirement
accounts (IRAs) and salary reduction retirement plans like
401(k)s or Keoghs.

• In most cases, there's cap, or limit, on the amount you can

invest tax-deferred each year. Experts advise you to take the
fullest advantage you can of this opportunity.

• There are drawbacks to tax-deferred investing. Generally

you'll have to pay a penalty as well as whatever tax is due -- if
you withdraw money from tax-deferred accounts before you
reach a certain percent & time.

• Anyway there are situations when the withdrawal penalty is

waived, including serious illness, paying college tuition or
putting money down on a first-home purchase.
 Additional Considerations
• Always set aside some of your money for emergencies before
you invest.
• Ask for advice from a trained and licensed professional.
• Be selective in your investment choices. Exercise your right to
say "No."
• Ask about all fees and charges related to your investment
choices prior to purchase. Fees reduce your rate of return; it
may take a year or more to recover such fees.
• Develop a sensible investment plan and follow it.
• Judge each company on its own merits. Do not invest in a
company just because it is part of a fast growing and
successful industry.
• Never invest based on information obtained from an
unsolicited telephone call or based on a "hot tip".
• Check the credentials of anyone you do not know who offers
to sell you an investment.
• After you develop a sensible investment plan, stick with it.
Reiterate Investment Basics

• With the exception of bank insured products,

there will always be a degree of risk involved
in investing.

• Risk and return go hand-in-hand. Higher

returns usually mean greater risk. Lower
returns generally promise greater safety.

• Again never invest in anything that you don't

understand
 Types of Investments
• Cash
• Savings a/c
• Debt Instruments/ Bonds
• Stocks
• Mutual Funds
• Collectibles
• Precious Metals
• Real Estate
 A Comparison of Investments
• There are many different ways to invest your money. So
how do you choose what's right for you?
• First, you must examine your own financial circumstances,
your goals, and your individual personality.
• For instance, how much risk will you be able to tolerate
before you're driven to walk the floors all night long worrying
about your money?
• Along those same lines, the primary criterion for evaluating
any investment is to weigh the potential profit against the
risk that it will expose you to. Finding the proper match is
crucial, not only to your financial success but to your
psyche, as well.
• Use the subsequent page as an at-a-glance comparison tool
to help you sort through the general types of investment
vehicles that are available.
Cash
Advantages of Cash as an investment:
• Cash is readily accepted for goods and services.
• It's the standard of value used in our society.
• It's easily portable, so it can be efficiently used to purchase
goods and services in lieu of bartering.

Disadvantages of Cash as an investment:

• Cash in itself earns no interest, and in periods of high
inflation it can rapidly lose its value and capability to be
exchanged for goods and services.
• It is subject to fire, theft, and other hazards.
• Large quantities of cash are cumbersome to handle and
transport, and risky to carry. Most major transactions today
are therefore completed by check or electronic funds
transfer.
Savings Accounts

Advantages of Savings Accounts as an investment:

• Savings accounts are the safest interest-bearing investment

available. Your principal is usually protected by the FDIC as
well as federal and state banking regulations.

• Due to the advent of electronic banking, money in savings

accounts is readily accessible at any time of the day or night.

Disadvantages of Savings Accounts as an investment:

• Because of the generally low rates of interest that savings

accounts earn, there's the potential for loss of your money's
purchasing power due to inflation.

• Very low interest & slow growth for this investments

Debt Instruments –

Advantages of Debt Instruments as an investment:

• Bonds and notes pay higher rates of interest than savings
accounts.
• Because of the fact that there's a trillion-dollar market for
government and corporate bonds, they can generally be
considered to be liquid investments.
• If you prefer not to liquidate them, they can be used as
collateral for loans.

Disadvantages of Debt Instruments as an investment:

• Bonds and notes are less liquid than savings accounts.
• Their safety depends solely on the strength of the issuer.
• If interest rates increase, lower-paying bonds may
temporarily drop in value until their maturity, when the bond
or note becomes payable.
• During periods of inflation, the face value of bonds will be
worth less than when they were first purchased.
Stocks –

Advantages of Stocks as an investment:

• As a shareholder in a corporation, an investor actually owns a piece of
the business, enabling him or her to benefit from the distribution of profits
(or dividends) without incurring any personal liability for losses.
• During inflationary periods, the prices of the products or services that the
corporation sells rise and the operation's profits increase, followed by a
corresponding rise in share values.
• Stocks can easily be sold and converted into cash, thus providing a high
degree of liquidity.

Disadvantages of Stocks as an investment:

• An important factor in stock prices is the ability of corporate management
to run the company. If managers are effective the company will ideally
grow, causing earnings to increase and thereby stock prices, as well. On
the other hand, poor managers may hinder the organization's growth
potential by making poor decisions.
• Stock prices are subject to general stock market conditions. If there's a
temporary downturn in the market at a time in which you must sell for any
reason, you could realize a substantial loss.
• Other people (the company's board of directors) are making decisions
and handling your money for you.
Collectibles - These are objects that are difficult or impossible to duplicate
and that have cultural, historical, or social value. Collectibles include, but
are by no means limited to, artwork (including paintings and sculptures),
antiques and relics, coins, stamps, rare books, dolls, automobiles, sports
trading cards, and the like.

Advantages of Collectibles as an investment:

• By definition, rare collectibles (especially artwork) cannot be replaced,
and are therefore more highly valued.
• They provide intangible benefits such as the enjoyment of accumulating a
collection and the pride and pleasure of ownership.
• Recognized, appraisable collections can be used as collateral for loans.
Although generally considered to be somewhat illiquid, they can in this
manner still provide some measure of liquidity.

Disadvantages of Collectibles as an investment:

• Collectibles are not particularly liquid because there is not a ready, liquid
market for them. In order to sell, you must find a dealer, an auction
house, or a private buyer.
• They generate no interest income.
• The costs of preservation to prevent further aging and deterioration can
often be prohibitive. Furthermore, the costs to insure collectibles against
fire, theft, and other risks can also be quite high.
Precious Metals - Precious metals include gold, silver, and platinum. Since
ancient times, gold and other precious metals have been accepted as
mediums of exchange worldwide. Today, many investors use precious
metals, or their stocks, as a hedge against massive inflation. As the
prices of the metals themselves rise, so do their stocks. Precious metal
stocks have the same advantages and disadvantages as other stocks.

Advantages of Precious Metals as an investment:

• Precious metals are an excellent hedge against inflation. Historically,
gold, silver, and platinum have been accepted as standards of value.
During periods of hyperinflation, their prices rise accordingly to keep
pace.
• Precious metal stocks, like other stocks, can be easily bought and sold on
major stock exchanges, giving them a high measure of liquidity.
• Owning shares in a precious metal company is an easy way to invest in
precious metals without having to physically buy and hold the actual
commodities.

Disadvantages of Precious Metals as an investment:

• Like collectibles, precious metals do not earn interest.
• Precious metal prices are greatly influenced by the actions of
governments. For example, if Russia (the world's major producer of
platinum) were to decide to sell off its stockpiles of the metal in order to
raise capital, the price of platinum worldwide would drop.
Real Estate – In India real estate earns significantly higher rates of return than most other
investment instruments.

Advantages of Real Estate as an investment:

• There can be immediate income from the net cash flow of a well-chosen property after
operating costs and debt service.
• The loan balance is amortized and reduced with each mortgage payment, thus
increasing equity.
• Property depreciation can be deducted against property income for tax purposes.
• As long as replacement costs or inflation (or a combination of the two) exceed the
rate of depreciation, the property will continue to appreciate in spite of depreciation.

Disadvantages of Real Estate as an investment:

• Real estate values, like stocks, are subject to the ups and downs of the economy as
well as temporary value fluctuations. However, in both cases, if you hold the property
long enough, overall growth in value will likely occur.
• Real estate is not a liquid investment, which is the reason that it should be done only
with surplus funds and should be designated as a long-term investment program.
• Land does not become obsolete the way that buildings and equipment do. As such,
only the depreciation of buildings and equipment may be deducted on your tax return.
Therefore, in every real estate investment, you must allocate the purchase price
between land and buildings in order to know how much is depreciable for income tax
purposes.
• Real estate generally requires more hands-on management than stocks or other types
of investments, but this disadvantage can actually reap additional tax benefits.
 A briefing on different types of
Investments
The various types of investment are:

• Cash investments: These include savings bank accounts,

certificates of deposit (CDs) and treasury bills. These
investments pay a low rate of interest and are slightly
volatile & risky in periods of inflation.

• Bond/Debt securities: This form of investment provides

returns in the form of fixed periodic payments and possible
capital appreciation at maturity. It is a safer and more 'risk-
free‘ investment tool than equities. However, the returns are
also generally lower than other securities.

• Stocks: Buying stocks (also called equities) makes you a

part-owner of the business and entitles you to a share of the
profits generated by the company. Stocks are more volatile
and riskier than bonds.
• Mutual funds: This is a collection of stocks and bonds and involves
paying a professional manager to select specific securities for you. The
prime advantage of this investment is that you do not have to bother
with tracking the investment. There may be bond, stock- or index-based
mutual funds.

• Derivatives: These are financial contracts the values of which are

derived from the value of the underlying assets, such as equities,
commodities and bonds, on which they are based. Derivatives can be in
the form of futures, options and swaps. Derivatives are used to minimize
the risk of loss resulting from fluctuations in the value of the underlying
assets (hedging).

• Commodities: The items that are traded on the commodities market are
agricultural and industrial commodities. These items need to be
standardized and must be in a basic, raw and unprocessed state. The
trading of commodities is associated with high risk and high reward.
Trading in commodity futures requires specialized knowledge and in-
depth analysis.

• Real estate: This investment involves a long-term commitment of funds

and gains that are generated through rental or lease income as well as
capital appreciation. This includes investments into residential or
commercial properties.
 Speculation
• Speculation, in the narrow sense of using it as
financial speculation, involves the
buying, holding, selling, and short-selling of stocks,
bonds, commodities, currencies, collectibles,
real estate, derivatives, or any valuable
financial instrument to profit from fluctuations in its
price as opposed to buying it for use or for income
via methods such as dividends or interest.
• Speculation or agiotage represents one of four
market roles in Western financial markets, distinct
from hedging, long- or short-term investing, and
arbitrage.
 Hedge/ Hedging
• A hedge is an investment that is taken out specifically to
reduce or cancel out the risk in another investment.

• Hedging is a strategy designed to minimize exposure to an

unwanted business risk, while still allowing the business to
profit from an investment activity.

• Typically, a hedger might invest in a security that he believes

is under-priced relative to its "fair value" (for example a
mortgage loan that he is then making), and combine this with
a short sale of a related security or securities.

• Thus the hedger is indifferent to the movements of the

market as a whole, and is interested only in the performance
of the 'under-priced' security relative to the hedge.