PROJECT REPORT ON

INVESTMENT
PATTERNS IN
INDIAN STOCK
MARKET

1
 ACKNOWLEDGEMENT

It plunge me in exhilaration in taking privilege in expressing our heart felt

appreciation to Ms Shabnam Bano, Branch Manager India Infoline, Kota Branch,
for her admirable and valuable guidance, keen interest, encouragement and
constructive suggestions during the course of the project.

I would like to express our gratitude to Mr. Pramod Vijay, Sr. Relationship
Manager, India Infoline, Kota for providing us an opportunity to take this project
work & under whose supervision & guidance whole of the project has got its
shape.

I would also like to express thanks to Mr. Prateek Saxena and Ms Garima Arora,
India Infoline Limited, who was closely associated with the project right from the
beginning.

I consider my proud privilege to express deep sense of gratefulness to Dr. K.C.

Goyal, Head of Department, Department of commerce and Management,
University Of Kota, who is the strength and an encouragement behind me.

My sincere appreciation also go to those clients, investors and persons in India

Infoline Ltd. who altruistically revealed important information regarding the Indian
stock market and how they trade and invest with the intense help of their respective
relationship managers and investment guides.

I am very grateful to my parents, family members and friends for their enthusiastic
support.

Last but not least; report was completed successfully because of the grace of the
Almighty God.

ALKA SHARMA

2
 EXECUTIVE SUMMARY

The project which is taken by me with the help of my Faculty and industry Guide
mainly focused on Indian Stock Market. The main focus of my project is to gain
knowledge about the core areas in which stock market works and what are the
trends and investment patterns available in it.

Working with India Infoline Limited I really had a learning experience basically
related with the stock market the how various components like, equities, stocks,
IPOs, derivatives (Future and options), Commodities and the Mutual Funds. These
all are important aspects of stock market. Other thing which has I learned that the
stock market is divided into two segments Primary market & Secondary market. In
the Primary market those companies who are unlisted and who want capital from
the public they issue their shares for the first time in the market which is called
Primary Market .Secondary market includes Equity shares, Right issues, Bonus
shares, Preference shares, Cumulative Preference Shares, Cumulative Convertible
Preference Shares, Bonds. The share market which I had seen the guidance of my
Industry Guide is the most volatile market.

So, the whole project was directed towards how the stock markets work in India
and what are the core areas of functioning of the stock market in order to
maximum out of the minimum so that the profile of mine and the project topic
should match and more and more learning can be done from them.

3
CONTENTS Page No.

CHAPTER 1- INTRODUCTION 1-2

 Need of the study 1

 Objectives 1
 Scope 2

CHAPTER 2- PROFILE OF INDIAINFOLINE LIMITED 3

CHAPTER 3- INVESTMENT AVENENUES 14 - 90

 Overview 14
 Investment alternative: A Choice Galore 17
 Risk return good and bad 32
 Securities analysis and valuation 36
 Derivatives 50
 Portfolio management 66

CHAPTER 4- RESEARCH METHODOLOGY 91

CHAPTER 5- DATA ANALYSIS AND INTERPRETATION 93

CHAPTER 6- CONCLUSION, SUGGESTION AND LIMITATION OF THE STUDY 109

BIBLIOGRAPHY 111

 WEBSITES
 ANNEXURE
 CHECKLIST
 ABBREVIATIONS

4
Table No Descriptions Page No

3.1 Return probability chart 72

3.2 Return probability chart 74

3.3 Return probability char 75

3.4 Expected return on stock 80

3.5 Expected Return on stock 81

5.1 Age of the investor 93

5.2 Occupation of the investor 94

5.3 Income Group of the investor 95

5.4 Type of investment you prefer 96

5.5 Type of the Investment Alternatives 97

5.6 Expected rates of return 98

5.7 Dependent factor of investment 99

5.8 The main purpose of your investment 100

5.9 D-Mat account 101

5.10 Depository participant) you prefer 102

5.11 Market condition while investing 103

5.12 Trading motive 104

5.13 Your investment advisor 105

5.14 Awareness about portfolio management 106

5.15 Portfolio can give better return 107

5.16 Takes help while managing portfolio 108

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Figure No Descriptions Page No

3.1 Investment avenues 14

3.2 Interest chart of different companies 21

3.3 Housing finance companies accepting deposits 22

3.4 Call option graph 59

3.5 Call option graph 60

3.6 Buy option graph 63

3.7 Risk free rate of return 69

3.8 Risk returns trade off 79

3.9 Expected return graph 80

3.10 Expected return graph 82

3.11 Determination of market port folio 84

3.12 optimal portfolio strategy 86

5.1 Age of the investor 93

5.2 Occupation of the investor 94

5.3 Income Group of the investor 95

5.4 Type of investment you prefer 96

5.5 Type of the Investment Alternatives 97

5.6 Expected rates of return 98

5.7 Dependent factor of investment 99

5.8 The main purpose of your investment 100

5.9 D-Mat account 101

6
5.10 Depository participant) you prefer 102

5.11 Market condition while investing 103

5.12 Trading motive 104

5.13 Your investment advisor 105

5.14 Awareness about portfolio management 106

5.15 Portfolio can give better return 107

5.16 Takes help while managing portfolio 108

INTRODUCTION TO INVESTMENT
7
Investment may be defined as an activity that commits funds in any financial form in the present
with an expectation of receiving additional return in the future. The expectations bring with it a
probability that the quantum of return may vary from a minimum to a maximum. This possibility
of variation in the actual return is known as investment risk. Thus every investment involves a
return and risk.

Investment is an activity that is undertaken by those who have savings. Savings can be
defined as the excess of income over expenditure. An investor earns/expects to earn additional
monetary value from the mode of investment that could be in the form of financial assets.

The three important characteristics of any financial asset are:

• Return-the potential return possible from an asset.

• Risk-the variability in returns of the asset form the chances of its value going down/up.
• Liquidity-the ease with which an asset can be converted into cash.

Investors tend to look at these three characteristics while deciding on their individual
preference pattern of investments. Each financial asset will have a certain level of each of these
characteristics.

NEED OF THE STUDY

8
We believe that our investors are better served by a disciplined investment approach, which
combines an understanding of the goals and objectives of the investor with a fine tuned strategy
backed by research.

 Stock specific selection procedure based on fundamental research for making sound
investment decisions.

 Focus on minimizing investment risk by following rigorous valuation disciplines.

 Capital preservation.

 Selling discipline and use of Derivatives to control volatility.

 Overall to enhance absolute return for investors.

The need of the study is to identify the different types of investment alternatives available in the
market and analyze their risk and return.

OBJECTIVES OF THE STUDY

Before starting a project, we should keep in mind the clear objective of the project because in the
absence of the objective one can’t reach the conclusion or the end result of the project. Research
objective answer the question “Why this study is being conducted”
For every problem there is a research. As all the research is based on some objective, our
research has also some objectives which are as follows:
 To identify and study the demand and supply scenario.
 To determine and understand dynamics of stock exchange and different Investment
alternative.

Primary Objective
 To identify and analyze the portfolio management strategies in Indian Sock market.
 To measure customers preference towards dealing in derivative market segment
 The perception held by investors about the financial derivatives
 Giving conclusion and recommendation.

Secondary Objective
 To study which class mostly invest in stock market
 Evaluate the various investment opportunities for investors
9
  To study the behavior of investor during the market fluctuations

Scope of the study

 To know the lack of awareness about stock market amongst most of people.
 To know the awareness about the portfolio investment.
 To know problem faced by people in online trading because of lack of knowledge
about computers and internet.
 To know the information regarding tax and many other transactions cost from
customers.
 To know how investing money in stock market for short period is risky. But if
investment is made judiciously it gives good returns.
 To Identify the volatile stock market is more then other country

10
 CORPORATE PROFILE

COMPANY STRUCTURE
India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both
the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and
Portfolio Management Services. It offers broking services in the Cash and Derivatives segments
of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL
as a depository participant, providing a one-stop solution for clients trading in the equities
market. It has recently launched its Investment banking and Institutional Broking business.

INDIA INFOLINE GROUP

The India Infoline group, comprising the holding company, India Infoline Limited and its
wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging
from Equity research, Equities and derivatives trading, Commodities trading, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small
savings instruments to loan products and Investment banking. India Infoline also owns and
manages the websites www.indiainfoline.com and www.5paisa.com

The company has a network of 976 business locations (branches and sub-brokers) spread across
365 cities and towns. It has more than 800,000 customers.

INDIA INFOLINE LTD

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both
the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and
Portfolio Management Services. It offers broking services in the Cash and Derivatives segments
of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL
as a depository participant, providing a one-stop solution for clients trading in the equities
market. It has recently launched its Investment banking and Institutional Broking business.

11
A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These
services are offered to clients as different schemes, which are based on differing investment
strategies made to reflect the varied risk-return preferences of clients.

INDIA INFOLINE MEDIA AND RESEARCH SERVICES LIMITED.

The content services represent a strong support that drives the broking, commodities, mutual
fund and portfolio management services businesses. Revenue generation is through the sale of
content to financial and media houses, Indian as well as global.

It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the
Web' and '…a must read for investors in Asia'. India Infoline's research is available not just over
the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First
Call and Internet Securities where India Infoline is amongst the most read Indian brokers.

INDIA INFOLINE COMMODITIES LIMITED.

India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Our
experience in securities broking empowered us with the requisite skills and technologies to allow
us offer commodities broking as a contra-cyclical alternative to equities broking. We enjoy
memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and
recently acquired membership of DGCX. We have a multi-channel delivery model, making it
among the select few to offer online as well as offline trading facilities.

INDIA INFOLINE MARKETING & SERVICES

India Infoline Marketing and Services Limited is the holding company of India Infoline
Insurance Services Limited and India Infoline Insurance Brokers Limited.

12
(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance
Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI
Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company.
India Infoline was the first corporate agent to get licensed by IRDA in early 2001.

(b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a newly
formed subsidiary which will carry out the business of Insurance broking. We have applied to
IRDA for the insurance broking licence and the clearance for the same is awaited. Post the grant
of license, we propose to also commence the general insurance distribution business.

INDIA INFOLINE INVESTMENT SERVICES LIMITED

Consolidated shareholdings of all the subsidiary companies engaged in loans and financing
activities under one subsidiary. Recently, Orient Global, a Singapore-based investment
institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services.
This will help focused expansion and capital raising in the said subsidiaries for various lending
businesses like loans against securities, SME financing, distribution of retail loan products,
consumer finance business and housing finance business. India Infoline Investment Services
Private Limited consists of the following step-down subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail loan products)

(b) Moneyline Credit Limited (consumer finance)

(c) India Infoline Housing Finance Limited (housing finance)

IIFL (ASIA) PTE LIMITED

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in Singapore to
pursue financial sector activities in other Asian markets. Further to obtaining the necessary
regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.

13
14
 PRODUCTS AND SERVICES

India Infoline is a one-stop financial services shop, most respected for quality of its advice,
personalized service and cutting-edge technology. It provide a bouquet of products to its
customer such as-

EQUITIES
India Infoline provided the prospect of researched investing to its clients, which was hitherto
restricted only to the institutions. Research for the retail investor did not exist prior to India
Infoline leveraged technology to bring the convenience of trading to the investor’s location of
preference (residence or office) through computerized access. India Infoline made it possible for
clients to view transaction costs and ledger updates in real time. Over the last five years, India
Infoline sharpened its competitive edge through the following initiatives:

MULTI-CHANNEL DELIVERY MODEL

The Company is among the few financial intermediaries in India to offer a complement of online
and offline broking. The Company’s network of branches also allows customers to place orders
on phone or visit our branches for trading.

INTEGRATED MIDDLE AND BACK OFFICE

The customer can trade on the BSE and NSE, in the cash as well as the derivatives segment all
through the available multiple options of Internet, phone or branch presence.

MULTIPLE-TRADING OPTIONS

The Company harnessed technology to offer services at among the lowest rates in the business
membership: The Company widened client reach in trading on the domestic and international
exchanges.

TECHNOLOGY

The Company provides a prudent mix of proprietary and outsourced technologies, which
facilitate business growth without a corresponding increase in costs.

CONTENT

15
The Company has leveraged its research capability to provide regular updates and investment
picks across the short and long-term.

SERVICE

Clients can access the customer service team through various media like toll-free lines, emails
and Internet- messenger chat for instant query resolution. The Company’s customer service
executives proactively contact customers to inform them of key changes and initiatives taken by
the Company. Business World rated the Company’s customer service as ‘Best’ in their survey of
online trading sites carried out in December 2003.

KEY FEATURES
• Membership on the Bombay Stock Exchange Limited (BSE ) and the National Stock
Exchange (NSE)
• Registered with the NSDL as well as CDSL as a depository participant, providing a one-
stop solution for clients trading in the equities market
• Broking services in cash and derivative segments, online as well as offline.
• Presence across 350 cities and towns with a network of over 850 business locations
Equity client base of over 500,000 clients
• Provision of free and world-class research to all clients

PMS (PORTFOLIO MANAGEMENT SERVICE)

Our Portfolio Management Service is a product wherein an equity investment portfolio is created
to suit the investment objectives of a client. We at India Infoline invest your resources into
stocks from different sectors, depending on your risk-return profile. This service is particularly
advisable for investors who cannot afford to give time or don't have that expertise for day-to-day
management of their equity portfolio.

RESEARCH
Sound investment decisions depend upon reliable fundamental data and stock selection
techniques. India Infoline Equity Research is proud of its reputation for, and we want you to find
the facts that you need. Equity investment professionals routinely use our research and models as
integral tools in their work. They choose Ford Equity Research when they can clear your doubts.

COMMODITIES
India Infoline’s extension into commodities trading reconciles its strategic intent to emerge as a
one-stop solutions financial intermediary. Its experience in securities broking has empowered it
with requisite skills and technologies. The Company’s commodities business provides a contra-
16
cyclical alternative to equities broking. The Company was among the first to offer the facility of
commodities trading in India’s young commodities market (the MCX commenced operations
only in 2003). Average monthly turnover on the commodity exchanges increased from Rs 0.34
bn to Rs 20.02 bn. The commodities market has several products with different and non-
correlated cycles. On the whole, the business is fairly insulated against cyclical gyrations in the
business.

MORTGAGES
During the year under review, India Infoline acquired a 75% stake in Moneytree Consultancy
Services to mark its foray into the business of mortgages and other loan products distribution.
The business is still in the investing phase and at the time of the acquisition was present only in
the cities of Mumbai and Pune. The Company brings on board expertise in the loans business
coupled with existing relationships across a number of principals in the mortgage and personal
loans businesses. India Infoline now has plans to roll the business out across its pan-Indian
network to provide it with a truly national scale in operations.

HOME LOANS and PERSONAL LOANS

Loan against residential and commercial property

Expert recommendations
Easy documentation
Quick processing and disbursal
No guarantor requirement

ONLINE INVESTMENT
India Infoline has made investing in Mutual funds and primary market so effortless. All have to
do is register with us and that’s all. No paperwork no queues and No registration charges.

INVEST IN MUTUAL FUNDS

India Infoline offers a host of mutual fund choices under one roof, backed by in-depth research
and advice from research house and tools configured as investor friendly.

APPLY IN INITIAL PUBLIC OFFERS (IPO)

Client could also invest in Initial Public Offers (IPO’s) online without going through the hassles
of filling ANY application form/ paperwork.

STOCK MESSAGING SERVICE (SMS)

Stay connected to the market remotely. The trader of today, you are constantly on the move.
But how to stay connected to the market while on the move? Simple, subscribe to India Infoline's
17
Stock Messaging Service and get Market on the Mobile of client! There are three products
under SMS Service:

 Market on the move.

 Best of the lot.

 VAS (Value Added Service)

INSURANCE
An entry into this segment helped complete the client’s product basket; concurrently, it
graduated the Company into a one-stop retail financial solutions provider. To ensure maximum
reach to customers across India, we have employed a multi pronged approach and reach out to
customers via our Network, Direct and Affiliate channels. Following the opening of the sector in
1999-2000, a number of private sector insurance service providers commenced operations
aggressively and helped grow the market.

The Company’s entry into the insurance sector derisked the Company from a predominant
dependence on broking and equity-linked revenues. The annuity based income generated from
insurance intermediation result in solid core revenues across the tenure of the policy.

WEALTH MANGEMENT SERVICE

Imagine a financial firm with the heart and soul of a two-person organization. A world-leading
wealth management company that sits down with you to understand your needs and goals. We
offer you a dedicated group for giving you the most personal attention at every level.

NEWSLETTERS
The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day
ideas, unless the markets are really choppy coupled with a brief on the global markets and any
other cues, which could impact the market. Occasionally an investment idea from the research
team and a crisp round up of the previous day's top stories. That's not all. As a subscriber to the
Daily Market Strategy, you even get research reports of India Infoline research team on a priority
basis.

The India Infoline Weekly Newsletter is your flashback for the week gone by. A weekly outlook
coupled with the best of the web stories from India Infoline and links to important investment
ideas, Leader Speak and features is delivered in your inbox every Friday evening.

18
 BUSINESS & OPERATIONS

BUSINESS
Over a period of time RSL has recorded a healthy growth rate both in business volumes and
profitability as it is one of the major players in this line of business. The business thrust has been
mainly in the development of business from Financial Institutions, Mutual Funds and Corporate.

OPERATIONS
The operations of the company are broadly organized along the following functions.

Research & Analysis

This group is focused on doing daily stock picks and periodical scrip segment specific research.
They provide the best of analysis in the industry and are valued by both our Institutional and
Retail clientele.

Marketing
This group is focused on tracking potential business opportunities and converting them into
business relationships. Evaluating the needs of the clients and tailoring products to meet their
specific requirements helps the company to build lasting relationships

Dealing
Enabling the clients to procure the best rates on their transactions is the core function of this
group.

Back Office
This group ensures timely deliveries of securities traded, liaison with stock exchange authorities
on operational matters, statutory compliance, handling tasks like pay-in, pay-out, etc. This
section is fully automated to enable the staff to focus on the technicalities of securities trading
and is manned by professionals having long experience in the field

19
 INFRASTRUCTURE
Offices
The company has offices located at prime locations in Mumbai, New Delhi, Kolkata and
Chennai. The offices are centrally located to cater to the requirements of institutional and
corporate clients and retails clients, and for ease of operations due to proximity to stock
exchanges and banks.

Communications
The company has its disposal, an efficient network of advance communication system and intend
to install CRM facility, besides this it is implementing interactive client information
dissemination system which enables clients to view their latest client information on web. It has
an installed multiple WAN to interconnect the branches to communicate on real time basis.

The company is equipped with most advanced systems to facilitate smooth functioning of
operations. It has installed its major application on IBM machines and uses latest state of art
financial software.

20
 MANAGEMENT TEAM

Mr. Nirmal Jain

Chairman & Managing Director

India Infoline Ltd.

Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost Accountant, founded India’s
leading financial services company India Infoline Ltd. in 1995, providing globally acclaimed
financial services in equities and commodities broking, life insurance and mutual funds
distribution, among others. Mr. Jain began his career in 1989 with Hindustan Lever’s
commodity export business, contributing tremendously to its growth. He was also associated
with Inquire-Indian Equity Research, which he co-founded in 1994 to set new standards in
equity research in India.

Mr. R Venkataraman

Executive Director

India Infoline Ltd.

R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech

(Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM
Bangalore). He joined the India Infoline board in July 1999. He previously held senior
managerial positions in ICICI Limited, including ICICI Securities Limited, their investment
banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation
Limited. He was also Assistant Vice President with G E Capital Services India Limited in their
private equity division, possessing a varied experience of more than 16 years in the financial
services sector.

The Board of Directors

21
Apart from Mr. Nirmal Jain and Mr. R Venkataraman, the Board of Directors of India Infoline
Ltd. comprises:

Mr Nilesh Vikamsey

Independent Director

India Infoline Ltd.

Mr. Vikamsey, Board member since February 2005 - a practising Chartered Accountant and
partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB
International, headed the audit department till 1990 and thereafter also handles financial
services, consultancy, investigations, mergers and acquisitions, valuations etc; an ICAI study
group member for Proposed Accounting Standard — 30 on Financial Instruments
Recognition and Management, Finance Committee of The Chamber of Tax Consultants
(CTC), Law Review, Reforms and Rationalization Committee and Infotainment and Media
Committee of Indian Merchants’ Chamber (IMC) and Insurance Committee and Legal
Affairs Committee of Bombay Chamber of Commerce and Industry (BCCI). Mr. Vikamsey
is a director of Miloni Consultants Private Limited, HLB Technologies (Mumbai) Private
Limited and Chairman of HLB India.

Mr Sat Pal Khattar

Non Executive Director

India Infoline Ltd.

Mr Sat Pal Khattar, - Board member since April 2001 - Presidential Council of Minority Rights
member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life
trustee of SINDA, a non profit body, helping the under-privileged Indians in Singapore. He
joined the India Infoline board in April 2001. Mr Khattar is a Director of public and private
companies in Singapore, India and Hong Kong; Chairman of Guocoland Limited listed in
Singapore and its parent Guoco Group Ltd listed in Hong Kong, a leading property company of
Singapore, China and Malaysia. A Board member of India Infoline Ltd, Gateway Distriparks
Ltd — both listed — and a number of other companies he is also the Chairman of the Khattar
Holding Group of Companies with investments in Singapore, India, UK and across the world.

Mr Kranti Sinha

Independent Director

India Infoline Ltd.

Mr. Kranti Sinha — Board member since January 2005 — completed his masters from the Agra
University and started his career as a Class I officer with Life Insurance Corporation of India. He served
as the Director and Chief Executive of LIC Housing Finance Limited from August 1998 to December
2002 and concurrently as the Managing Director of LICHFL Care Homes (a wholly owned subsidiary
22
 of LIC Housing Finance Limited). He retired from the permanent cadre of the Executive Director of
LIC; served as the Deputy President of the Governing Council of Insurance Institute of India and as a
member of the Governing Council of National Insurance Academy, Pune apart from various other such
bodies. Mr. Sinha is also on the Board of Directors of Hindustan Motors Limited, Larsen & Toubro
Limited, LICHFL Care Homes Limited, Gremach Infrastructure Equipments and Projects Limited and
Cinemax (India) Limited.

Mr Arun K. Purvar

Independent Director

India Infoline Ltd.

Mr. A.K. Purvar – Board member since March 2008 – completed his Masters degree in commerce from
Allahabad University in 1966 and a diploma in Business Administration in 1967. Mr. Purwar joined the
State Bank of India as a probationary officer in 1968, where he held several important and critical
positions in retail, corporate and international banking, covering almost the entire range of commercial
banking operations in his illustrious career. He also played a key role in co-coordinating the work for
the Bank's entry into the field of insurance. After retiring from the Bank at end May 2006, Mr. Purwar
is now working as Member of Board of Governors of IIM-Lucknow, joined IIM–Indore as a visiting
professor, joined as a Hon.-Professor in NMIMS and he is also a member of Advisory Board for
Institute of Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. He has now taken over
as Chairman of IndiaVenture Advisors Pvt. Ltd., as well as IL & FS Renewable Energy Limited. He is
also working as Independent Director in leading companies in Telecom, Steel, Textiles, Autoparts,
Engineering and Consultancy.

Shabnam Bano

Branch Manager, Kota Branch

India Infoline Ltd.

Ms. Shabnam Bano, Branch Manager India Infoline Limited, Kota Branch. She started her
career from ICICI Personal Loans DST as a Sales Executive, After that she joined India Bulls
Securities Ltd. As Assistant Relationship Manager. In Jan 2007, she join India Infoline Ltd. as
Relationship Manager. Then she promoted as Branch Manager for Kota Branch of India Infoline
Ltd. She had diploma in Civil Engineering, and MBA in Finance. She is an excellent Team
Manager for her team. She is Mentor and guide in this project.
Pramod Vijay

Senior Relationship Manager,

India Infoline Ltd. Kota

23
Mr. Pramod Vijay Sr. Relation Manager, working at Kota Branch of India Infoline Ltd. He join
India Infoline as Marketing Executive in the year of 2006. After joining he continuously upgrade
himself and got promoted to the designation of Sr. Relation Manager. He got his graduation from
MDS University, Ajmer with flying colors. He always ready to lend a hand to his colleagues and
team members. He provides excellent guidance in the accomplishment of the project report.

COMPETITIVE ADVANTAGES
OF INDIA INFOLINE LTD.
24
Participant on the country’s premier exchange: INDIA INFOLINE LTD. is a member of the
country’s premier stock exchange – The National Stock Exchange of India (NSE).

Clearing membership on Capital & Derivatives segments: It has clearing memberships on

both the Capital Market and Derivatives segment of the exchange. We are also authorized to
trade the retail debt market.

Depository Participants with NSDL & CDSL: We are depository participants with the
country’s premier depository service - National Securities Depository Limited (NSDL), as well
as with the only other depository with a countrywide reach - Central Depository Services
Limited (CDSL).

Leading private sector bank as partner: Our banking partner is HDFC Bank, ICICI Bank, Citi
Bank, Bank of Baroda – The foremost private sector bank in the country, which has the most
technologically advanced infrastructure in the country, with Internet banking allowing access to
information 24 X 7.

Bloomberg Information Services: The world’s two best information services are Bloomberg
LP and Reuters. These are prohibitively expensive for all but mutual funds and financial
institutions to own terminals of, and subscribe to. We however have two connections to the
Bloomberg Information Service, the premier service, both in Delhi and Mumbai, and these
provide us information ahead of the general public, and at par with the financial institutions.

Access to breaking news from across the globe, and across asset classes, and superior research
and analysis capabilities.

Prime Office Locations: We have prime office locations in the nation’s political capital and the
business capital – Delhi and Mumbai, in the heart of the city.

Research Capabilities: We have a dedicated team of analysts in our Bombay office – They
provide fundamental analysis of stocks and markets, which are fundamentally strong, and
provide above market returns to investors, but over a slightly longer time frame – Typically 6
months and above.

Technical Analysis: A daily technical newsletter is published by our in-house technical analyst,
who is a recognized leading practitioner of the science. He has a success rate of over 73%. He
tracks the progress of the calls on a real-time basis, and advises of any change in the profit points
or stop loss levels.

. All Services under one roof: India has moved to a T+2 settlement system, where all
trades and settled on a rolling basis. However this gives the clients no time to arrange deliveries
to their broker, through a separate depository participant. INDIA INFOLINE LTD., being a
trading-clearing member, as well as a depository participant, allows seamless transfer of
securities under the same roof, with minimum delay, and constant monitoring

25
INDIA INFOLINE LTD. PORTFOLIO MANAGEMENT SERVICE

India Infoline Ltd. offers PMS to address varying investment preferences. As a focused service,
PMS pays attention to details, and portfolios are customized to suit the unique requirements of
investors.

India Infoline Ltd. PMS currently extends five portfolio management schemes - Panther,
Tortoise, Elephant, Caterpillar and Leo. Each scheme is designed keeping in mind the varying
tastes, objectives and risk tolerance of our investors

INVESTMENT AVENUES

There are a large number of investment avenues for savers

in India. Some of them are marketable and liquid, while others are

26
non-marketable. Some of them are highly risky while some others
are almost risk less.

Investment avenues can be broadly categorized under the

following heads:

Corporate securities

• Equity shares.
• Preference shares.
• Debentures/Bonds.
• Derivatives.
• Others.

Corporate Securities

Joint stock companies in the private sector issue corporate

securities. These include equity shares, preference shares, and
debentures. Equity shares have variable dividend and hence
belong to the high risk-high return category; preference shares
and debentures have fixed returns with lower risk.

The classification of corporate securities that can be chosen as

investment avenues can be depicted as shown below:

27
Equity Preferenc Bonds Warrant Derivative
e shares s s
Share

Equity shares

By investing in shares, investors basically buy the ownership

right to the company. When the company makes profits,
shareholders receive their share of the profits in the form of
dividends. In addition, when company performs well and the
future expectation from the company is very high, the price of the
company’s shares goes up in the market. This allows shareholders
to sell shares at a profit, leading to capital gains.

Investors can invest in shares either through primary market

offerings or in the secondary market.

The primary market has shown abnormal returns to

investors who subscribed for the public issue and were allotted
shares.

Stock Exchange:

In a stock exchange a person who wishes to sell his security

is called a seller, and a person who is willing to buy the particular
stock is called as the buyer. The rate of stock depends on the
simple law of demand and supply. If the demand of shares of

28
 company x is greater than its supply then its price of its security
increases.

In Online Exchange the trading is done on a computer

network. The sellers and buyers log on to the network and
propose their bids. The system is designed in such ways that at
any given instance, the buyers/sellers are bidding at the best
prices.

The transaction cycle for purchasing and selling shares

online is depicted below:

Tra
nsaction Cycle

Member/ Member/
Broking
firm. Broking
firm.
Stock
Exchange
Client Client

29
 Investment avenues

Non-marketable Financial Equity Shares

Assets

Bonds Money Market Instruments

Mutual Fund Schemes Life Insurance Policies

Real Estate Precious Objects

Financial Derivatives
Figure: INVESTMENT AVENUES

Non Marketable Financial Assets: A good portion of financial assets is represented by

non marketable financial assets. These can be classified in to the following broad categories.

 Bank
 Post office
 Company deposit
 Provident fund deposit

Equity share: Equity share represent the ownership capital. As an equity share holder, you
have an ownership stake in the company. This essentially means that you have an residual
interest in income and wealth. Perhaps the most romantic among various investment avenues,
equity share are classified in to the following broad categories by stock market analyst.

 Blue chip shares

 Growth shares
 Income shares
 Cyclical shares
 Speculative shares

30
Bonds: Bonds or debenture represent long term debt instruments. The issuer of bonds promises
to pay a stipulated stream of cash flow bond may be classified in to following securities

 Government securities.
 Government of India relief bonds
 PSU bonds
 Debenture of private sector companies
 Preference Shares

Money market instruments: Debt instruments which have a maturity of less than one year
at the time of issue are called money market instrument. The important money market
instruments are:

 Treasury bills
 Commercial papers
 Certificate of deposit

Mutual funds: Instead of directly buying the equity shares and fixed income securities, you
can participate in various schemes floated by mutual funds which invest in equity shares and
fixed income securities. There are three broad types of mutual fund scheme are

 Equity scheme
 Debt scheme
 Balance scheme

Life insurance: in a broad sense, life insurance may be viewed as an investment. Insurance
premium represent the sacrifice and the assured sum the benefit.

The important types of insurance policies in India are

 Endowment insurance policy

 Money back policy
 Team assurance policy

Real Estate: for the bulk of the investor the most important assets in their portfolio is a
residential house. in addition to residential house, the most affluent investor likely to be
interested in the following type of real estate.

 Agriculture land
 Semi urban land
 Time share in a holiday resort

31
Precious object: Precious object are the item that are generally small in size but highly
valuable in monetary terms. Some important precious objects are

 Gold and silver

 Precious stones
 Art object

Financial derivative: A Financial derivative is an instrument whose value is derived from

the value of an underline asserts. It may be viewed as a side bet on the asset. The most important
financial derivatives from the point of view of the investor are

 Option
 Future

INVESTMENT ALTERNATIVE: CHOICE GALORE

A confuse range of investment alter native is available. They fall in to broad categories. viz.
financial assets and real assets. Financial assets are paper or electronic claim on such issuer such
as government or the corporate body. The important financial assets are equity share, corporate
debenture, government securities, deposit wit policy, bank, mutual funds, shares insurance
policy, and derivative instrument, real assets are represented by tangible assets like a residential
house, a commercial property, an agricultural farm, gold precious stone and art object.

Although discussion is fairly up to date, the rapid change in the world of investment leads to the
creation of new investment alternatives. if you understand the basis characteristic of major
investment alternative currently available , you will have the background to understand new
alternative as they appear

NON MARETABLE FINANCIAL ASSETS

Bank Deposits:
A Bank account (SB account) is meant to promote the habit of saving among the people. It also
facilitates safekeeping of money. In this scheme fund is allowed to be withdrawn whenever
required, without any condition. Hence a savings account is a safe, convenient and affordable
way to save your money. Bank deposits are fairly safe because banks are subject to control of the
Reserve Bank of India with regard to several policy and operational parameters. Bank also pays
you a minimal interest for keeping your money with them. the interest rate of savings bank
account in India varies between 2.5% and 4%.

32
Post office term deposit:
A popular scheme of post office, deposits meant to provide regular month income to the
depositor’s .The silent features of this scheme are as follows:

1. Duration 8 years 7 months

2. Rate of Interest 8.25%

3. Who can invest ? i). An individual (above 18 years)

(ii). Two / three individuals in joint names.

(iii). A guardian on behalf of a minor.

(iv). A Trust for Denomination of certificates .

4. Withdrawal i). On maturity (8 years and 7 months)

(ii). Premature after 2 years and 6 months.

5..tax exemption with in certain limit u/s sol of income tax

Kisan Vikas Patra:

A scheme of post office has the following feature:

• Minimum Investment Rs. 500/- No maximum limit.

• Rate of interest 8.40% compounded annually.

• Money doubles in 8 years and 7 months.

• Two adults, Individuals and minor through guardian can purchase.

• Companies, Trusts, Societies and any other Institution not eligible to purchase.

• Non-Resident Indian/HUF are not eligible to purchase.

• Patras can be pledged as security against a loan to Banks/Govt. Institutions.

• Patras are transferable to any Post office in India.

• Patras are transferable from one person to another person before maturity

• Nomination facility available.

33
 • Facility of purchase/payment of Kisan vikas Patras to the holder of Power of attorney.

• Rebate under section 80 C not admissible.

• Interest income taxable but no TDS

National Savings Certificate: issued at post office:

National Savings Certificates (NSC) are certificates issued by department of post, Government
of India and are available at all post office counters in the country It is a long term safe savings
option for the investor. The scheme combines growth in money with reductions in tax liability as
per the provisions of the Income Tax Act, 1961.

Features of this scheme are

• Interest rate of 8% per annum payable monthly.

• Maturity period is 6 years.

• Minimum investment amount is Rs.1000/- or in multiple thereof.

• Maximum amount is Rs. 3 lacs in single account and Rs. 6 lacs in a joint account.

• Account can be opened by an individual, 2/3 adults jointly and a minor through a
guardian.

• Facility of premature closure of account after one year @ 3.50% discount.

• No deduction of 3.5% if account is closed on completion of three years.

• Rebate under section 80 C not admissible.

• Interest income is taxable, but no TDS .

• Deposits are exempt from Wealth

Public Provident Fund:

The Public Provident Fund Scheme is a statutory scheme of the Central Government of India.
Feature of this scheme are

 The Scheme is for 15 years.

 The rate of interest is 8% compounded annually.

 The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial year.

34
  The deposit can be in lumpsum or in convenient installments, not more than 12
Installments in a year or two installments in a month subject to total deposit of
Rs.70,000/-.

 A Power of attorney holder can neither open or operate a PPF The grand
father/mother cannot open a PPF behalf of their minor grand son/daughter.

 Pre-mature closure of a PPF Account is not permissible except in case of death.

 PPF account can be extend for any period in a block of 5 years on each time.

 Account is transferable from one Post office to another and from Post office

 Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.

 The interest on deposits is totally tax free. And deposits are exempt from wealth tax

COMPANY DEPOSIT

1. Non-banking Financial Company:

In terms of section 45 - I subsection (f) of Reserve Bank of India Act, 1934, Non Banking
Financial Company is defined as
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or lending in
any manner ;
(iii) such others non-banking institution or class of such institutions as the RBI may, with the
previous approval of the Central Government and by notification in the Official Gazette, specify)

Interest chart of different companies

Name of the Companies Rate of Interest %

Durations 12M 24M 36M 48M 60m

BAJAJ AUTO FINANCE LTD. - - 6.00 - -

CHOLAMANDALAM FIN. LTD. 6.00 6.50 7.00 - -

35
ESCORTS FINANCE LTD. 8.25 8.75 9.00 - -

FIRST LEASING COMPANYOF

6.50 7.50 8.00 8.00 8.00
INDIA LTD.

2. Finance Company:
Finance company means a company engaged in the business of financing, whether by making
loans or advances or otherwise, of any industry, commerce or agriculture and includes any
company engaged in the business of hire-purchase, lease financing and financing of housing.

HOUSING FINANCE COMPANIES ACCEPTING DEPOSITS

Debenture:
36
They are securities of fixed interests that are issued for long terms with an amortization period of
five or more years Non-financial private companies issue them although on certain occasion’s
banks, saving banks and government institutions will also issue them. The objective they go after
with the emission for the market of these securities is to attract great amounts of capital sums at
a less cost that if using other financial sources as is to go to banking institutions to ask for a loan.

MONEY MARET INSTRUMENT:

The Debt instruments which have the maturity of less than one year at the time of issue are called
Money market instruments. The important Money market Instrument are Treasury bills ,
Commercial paper, Certificates of deposits etc.

Treasury Bills:
The Treasury bills are short-term money market instrument that mature in a year or less than
that. The purchase price is less than the face value. At maturity the government pays the
Treasury Bill holder the full face value. The Treasury Bills are marketable, affordable and risk
free. The security attached to the treasury bills comes at the cost of very low returns.

Certificate of Deposit:

The certificates of deposit are basically time deposits that are issued by the commercial banks
with maturity periods ranging from 3 months to five years. The return on the certificate of
deposit is higher than the Treasury Bills because it assumes a higher level of risk.
Advantages of Certificate of Deposit as a money market instrument

 Since one can know the returns from before, the certificates of deposits are
considered much safe.

 One can earn more as compared to depositing money in savings account.

 They are very safe since the financial situation of the corporation can be anticipated
over a few months.

Banker's Acceptance: I
It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's
Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance
exports, imports and other transactions in goods. The banker's acceptance need not be held till
the maturity date but the holder has the option to sell it off in the secondary market whenever he
finds it suitable.
37
REPO:
The Repo or the repurchase agreement is used by the government security holder when he sells
the security to a lender and promises to repurchase from him overnight. Hence the Repos have
terms raging from 1 night to 30 days. They are very safe due government backing

BONDS
A bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged
to repay the principal and interest (the coupon) at a later date, termed maturity. Bonds and
stocks are both securities, but the major difference between the two is that stock-holders are the
owners of the company (i.e., they have an equity stake), whereas bond-holders are lenders to the
issuing company. Another difference is that bonds usually have a defined term, or maturity, after
which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a
consol bond, which is a perpetuity (i.e., bond with no maturity). Bonds are issued by public
authorities, credit institutions, companies and supranational institutions in the primary markets.
The most common process of issuing bonds is through underwriting. In underwriting, one or
more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer
and re-sell them to investors.

There are various types of bonds which are available in the market.

Convertible Bond
This lets a bondholder exchange a bond to a number of shares of the issuer’s common stock.

Exchangeable Bond
This allows for exchange to shares of a corporation other than the issuer.

Fixed Rate Bonds

which have a coupon that remains constant throughout the life of the bond

Zero Coupon Bonds

The bonds which do not pay any interest. They trade at a substantial discount from par value.
The bond holder receives the full principal amount as well as value that has accrued on the
redemption date. An example of zero coupon bonds are Series E savings bonds issued by the
U.S. government Zero coupon bonds may be created from fixed rate bonds by financial
institutions by "stripping off" the coupons. In other words, the coupons are separated from the
final principal payment of the bond and traded independently. .

Bearer Bond

38
The bonds which are an official certificate issued without a named holder. In other words, the
person who has the paper certificate can claim the value of the bond. Often they are registered by
a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky
because they can be lost or stolen.

Bonds Issued By Foreign Company

Some companies, banks, governments, and other sovereign entities may decide to issue bonds in
foreign currencies as it may appear to be more stable and predictable than their domestic
currency. Issuing bonds denominated in foreign currencies also gives issuers the ability to access
investment capital available in foreign markets. The proceeds from the issuance of these bonds
can be used by companies to break into foreign markets, or can be converted into the issuing
company's local currency to be used on existing operations. Foreign issuer bonds can also be
used to hedge Foreign exchange rate risk. Some of these bonds are called by their nicknames,
such as the "samurai bond."

RBI Relief Bonds

RBI Relief Bonds are instruments that are issued by the RBI, and currently carry an 8.5 per cent
rate of interest, which was reduced from 9 per cent early this year. The interest is compounded
half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the
hands of the investor. you can opt to receive interest either on a half-yearly basis or on maturity
of the instrument, along with the principal invested. If you opt for the first option, i.e., to receive
interest on a half-yearly basis, you will receive interest every six months from the date of issue of
the bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st July and
1st January each year.

The RBI Relief Bond continues to be one of the most popular investment instruments in the
country today. It is very attractive for a variety of reasons:

The Relief Bond comes closest to being risk free among all investment instruments.

Attractive interest rate of 8% pa for 5 years (as compared to a 10 year G-Sec which offers only
about 6.5%).The interest income is totally tax free.

Examples of relief bonds are:

a) Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b) Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961
c) RBI Tax Relief Bonds

MUTUAL FUND:

39
A mutual fund is simply a financial intermediary that allows a group of investors to pool their
money together with a predetermined investment objective. The mutual fund will have a fund
manager who is responsible for investing the pooled money into specific securities (usually
stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the
mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments
ever created because they are very cost efficient and very easy to invest in (you don't have to
figure out which stocks or bonds to buy. The ne t asset value of the fund is the cumulative
market value of the assets fund net of its ies. In other words, if the fund is dissolved or
liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would
collectively own. This gives rise to the concept of net asset value per unit, which is the value,
represented by the ownership of one unit in the fund.

It is calculated simply by dividing the net asset value of the fund by the number of units.
However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit".

Calculation Of NAV:

The most important part of the calculation is the valuation of the asset owned by the fund.
Once it is calculated, the NAV is simply the net value of assets divided by the number of units
outstanding. The detailed methodology for the calculation of the asset value is given below.

Asset value = sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

Expenses accrued but not paid

Details on the above items for liquid shares/debentures, valuation is done on the basis of the last
or closing market price on the principal exchange where the security is traded. Interest is
payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing
day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the
periodic interest payment with the number of days in each period. Thus, accrued interest on a
particular day is equal to the daily interest rate multiplied by the number of days since the last
interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become due on
the record date. There is a gap between the dates on which it becomes due and the actual
payment date. In the intermediate period, it is deemed to be "accrued". Expenses including
management fees, custody charges etc.

40
BENEFITS OF INVESTING IN MUTUAL FUNDS:

Professional management:

Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme.

Diversification:
Mutual Funds invest in a number of companies across a broad cross-section of industries and
sectors. This diversification reduces the risk because seldom do all stocks decline at the same
time and in the same proportion. You achieve this diversification through a Mutual Fund with far
less money than you can do on your own.

Convenient Administration:

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad
deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save
your time and make investing easy and convenient

Return Potential:

Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they
invest in a diversified basket of selected securities.

Low Costs

Mutual Funds are a relatively less expensive way to invest compared to directly investing in the
capital markets because the benefits of scale in brokerage, custodial and other fees translate into
lower costs for investors.

Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related prices
from the Mutual Fund. In closed-end schemes, the units can be the units can be sold on a stock
exchange at the prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.

Transparency

41
You get regular information on the value of your investment in addition to disclosure on the
specific investments made by your scheme, the proportion invested in each class of assets and
the fund manager's investment strategy and outlook.

Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically invest or withdraw funds according to your needs and
convenience.

Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
because of its large corpus allows even a small investor to take the benefit of its investment
strategy.

Choice Of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are
regularly monitored by SEBI

Types of Mutual Fund

Mutual fund schemes may be classified on the basis of its structure and its investment objective.
By Structure: they are two types of Mutual Funds

Open-ended Funds:

An open-end fund is one that is available for subscription all through the year. These do not have
a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV")
related prices. The key feature of open-end schemes is liquidity.

.The fund is open for subscription only during a specified period. 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 they 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

42
through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one
of the two exit routes is provided to the investor.

Closed-ended Funds:

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years.
The fund is open for subscription only during a specified period. 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 they 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.

Interval Funds:

Interval funds combine the features of open-ended and close endedschemes. They are open for
sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective:

Different types of funds are available in the market some of them are discussed over here

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a majority of their corpus in equities. It has been proven that returns
from stocks, have outperformed most other kind of investments held over the long term. Growth
schemes are ideal for investors having a long-term outlook seeking growth over a period of time.

Income Funds

The aim of income funds is to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures and Government
securities. Income Funds are ideal for capital stability and regular income.

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

43
securities in the proportion indicated in their offer documents. In a rising stock market, the NAV
of these schemes may not normally keep pace, or fall equally when the market falls. These are
ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate
income. These schemes generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes
may fluctuate depending upon the interest rates prevailing in the market. These are ideal for
Corporate and individual investors as a means to park their surplus funds for short periods.

Load Funds

A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or
sell units in the fund, a commission will be payable. Typically entry and exit loads range from
1% to 2%. It could be worth paying the load, if the fund has a good performance history.

No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no load fund
is that the entire corpus is put to work.

MEASURING EXPECTED RETURN AND RISK

Risk premiums
Investor assume risk so that they are rewarded in the form of higher return. Hence risk premium
may be defined as the additional return investor expect to get , investor earned in the past, for
assuming additional risk . risk premium may be calculated between two classes of securities that
differ in their risk level.

There are three well known risk premiums:

Equity Risk Premium: equity stocks as a class and the risk free rate represented commonly
by the return on treasury bills.

44
Bond Origin Premium: This is the difference between the return on long term government
bonds and the return on treasury bills.

Bond Default Premium: This is the difference between the return on long term scorporate
bonds (which have some probability of default) and the return on long term government bonds
(which are free from default risk) .

SECURITY ANALYSIS AND VALUATIONS

1. FUNDAMENTAL ANALYSIS

A method of evaluating a security by attempting to measure its intrinsic value by examining

related economic, financial and other qualitative and quantitative factors. Fundamental analysts
attempt to study everything that can affect the security's value, including macroeconomic factors
(like the overall economy and industry conditions) and individually specific factors (like the
financial condition and management of companies).
The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price in hopes of figuring out what sort of position to take
with that security (under priced = buy, overpriced = sell or short).

For example, an investor can perform fundamental analysis on a bond's value by looking at
economic factors, such as interest rates and the overall state of the economy, and information
about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this
method uses revenues, earnings, future growth, return on equity, profit margins and other data to
determine a company's underlying value and potential for future growth. In terms of stocks,
fundamental analysis focuses on the financial statements of a the company being evaluated.

The biggest part of fundamental analysis involves delving into the financial statements. Also
known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and
all the other financial aspects of a company. Fundamental analysts look at this information to
gain insight on a company's future performance. A good part of this tutorial will be spent
learning about the balance sheet, income statement, cash flow statement and how they all fit
together.
45
When talking about stocks, fundamental analysis is a technique that attempts to determine a
security’s value by focusing on underlying factors that affect a company's actual business and its
future prospects. On a broader scope, you can perform fundamental analysis on industries or the
economy as a whole. The term simply refers to the analysis of the economic well-being of a
financial entity as opposed to only its price movements.

Why fundamental analysis :

• Is the company’s revenue growing?

• Is it actually making a profit?
• Is it in a strong-enough position to beat out its competitors in the future?
• Is it able to repay its debts?
• Is management trying to "cook the books"?

Fundamentals: Quantitative and Qualitative

The various fundamental factors can be grouped into two categories: quantitative and
qualitative. The financial meaning of these terms isn’t all that different from their regular
definitions.
Qualitative – It is related to or based on the quality or character of something, often
as opposed to its size or quantity.
These are the less tangible factors surrounding a business - things such as the quality of a
company’s board members and key executives, its brand-name recognition, patents or
proprietary technology

Quantitative – Quantitative fundamentals are numeric, measurable characteristics

about a business. It’s easy to see how the biggest source of quantitative data is the
financial statements. You can measure revenue, profit, assets and more with great
precision.

QUALITATIVE FACTORS :

The Industry
46
Each industry has differences in terms of its customer base, market share among firms, industry-
wide growth, competition, regulation and business cycles. Learning about how the industry
works will give an investor a deeper understanding of a company's financial health.
Customers

Some companies serve only a handful of customers, while others serve millions. In general, it's a
red flag (a negative) if a business relies on a small number of customers for a large portion of its
sales because the loss of each customer could dramatically affect revenues.

Market Share
Understanding a company's present market share can tell volumes about the company's business.
The fact that a company possesses an 85% market share tells you that it is the largest player in its
market by far. Furthermore, this could also suggest that the company possesses some sort of
"economic moat," in other words, a competitive barrier serving to protect its current and future
earnings, along with its market share. Market share is important because of economies of scale.
When the firm is bigger than the rest of its rivals, it is in a better position to absorb the high fixed
costs of a capital-intensive industry.

Industry Growth
One way of examining a company's growth potential is to first examine whether the amount of
customers in the overall market will grow. This is crucial because without new customers, a
company has to steal market share in order to grow.
In some markets, there is zero or negative growth, a factor demanding careful consideration.

Competition
Simply looking at the number of competitors goes a long way in understanding the competitive
landscape for a company. Industries that have limited barriers to entry and a large number of
competing firms create a difficult operating environment for firms. One of the biggest risks
within a highly competitive industry is pricing power. This refers to the ability of a supplier to
increase prices and pass those costs on to customers. Companies operating in industries with few
alternatives have the ability to pass on costs to their customers.

A great example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-
Mart practically sets the price for any of the suppliers wanting to do business with them. If you

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want to sell to Wal-Mart, you have little, if any, pricing power.

Regulation
Certain industries are heavily regulated due to the importance or severity of the industry's
products and/or services. As important as some of these regulations are to the public, they can
drastically affect the attractiveness of a company for investment purposes.

GDP

The monetary value of all the finished goods and services produced within a country's
borders in a specific time period, though GDP is usually calculated on an annual basis. It
includes all of private and public consumption, government outlays, investments and exports less
imports that occur within a defined territory.

GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX
= Exports - Imports)

Inflation:

The rate at which the general level of prices for goods and services is rising, and, subsequently,
purchasing power is falling. As the inflation rises, every dollar will buy a smaller percentage of
a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

Most countries' central banks will try to sustain an inflation rate of 2-3%.

QUANTITATIVE FACTORS :

Financial Statements

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Financial statements are the medium by which a company discloses information concerning its
financial performance. Followers of fundamental analysis use the quantitative information
gleaned from financial statements to make investment decisions. Before we jump into the
specifics of the three most important financial statements - income statements, balance sheets
and cash flow statements - we will briefly introduce each financial statement's specific function,
along with where they can be found.

The Balance Sheet

The balance sheet represents a record of a company's assets, liabilities and equity at a particular
point in time. The balance sheet is named by the fact that a business's financial structure balances
in the following manner:

Assets = Liabilities + Shareholders' Equity

Assets represent the resources that the business owns or controls at a given point in time. This
includes items such as cash, inventory, machinery and buildings. The other side of the equation
represents the total value of the financing the company has used to acquire those assets.
Financing comes as a result of liabilities or equity. Liabilities represent debt (which of course
must be paid back), while equity represents the total value of money that the owners have
contributed to the business - including retained earnings, which is the profit made in previous
years.

The Income Statement

While the balance sheet takes a snapshot approach in examining a business, the income
statement measures a company's performance over a specific time frame. Technically, you could
have a balance sheet for a month or even a day, but you'll only see public companies report
quarterly and annually.
The income statement presents information about revenues, expenses and profit that was
generated as a result of the business' operations for that period.

Statement of Cash Flows

The statement of cash flows represents a record of a business' cash inflows and outflows over a

49
period of time. Typically, a statement of cash flows focuses on the following cash-related
activities:

• Operating Cash Flow (OCF): Cash generated from day-to-day business operations
• Cash from investing (CFI): Cash used for investing in assets, as well as the
proceeds from the sale of other businesses, equipment or long-term assets
• Cash from financing (CFF): Cash paid or received from the issuing and borrowing
of funds

The cash flow statement is important because it's very difficult for a business to manipulate its
cash situation. There is plenty that aggressive accountants can do to manipulate earnings, but it's
tough to fake cash in the bank. For this reason some investors use the cash flow statement as a
more conservative measure of a company's performance.

Balance Sheet's Main Three

Assets, liability and equity are the three main components of the balance sheet. Carefully
analyzed, they can tell investors a lot about a company's fundamentals.

Assets

There are two main types of assets: current assets and non-current assets. Current assets are
likely to be used up or converted into cash within one business cycle - usually treated as twelve
months. Three very important current asset items found on the balance sheet are: cash,
inventories and accounts receivables.
Investors normally are attracted to companies with plenty of cash on their balance sheets. After
all, cash offers protection against tough times, and it also gives companies more options for
future growth. Growing cash reserves often signal strong company performance. Indeed, it
shows that cash is accumulating so quickly that management doesn't have time to figure out how
to make use of it

Liabilities
There are current liabilities and non-current liabilities. Current liabilities are obligations the firm
must pay within a year, such as payments owing to suppliers. Non-current liabilities, meanwhile,
represent what the company owes in a year or more time. Typically, non-current liabilities
represent bank and bondholder debt.
You usually want to see a manageable amount of debt. When debt levels are falling, that's a good
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sign. Generally speaking, if a company has more assets than liabilities, then it is in decent
condition. By contrast, a company with a large amount of liabilities relative to assets ought to be
examined with more diligence. Having too much debt relative to cash flows required to pay for
interest and debt repayments is one way a company can go bankrupt.

Equity

Equity represents what shareholders own, so it is often called shareholder's equity. As described
above, equity is equal to total assets minus total liabilities.

Equity = Total Assets – Total Liabilities

The two important equity items are paid-in capital and retained earnings. Paid-in capital is the
amount of money shareholders paid for their shares when the stock was first offered to the
public. It basically represents how much money the firm received when it sold its shares. In other
words, retained earnings are a tally of the money the company has chosen to reinvest in the
business rather than pay to shareholders. Investors should look closely at how a company puts
retained capital to use and how a company generates a return on it.
Most of the information about debt can be found on the balance sheet - but some assets and debt
obligations are not disclosed there. For starters, companies often possess hard-to-measure
intangible assets. Corporate intellectual property (items such as patents, trademarks, copyrights
and business methodologies), goodwill and brand recognition are all common assets in today's
marketplace. But they are not listed on company's balance sheets.
There is also off-balance sheet debt to be aware of. This is form of financing in which large
capital expenditures are kept off of a company's balance sheet through various classification
methods. Companies will often use off-balance-sheet financing to keep the debt levels low. Ther
some fundamental ratios to analysis the investment. Some of them are follows.

Profitability Ratios:

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A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time. For
most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well.

ratio of profitability calculated as net income divided by revenues, or net profits divided by sales.
It measures how much out of every dollar of sales a company actually keeps in earnings.

Profit margin
Profit margin is very useful when comparing companies in similar industries. A higher profit
margin indicates a more profitable company that has better control over its costs compared to its
competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means
the company has a net income of $0.20 for each dollar of sales.

Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are
good, but an increase does not mean that the profit margin of a company is improving. For
instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower
profit margin. This is an indication that costs need to be under better control.

Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

For example, if a company is currently trading at rs.43 a share and earnings over the last 12
months were Rs.1.95 per share, the P/E ratio for the stock would be 22.05 (Rs.43/ Rs 1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the
estimates of earnings expected in the next four quarters (projected or forward P/E). A third

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variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

It would not be useful for investors using the P/E ratio as a basis for their investment to compare
the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has
much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are
willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of
20, the interpretation is that an investor is willing to pay Rs. 20 for Rs 1 of current earnings

Return on Equity – ROE

A measure of a corporation's profitability that reveals how much profit a company generates with
the money shareholders have invested.

Calculated as:

The ROE is useful for comparing the profitability of a company to that of other firms in the
same industry.

There are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the formula above by
subtracting preferred dividends from net income and subtracting preferred equity from
shareholders' equity, giving the following: return on common equity (ROCE) = net income -
preferred dividends / common equity.
2. Return on equity may also be calculated by dividing net income by average shareholders'
equity. Average shareholders' equity is calculated by adding the shareholders' equity at the
beginning of a period to the shareholders' equity at period's end and dividing the result by two.

Earnings per Share – EPS

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The portion of a company's profit allocated to each outstanding share of common stock. EPS
serves as an indicator of a company's profitability.

Calculated as:

In the EPS calculation, it is more accurate to use a weighted average number of shares
outstanding over the reporting term, because the number of shares outstanding can change over
time

For example, assume that a company has a net income of rs.25 million. If the company pays out
$1 million in preferred dividends and has 10 million shares for half of the year and 15 million
shares for the other half, the EPS would be or example, assume that a company has a net income
of rs.25 million. If the company pays out or example, assume that a company has a net income of
rs.25 million. If the company pays out rs.1 million in preferred dividends and has 10 million
shares for half of the year and 15 million shares for the other half, the EPS would be rs.1.92
(24/12.5). First, the rs.1 million is deducted from the net income to get rs.24 million, then a
weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M =
12.5M).

An important aspect of EPS that's often ignored is the capital that is required to generate the
earnings (net income) in the calculation.

LIQUIDITY RATIO

A class of financial metrics that is used to determine a company's ability to pay off its short-
terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of
safety that the company possesses to cover short-term debts.

Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow
ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some
analysts will calculate only the sum of cash and equivalents divided by current liabilities
because they feel that they are the most liquid assets, and would be the most likely to be used to
cover short-term debts in an emergency.
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Current ratio

A liquidity ratios are that measures a company's ability to pay short-term obligations.

Calculated as:

The higher the current ratio, the more capable the company is of paying its obligations. A ratio
under 1 suggests that the company would be unable to pay off its obligations if they came due at
that point. While this shows the company is not in good financial health, it does not necessarily
mean that it will go bankrupt - as there are many ways to access financing - but it is definitely
not a good sign.

Other ratio:

Stockholders' Equity Ratio

Stockholders' Equity Ratio = Stockholders' Equity

Total Assets

Relative financial strength and long-run liquidity are approximated with this calculation. A low
ratio points to trouble, while a high ratio suggests you will have less difficulty meeting fixed
interest charges and maturing debt obligations.

Total Debt to Net Worth

Total Debt to Net Worth Ratio = Current + Deferred Debt

Tangible Net Worth

Rarely should your business's total liabilities exceed its tangible net worth. If it does, creditors
assume more risk than stockholders. A business handicapped with heavy interest charges will
likely lose out to its better financed competitors.

DERIVATIVES

A Financial Instrument that derives its value from an underlying security. In other words, a
derivative is a financial instrument that is derived from an underlying asset's value; rather than
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trade or exchange the asset itself, market participants enter into an agreement to exchange
money, assets or some other value at some future date based on the underlying asset. Examples
of assets could be anything from bars of gold, to a stock, or even an interest rate. A simple
example is a futures contract: an agreement to exchange the underlying asset (or equivalent cash
flows) at a future date. The exact terms of the derivative (the payments between the
counterparties) depend on, but may or may not exactly correspond to, the behavior or
performance of the underlying asset.

Why Derivatives?

• The advantage of derivatives are two: leverage and liquidity

• The uses are three: speculation, hedging and arbitrage.

USAGES

Insurance and hedging

One use of derivatives is as a tool to transfer risk. For example, farmers can sell futures contracts
on a crop to a speculator before the harvest. The farmer offloads (or hedges) the risk that the
price will rise or fall, and the speculator accepts the risk with the possibility of a large reward.
The farmer knows for certain the revenue he will get for the crop that he will grow; the
speculator will make a profit if the price rises, but also risks a loss if the price falls.

It is not uncommon for farmers to walk away smiling when they have lost out in the derivatives
market as the result of a hedge. In this case, they have profited from the real market from the sale
of their crops. Contrary to popular belief, financial markets are not always a zero-sum game.
This is an example of a situation where both parties in a financial markets transaction benefit.

Speculation and arbitrage

Of course, speculators may trade with other speculators as well as with hedgers. In most
financial derivatives markets, the value of speculative trading is far higher than the value of true
hedge trading. As well as outright speculation, derivatives traders may also look for arbitrage
opportunities between different derivatives on identical or closely related underlying securities.

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Derivatives such as options, futures, or swaps, generally offer the greatest possible reward for
betting on whether the price of an underlying asset will go up or down.

Other uses of derivatives are to gain an economic exposure to an underlying security in situations
where direct ownership of the underlying is too costly or is prohibited by legal or regulatory
restrictions, or to create a synthetic short position.

In addition to directional plays (i.e. simply betting on the direction of the underlying security),
speculators can use derivatives to place bets on the volatility of the underlying security. This
technique is commonly used when speculating with traded options.

Types of Derivatives

• Forwards
• Futures
• Options

FORWARDS : A forward contract is an agreement between two parties to buy or sell an asset
(which can be of any kind) at a pre-agreed future point in time. Therefore, the trade date and
delivery date are separated. It is used to control and hedge risk, for example currency exposure
risk (e.g. forward contracts on USD or EUR) or commodity prices (e.g. forward contracts on oil).

One party agrees to sell, the other to buy, for a forward price agreed in advance. In a forward
transaction, no actual cash changes hands. If the transaction is collaterised, exchange of margin
will take place according to a pre-agreed rule or schedule. Otherwise no asset of any kind
actually changes hands, until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot price, which is the
price at which the asset changes hands (on the spot date, usually two business days). The
difference between the spot and the forward price is the forward premium or forward discount.A
standardized forward contract that is traded on an exchange is called a futures contract.

The forward price of such a contract is commonly contrasted with the spot price, which is the
price at which the asset changes hands (on the spot date, usually two business days). The
difference between the spot and the forward price is the forward premium or forward discount.

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Futures A standardized forward contract that is traded on an exchange is called a futures
contract.

What It Is:

Futures are financial contracts giving the buyer an obligation to purchase an asset (and the seller
an obligation to sell an asset) at a set price at a future point in time.
The assets often traded in futures contracts include commodities, stocks, and bonds. Grain,
precious metals, electricity, oil, beef, orange juice, and natural gas are traditional examples of
commodities, but foreign currencies, emissions credits, bandwidth, and certain financial
instruments are also part of today's commodity markets.There are two kinds of futures traders:

HEDGERS AND SPECULATORS

Hedgers do not usually seek a profit by trading commodities futures but rather seek to stabilize
the revenues or costs of their business operations. Their gains or losses are usually offset to some
degree by a corresponding loss or gain in the market for the underlying physical commodity.

Speculators are usually not interested in taking possession of the underlying assets. They
essentially place bets on the future prices of certain commodities. Thus, if you disagree with the
consensus that wheat prices are going to fall, you might buy a futures contract. If your prediction
is right and wheat prices increase, you could make money by selling the futures contract (which
is now worth a lot more) before it expires (this prevents you from having to take delivery of the
wheat as well). Speculators are often blamed for big price swings, but they also provide liquidity
to the futures market.
Futures contracts are standardized, meaning that they specify the underlying commodity's
quality, quantity, and delivery so that the prices mean the same thing to everyone in the market.
For example, each kind of crude oil (light sweet crude, for example) must meet the same quality
specifications so that light sweet crude from one producer is no different from another and the
buyer of light sweet crude futures knows exactly what he's getting.

Futures exchanges depend on clearing members to manage the payments between buyer and
seller. They are usually large banks and financial services companies. Clearing members
guarantee each trade and thus require traders to make good-faith deposits (called margins) in
order to ensure that the trader has sufficient funds to handle potential losses and will not default

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on the trade. The risk borne by clearing members lends further support to the strict quality,
quantity, and delivery specifications of futures contracts.

REGULATION: The Commodity Futures Trading Commission (CFTC) regulates commodities

futures trading through its enforcement of the Commodity Exchange Act of 1974 and the
Commodity Futures Modernization Act of 2000. The CFTC works to ensure the competitiveness,
efficiency, and integrity of the commodities futures markets and protects against manipulation,
abusive trading, and fraud.

FUTURES EXCHANGE: There are several futures exchanges. Common ones include The
New York Mercantile Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange,
the Chicago Board of Options Exchange, the Chicago Climate Futures Exchange.

Why It Matters:

Futures are a great way for companies involved in the commodities industries to stabilize their
prices and thus their operations and financial performance. Futures give them the ability to "set"
prices or costs well in advance, which in turn allows them to plan better, smooth out cash flows,
and communicate with shareholders more confidently.

Futures’ trading is a zero-sum game; that is, if somebody makes a million dollars, somebody
else loses a million dollars. Because futures contracts can be purchased on margin, meaning that
the investor can buy a contract with a partial loan from his or her broker, futures traders have an
incredible amount of leverage with which to trade thousands or millions of dollars worth of
contracts with very little of their own money. These are similar to forwards in length of time.
However, profits and losses are recognized at the close of business daily, “Mark-to-
market.” Transactions go through a clearinghouse to reduce default risk. 90% of all futures
contracts are delivered to someone other than the original buyer.

OPTIONS

Options are types of derivative contracts, including call options and put options, where the future
payoffs to the buyer and seller of the contract are determined by the price of another security,
such as a common stock. More specifically, a call option is an agreement in which the buyer
(holder) has the right (but not the obligation) to exercise by buying an asset at a set price (strike
price) on (for a European style option) or not later than (for an American style option) a future
59
date (the exercise date or expiration); and the seller (writer) has the obligation to honor the terms
of the contract. A put option is an agreement in which the buyer has the right (but not the
obligation) to exercise by selling an asset at the strike price on or before a future date; and the
seller has the obligation to honor the terms of the contract.

Since the option gives the buyer a right and the writer an obligation, the buyer pays the option
premium to the writer. The buyer is considered to have a long position, and the seller a short
position. For every open contract there is a buyer and a seller.

An Option is the right, not the obligation to buy or sell an underlying instrument.

OPTION TERMS

• Put: the right to sell @ a certain price

• Call: the right to buy @ a certain price
• Long: to purchase the option
• Short: to sell or write the option
• Bullish: feel the value will increase
• Bearish: feel the value will decrease
• Strike/Exercise Price: Price the option can be bought or sold.

Important terms in options

1. Strike Price - This is the stated price per share for which an underlying stock may be
purchased (for a call) or sold (for a put) upon the exercise of the option contract.
2. Expiry Date - This is the termination date of an option contract.
3. Volume - This indicates the total number of options contracts traded for the day.
4. Bid - This indicates the price someone is willing to pay for the options contract.
5. Ask - This indicates the price at which someone is willing to sell an options contract.
6. Open Interest - This is the number of options contracts that are open; these are contracts
that have neither expired nor been exercised.
7. Underlying Security- An equity option's underlying security is the stock that will change
hands when the option is exercised. An option is classified as a derivative security
because its value is derived from the value and characteristics of this underlying stock

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 8. Unit of Trade- An option's unit of trade (which is sometimes referred to as its contract
size) is simply the number of shares that change hands when its holder chooses to
exercise the contract. Generally this unit is a standardized 100 shares of the option's
underlying stock.
Opportunities for Investors in Options

1. Flexibility. Options can be used in a wide variety of strategies, from conservative to

high-risk, and can be tailored to more expectations than simply "the stock will go up" or
"the stock will go down."
2. Leverage. An investor can gain leverage in a stock without committing to a trade.
3. Limited Risk and unlimited returns. Risk is limited to the option premium (except
when writing options for a security that is not already owned).
4. Hedging. Options allow investors to protect their positions against price fluctuations
when it is not desirable to alter the underlying position.

Risks for Investors in Options Trading

1. Costs: The costs of trading options (including both commissions and the bid/ask spread)
is significantly higher on a percentage basis than trading the underlying stock, and these
costs can drastically eat into any profits.
2. Liquidity: With the vast array of different strike prices available, some will suffer from
very low liquidity making trading difficult.
3. Complexity: Options are very complex and require a great deal of observation and
maintenance.
4. Time decay: The time-sensitive nature of options leads to the result that most options
expire worthless. This only applies to those traders that purchase options - those selling
collect the premium but with unlimited risk some option positions, such as writing
uncovered options, are accompanied by unlimited risk.

Option are two types ie. calls and put

Calls : A call option is a financial contract between two parties, the buyer and theseller of this
type of option. Often it is simply labeled a "call". The buyer of the option has the right, but not
the obligation to buy an agreed quantity of a particular commodity or financial instrument (the
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underlying instrument) from the seller of the option at a certain time (the expiration date) for a
certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or
financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this
right.

The buyer of a call option wants the price of the underlying instrument to rise in the future; the
seller either expects that it will not, or is willing to give up some of the upside (profit) from a
price rise in return for (a) the premium (paid immediately) plus (b) retaining the opportunity to
make a gain up to the strike price (see below for examples).

Call options are most profitable for the buyer when the underlying instrument is moving up,
making the price of the underlying instrument closer to the strike price. When the price of the
underlying instrument surpasses the strike price, the option is said to be "in the money".

The initial transaction in this context (buying/selling a call option) is not the supplying of a
physical or financial asset (the underlying instrument). Rather it is the granting of the right to
buy the underlying asset, in exchange for a fee - the option price or premium.

Exact specifications may differ depending on option style. A European call option allows the
holder to exercise the option (i.e., to buy) only on the option expiration date. An American call
option allows exercise at any time during the life of the option.

Call options can be purchased on many financial instruments other than stock in a corporation -
options can be purchased on futures on interest rates, for example (see interest rate cap) - as well
as on commodities such as gold or crude oil. A tradeable call option should not be confused with
either Incentive stock options or with a warrant. An incentive stock option, the option to buy
stock in a particular company, is a right granted by a corporation to a particular person (typically
executives) to purchase treasury stock. When an incentive stock option is exercised, new shares
are issued. Incentive stock options are not traded on the open market. In contrast, when a call
option is exercised, the underlying asset is transferred from one owner to another.

Buy a call: buyer expects that the price may go up.

Pays a premium that buyer will never get back.
Buyer has the right to exercise the option at the strike price.

Write a call: writer receives the premium..

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 if buyer decides to exercise the option,
writer has to sell the stock at the strike price.

Example of a call option on a stock:

An investor buys a call on a stock with a strike price of 50 and an option expiration date of June
16, 2006 and pays a premium of 5 for this call option. The current price is 40. Assume that the
share price (the spot price) rises, and is 60 on the strike date.

The investor would exercise the option (i.e., buy the share from the counter-party), and could
then hold the share, or sell it in the open market for 60. The profit would be 10 minus the fee
paid for the option, 5, for a net profit of 5.

The investor has thus doubled his money, having paid 5 and ending up with 10.

If however the share price never rises to 50 (that is, it stays below the strike price) up through the
exercise date, then the option would expire as worthless. The investor loses the premium of 5.

Thus, in any case, the loss is limited to the fee (premium) initially paid to purchase the stock,
while the potential gain is theoretically unlimited (consider if the share price rose to 100).From
the viewpoint of the seller, if the seller thinks the stock is a good one, (s)he is better (in this case)
by selling the call option, should the stock in fact rise. However, the strike price (in this case, 50)
limits the seller's profit. In this case, the seller does realize the profit up to the strike price (that is,
the 10 rise in price, from 40 to 50, belongs entirely to the seller of the call option), but the
increase in the stock price thereafter goes entirely to the buyer of the call option.

Prior to exercise, the option value, and therefore price, varies with the underlying price and with
time. The call price must reflect the "likelihood" or chance of the option "finishing in-the-
money". The price should thus be higher with more time to expiry (except in cases when a
significant dividend is present) and with a more volatile underlying instrument. The buyer and
seller must agree on the initial value (the premium), otherwise the exchange (buy/sell) of the
option will not take place.(Option Premium)

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 Fig.3.4 call option graph

Buying a call option : This is a graphical interpretation of the payoffs and profits generated by a
call option as seen by the buyer. A higher stock price means a higher profit. Eventually, the price
of the underlying security will be high enough to fully compensate for the price of the option.

fig.3.5 call option graph

Writing a call option - This is a graphical interpretation of the payoffs and profits generated
by a call option as seen by the writer of the option. Profit is maximized when the strike price
exceeds the price of the underlying security, because the option expires worthless and the writer
keeps the premium.

Long a call. Person buys the right (a contract) to buy an asset at a cretin price. They feel that
the price in the future will exceed the strike price. This is a Bullish position.

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Short a Call. Person sells the right (a contract) to someone that allows them to buy a asset at a
cretin price. The writer feels that the asset will devalue over the time period of the contract.
This person is Bearish on that asset.

PUTS : A put option (sometimes simply called a "put") is a financial contract between two
parties, the buyer and the writer (seller) of the option. The put allows the buyer the right but not
the obligation to sell a commodity or financial instrument (the underlying instrument) to the
writer (seller) of the option at a certain time for a certain price (the strike price). The writer
(seller) has the obligation to purchase the underlying asset at that strike price, if the buyer
exercises the option.

Note:That the writer of the option is agreeing to buy the underlying asset if the buyer exercises
the option. In exchange for having this option, the buyer pays the writer (seller) a fee (the
premium). (Note: Although option writers are frequently referred to as sellers, because they
initially sell the option that they create, thus taking a short position in the option, they are not the
only sellers. An option holder can also sell his

long position in the option. However, the difference between the two sellers is that the option
writer takes on the legal obligation to buy the underlying asset at the strike price, whereas the
option holder is merely selling his long position, and is not contractually obligated by the sold
option.)

Exact specifications may differ depending on option style. A European put option allows the
holder to exercise the put option for a short period of time right before expiration. An American
put option allows exercise at any time during the life of the option.

The most widely-known put option is for stock in a particular company. However, options are
traded on many other assets: financial - such as interest rates (see interest rate floor) - and
physical, such as gold or crude oil.

The put buyer either believes its likely the price of the underlying asset will fall by the exercise
date, or hopes to protect a long position in the asset. The advantage of buying a put over shorting
the asset is that the risk is limited to the premium. The put writer does not believe the price of the
underlying security is likely to fall. The writer sells the put to collect the premium. Puts can also
be used to limit portfolio risk, and may be part of an option spread

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Buy a Put: Buyer thinks price of a stock will decrease.
Pay a premium which buyer will never get back.
The buyer has the right to sell the at strike price.
Write a put: Writer receives a premium, if buyer exercises the Option, writer will buy the
stock at strike price, If buyer does not exercise the option,
Writer’s profit is premium

Example of a put option on a stock

I purchase a put contract to sell 100 shares of XYZ Corp. for 50. The current price is 55, and I
pay a premium of 5. If the price of XYZ stock falls to 40 per share right before expiration, then I
can exercise my put by buying 100 shares for 4,000, then selling it to a put writer for 5,000. My
total profit would equal 500 (5,000 from put writer - 4,000 for buying the stock - 500 for buying
the put contract of 100 shares at 5 per share, excluding commissions).

If, however, the share price never drops below the strike price (in this case, 50), then I would not
exercise the option. (Why sell a stock to someone at 50, the strike price, if it would cost me more
than that to buy it?) My option would be worthless and I would have lost my whole investment,
the fee (premium) for the option contract, 500 (5 per share, 100 shares per contract). My total
loss is limited to the cost of the put premium plus the sales commission to buy it.

This example illustrates that the put option has positive monetary value when the underlying
instrument has a spot price (S) below the strike price (K).

Prior to exercise, the option value, and therefore price, varies with the underlying price and with
time. The put price must reflect the "likelihood" or chance of the option "finishing in-the-
money". The price should thus be higher with more time to expiry, and with a more volatile
underlying instrument. The buyer and seller must agree on this value initially.

Buying a put option - This is a graphical interpretation of the payoffs and profits generated
by a put option as seen by the buyer of the option. A lower stock price means a higher profit.
Eventually, the price of the underlying security will be low enough to fully compensate for the
price of the option.

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 fig.3.6 :buy option graph

Writing a put option - This is a graphical interpretation of the payoffs and profits generated
by a put option as seen by the writer of the option. Profit is maximized when the price of the
underlying security exceeds the strike price, because the option expires worthless and the writer
keeps the premium.

Long a Put. Buy the right to sell an asset at a pre-determined price. You feel that the asset will
devalue over the time of the contract. Therefore you can sell the asset at a higher price than is
the current market value. This is a bearish position.

Short a Put. Sell the right to someone else. This will allow them to sell the asset at a specific
price. They feel the price will go down and you do not. This is a bullish position.

What is the difference between a futures contract and a forward

contract

Both a futures contract and a forward contract are used to hedge investments. They trade
securities, currencies, or commodities contracts that settle on a future date. Since the
trading is of contracts and not the actual instruments these trades are referred to as
derivative trading.

In the confusing world of derivative trading it is important to know exactly what you are
investing in and how. Although very similar a futures contract and a forward contract
have some distinct differences.A futures contract is a type of financial contract where two
parties come to an agreement on a future transaction. The buyer of the futures contract
agrees to buy a commodity at a certain future date for a specific price.

Most futures contracts do not actually end with a transfer of the physical commodity.
Futures contracts, like most derivatives, are often used to hedge an investment. The

67
accounts are settled daily in the cash market. The potential for gain is virtually unlimited
but so is the potential for loss.

For example, suppose you believe that this year Hawaii will produce a poor crop of
coffee. Currently on the commodities market coffee is trading at 5 dollars a pound. You
agree to buy 1000 pounds of coffee in two months at 5 dollars a pound, 5000 dollars. The
coffee grower agrees to sell you those 1000 pounds in two months. Fifteen days later
ideal conditions lead investors to believe there will be a bumper crop, the price of coffee
drops. What happened? You agreed to buy at 5 dollars; coffee is now trading at 3 dollars.
Your account, which is settled daily, has been debited 2 dollars a pound, 2000 dollars.

You could call it quits and settle, loosing the 2000 dollars or you could await the end of
the contract and hope a hurricane comes and ruins the crop driving up prices.

A forward contract is very similar. It allows for a buyer to contract to buy at a later date
at a specific price. In contrast, however, the forward contract is not traded on an
exchange, which means that it is not settled in cash daily.

Returning to our example, on that fifteenth day you, the buyer, would not see a decline in
your cash account of 2000 dollars. You would simply be anxiously hoping for a recovery
of the price of coffee so that on day 30 you can make a profit.Futures are common in the
FOREX market where companies and organizations use currency futures to hedge against
the change in a currencies value.

For example, if you have agreed to accept payment in Yen on a day two months in the future you
may purchase a future contract on the Japanese Yen. You would want to be guaranteed that you
could sell those Yen for a specific USD amount. Whether the value of the Yen rises or falls you
now have the guarantee that you will not make any less than the value of your
contract.Commodity futures trading and forward contracts can be very risky. The assistance of
commodity futures brokers can be invaluable. Commodity trading using futures and forwards are
not for novice investors.

BSE SENSEX 30 FUTURE HOW TO PURCHASES

Step 1 You feel that the Sensex will close at 5000 on the last Thursday of July (all the contracts
whether for one month, two month or three month expire on the last Thursday of the month) for
the one month contract. Then, you have to choose the minimum quantity of transaction akin to
market lot in the spot market. In the case of the Sensex, it is fixed at 50 times the index. In other
words, you are required to buy a minimum of 50 contracts of Sensex futures.

Step 2 At this stage, you have to calculate what is called the Tick size which is nothing but the

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minimum movement of the Sensex futures. This is taken at 0.1 percent which is equivalent to
Rs.5. That is to say, the price of each contract is Rs.5.

Step 3 You decide to buy 50 July contracts of Sensex futures. With the Sensex futures for July
pegged at 5000, your contract value is Rs.12.5 lacks (5000 x 50 (contracts) x Rs.5)

Step 4 You are not required to pay the entire money now as all that is needed from you is the
initial margin which is fixed at 5 percent. i.e., Rs.62,500 on the total value of the contract of
Rs.12.5 lacks.

Step 5 On the next trading day, if the Sensex rises to 5200, your July futures contract will have
gained 200 points and you will have made a profit of Rs.50, 000 (200 x 50 x 5) which the seller
will pay you. On the other hand, if the Sensex falls by a similar margin, you are obliged to pay
the seller a similar sum.

Step 6 This kind of transaction can be undertaken on a daily basis till the July contract expires.
Alternatively, you can carry on in this fashion till the final settlement is done.

Step 7 When the final settlement falls due, one fact must be borne in mind. On this day, the
actual Sensex is related to the Sensex futures of the preceding day, which is the last Thursday of
July. Even if the actual Sensex is at 5400 while the Sensex futures is fixed at 5200, you stand to
gain Rs.50, 000 (200 x 50 x 5), this being the sum payable by the seller

Portfolio Management
Portfolio (finance)

In finance, a portfolio is a collection of investments held by an institution or a private individual.

In building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services. Holding a portfolio
is part of an investment and risk-limiting strategy called diversification. By owning several
assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio
could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts,
production facilities, or any other item that is expected to retain its value.

Management

Portfolio management involves deciding what assets to include in the portfolio, given the goals
of the portfolio owner and changing economic conditions. Selection involves deciding what
assets to purchase, how many to purchase, when to purchase them, and what assets to divest.
These decisions always involve some sort of performance measurement, most typically expected
return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the
return). Typically the expected return from portfolios comprised of different asset bundles are

69
compared. The unique goals and circumstances of the investor must also be considered. Some
investors are more risk averse than other

Some of the financial models used in the process of Valuation, stock selection, and management
of portfolios include:

• Maximizing return, given an acceptable level of risk.

• Modern portfolio theory—a model proposed by Harry Markowitz among others.
• The single-index model of portfolio variance.
• Capital asset pricing model.
• Arbitrage pricing theory.
• The Jensen Index.
• The Sharpe Diagonal (or Index) model

Returns

Portfolio returns can be calculated either in absolute manner or in relative manner. Absolute
return calculation is very straight forward, where return is calculated by considering total
investment and total final value. Time duration and cash flow in portfolio doesn't influence final
return.

To calculate more accurate return of your investments you have to use complicated statistical
models like Internal rate of return or Modified Internal Rate of Return. The only problem with
these models are that, they are very complicated and very difficult to compute by pen and paper.
You need to have scientific calculator or some software. Both of these model consider all cash
flow(Money In/Money Out) and provide more accurate returns than absolute return. Time is a
major factor in these models.

Market Portfolio

A market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with
weights in the proportions that they exist in the market (with the necessary assumption that these
assets are infinitely divisible).

Richard Roll's critique (1977) states that this is only a theoretical concept, as to create a market
portfolio for investment purposes in practice would necessarily include every single possible
available asset, including real estate, precious metals, stamp collections, jewelry, and anything
with any worth, as the theoretical market being referred to would be the world market. As a
result, proxies for the market (such as the FTSE100 in the UK or the S&P500 in the US) are used
in practice by investors. Roll's critique states that these proxies cannot provide an accurate
representation of the entire market.

The concept of a market portfolio plays an important role in many financial theories and models,
including the Capital asset pricing model where it is the only fund in which investors need to
invest, to be supplemented only by a risk-free asset (depending upon each investor's attitude
towards risk).

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Capital Asset Pricing Model - CAPM
A model that describes the relationship between risk and expected return and that is used in the
pricing of risky securities.

Assumptions of CAPM
• All investors have rational expectations.
• There are no arbitrage opportunities.
• Returns are distributed normally.
• Fixed quantity of assets.
• Perfectly efficient capital markets.
• Investors are solely concerned with level and uncertainty of future wealth
• Separation of financial and production sectors.
• Thus, production plans are fixed.
• Risk-free rates exist with limitless borrowing capacity and universal access.
• The Risk-free borrowing and lending rates are equal.
• No inflation and no change in the level of interest rate exists.
• Perfect information, hence all investors have the same expectations about security
returns for any given time period.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of
money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and
compensates the investors for placing money in any investment over a period of time. The other half of
the formula represents risk and calculates the amount of compensation the investor needs for taking on
additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to
the market over a period of time and to the market premium.

Using the CAPM model and the following assumptions, we can compute the expected return of a stock: if
the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected market return over the
period is 10%, the stock is expected to return 17%(3%+2(10%-3%)).capital asset pricing model

71
 Fig.3.7: risk free rate of return

The Security Market Line, seen here in a graph, describes a relation between the beta and the asset's
expected rate of return.

The Capital Asset Pricing Model (CAPM) is used in finance to determine a theoretically
appropriate required rate of return (and thus the price if expected cash flows can be estimated) of
an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's
non-diversifiable risk. The CAPM formula takes into account the asset's sensitivity to non-
diversifiable risk (also known as systematic risk or market risk), in a number often referred to as
beta (β) in the financial industry, as well as the expected return of the market and the expected
return of a theoretical risk-free asset.

The model was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin
independently, building on the earlier work of Harry Markowitz on diversification and modern
portfolio theory. Sharpe received the Nobel Memorial Prize in Economics (jointly with Harry
Markowitz and Merton Miller) for this contribution to

The formula

The CAPM is a model for pricing an individual security (asset) or a portfolio. For individual
security perspective, we made use of the security market line (SML) and its relation to expected
return and systematic risk (beta) to show how the market must price individual securities in
relation to their security risk class. The SML enables us to calculate the reward-to-risk ratio for
any security in relation to that of the overall market. Therefore, when the expected rate of return
for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual
security in the market is equal to the market reward-to-risk ratio, thus:

Individual security’beta = Market’s securities (portfolio)

72
Reward-to-risk ratio =

The market reward-to-risk ratio is effectively the market risk premium and by rearranging the
above equation and solving for E(Ri), we obtain the Capital Asset Pricing Model (CAPM).

Where:

• is the expected return on the capital asset

• is the risk-free rate of interest

• (the beta coefficient) the sensitivity of the asset returns to market returns, or also,

• is the expected return of the market

• is sometimes known as the market premium or risk premium (the

difference between the expected market rate of return and the risk-free rate of return).
Note 1: the expected market rate of return is usually measured by looking at the
arithmetic average of the historical returns on a market portfolio (i.e. S&P 500). Note 2:
the risk free rate of return used for determining the risk premium is usually the arithmetic
average of historical risk free rates of return and not the current risk free rate of return.
An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones
Industrial Average over the last 3 years for monthly data.

Asset pricing

Once the expected return, E(Ri), is calculated using CAPM, the future cash flows of the asset can
be discounted to their present value using this rate (E(Ri)), to establish the correct price for the
asset.

In theory, therefore, an asset is correctly priced when its observed price is the same as its value
calculated using the CAPM derived discount rate. If the observed price is higher than the
73
valuation, then the asset is overvalued (and undervalued when the observed price is below the
CAPM valuation).

Alternatively, one can "solve for the discount rate" for the observed price given a particular
valuation model and compare that discount rate with the CAPM rate. If the discount rate in the
model is lower than the CAPM rate then the asset is overvalued (and undervalued for a too high
discount rate).

\Asset-specific required return

The CAPM returns the asset-appropriate required return or discount rate - i.e. the rate at which
future cash flows produced by the asset should be discounted given that asset's relative riskiness.
Betas exceeding one signify more than average "riskiness"; betas below one indicate lower than
average. Thus a more risky stock will have a higher beta and will be discounted at a higher rate;
less sensitive stocks will have lower betas and be discounted at a lower rate. The CAPM is
consistent with intuition - investors (should) require a higher return for holding a more risky
asset.

Since beta reflects asset-specific sensitivity to non-diversifiable, i.e. market risk, the market as a
whole, by definition, has a beta of one. Stock market indices are frequently used as local proxies
for the market - and in that case (by definition) have a beta of one. An investor in a large,
diversified portfolio (such as a mutual fund) therefore expects performance in line with the
market.

Risk and diversification

Investors purchase financial assets such as shares of stock because they desire to increase their
wealth, i.e., earn a positive rate of return on their investments. The future, however, is uncertain;
investors do not know what rate of return their investments will realize.

In finance, we assume that individuals base their decisions on what they expect to happen and
their assessment of how likely it is that what actually occurs will be close to what they expected
to happen. When evaluating potential investments in financial assets, these two dimensions of
the decision making process are called expected return and risk.

The concepts presented in this paper include the development of measures of expected return and
risk on an indivdual financial asset and on a portfolio of financial assets, the principle of
diversification, and the Captial Asset Pricing Model (CAPM).

74
Expected Return

The future is uncertain. Investors do not know with certainty whether the economy will be
growing rapidly or be in recession. As such, they do not know what rate of return their
investments will yield. Therefore, they base their decisions on their expectations concerning the
future.

The expected rate of return on a stock represents the mean of a probability distribution of
possible future returns on the stock. The table below provides a probability distribution for the
returns on stocks A and B.

Table3.1:return probability chart

Return on Return on
State Probability
Stock A Stock B
1 20% 5% 50%
2 30% 10% 30%
3 30% 15% 10%
3 20% 20% -10%

In this probability distribution, there are four possible states of the world one period into the
future. For example, state 1 may correspond to a recession. A probability is assigned to each
state. The probability reflects how likely it is that the state will occur. The sum of the
probabilities must equal 100%, indicating that something must happen. The last two columns
present the returns or outcomes for stocks A and B that will occur in the four states.

Given a probability distribution of returns, the expected return can be calculated using the
following equation:

where

• E[R] = the expected return on the stock,

• N = the number of states,
• pi = the probability of state i, and
• Ri = the return on the stock in state i.

Expected Return on Stocks A and B

Stock A

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 Stock B

So we see that Stock B offers a higher expected return than Stock A. However, that is only part
of the story; we haven't yet considered risk.

Measures of Risk - Variance and Standard Deviation

Risk reflects the chance that the actual return on an investment may be very different than the
expected return. One way to measure risk is to calculate the variance and standard deviation of
the distribution of returns.

Consider the probability distribution for the returns on stocks A and B provided below.

Table3.2: Return probability chart

Return on Return on
State Probability
Stock A Stock B
1 20% 5% 50%
2 30% 10% 30%
3 30% 15% 10%
3 20% 20% -10%

The expected returns on stocks A and B were calculated on the Expected Return page. The
expected return on Stock A was found to be 12.5% and the expected return on Stock B was
found to be 20%.

Given an asset's expected return, its variance can be calculated using the following equation:

where

• N = the number of states,

• pi = the probability of state i,
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 • Ri = the return on the stock in state i, and
• E[R] = the expected return on the stock.

The standard deviation is calculated as the positive square root of the variance.

Variance and Standard Deviation on Stocks A and B

Note: E[RA] = 12.5% and E[RB] = 20%

Stock A

Stock B

Although Stock B offers a higher expected return than Stock A, it also is riskier since its
variance and standard deviation are greater than Stock A's. This, however, is only part of the
picture because most investors choose to hold securities as part of a diversified portfolio..

Portfolio Risk and Return

Most investors do not hold stocks in isolation. Instead, they choose to hold a portfolio of several
stocks. When this is the case, a portion of an individual stock's risk can be eliminated, i.e.,
diversified away. This principle is presented on the Diversification page. First, the computation
of the expected return, variance, and standard deviation of a portfolio must be illustrated.

Once again, we will be using the probability distribution for the returns on stocks A and B.

Table3.3:rReturn probabilitychart

Return on Return on
State Probability
Stock A Stock B
1 20% 5% 50%
2 30% 10% 30%
3 30% 15% 10%
3 20% 20% -10%

From the Expected Return and Measures of Risk pages we know that the expected return on
Stock A is 12.5%, the expected return on Stock B is 20%, the variance on Stock A is .00263, the
77
variance on Stock B is .04200, the standard deviation on Stock S is 5.12%, and the standard
deviation on Stock B is 20.49%.

Portfolio Expected Return

The Expected Return on a Portfolio is computed as the weighted average of the expected
returns on the stocks which comprise the portfolio. The weights reflect the proportion of the
portfolio invested in the stocks. This can be expressed as follows:

where

• E[Rp] = the expected return on the portfolio,

• N = the number of stocks in the portfolio,
• wi = the proportion of the portfolio invested in stock i, and
• E[Ri] = the expected return on stock i.

For a portfolio consisting of two assets, the above equation can be expressed as

Expected Return on a Portfolio of Stocks A and B

Note: E[RA] = 12.5% and E[RB] = 20%

Portfolio consisting of 50% Stock A and 50% Stock

B

Portfolio consisting of 75% Stock A and 25% Stock

B

Portfolio Variance and Standard Deviation

The variance/standard deviation of a portfolio reflects not only the variance/standard deviation of
the stocks that make up the portfolio but also how the returns on the stocks which comprise the
portfolio vary together. Two measures of how the returns on a pair of stocks vary together are the
covariance and the correlation coefficient.

The Covariance between the returns on two stocks can be calculated using the following
equation:

78
where

• s12 = the covariance between the returns on stocks 1 and 2,

• N = the number of states,
• pi = the probability of state i,
• R1i = the return on stock 1 in state i,
• E[R1] = the expected return on stock 1,
• R2i = the return on stock 2 in state i, and
• E[R2] = the expected return on stock 2.

The Correlation Coefficient between the returns on two stocks can be calculated using the
following equation:

where

• r12 = the correlation coefficient between the returns on stocks 1 and 2,

• s12 = the covariance between the returns on stocks 1 and 2,
• s1 = the standard deviation on stock 1, and
• s2 = the standard deviation on stock 2.

Covariance and Correlation Coefficent between the Returns on Stocks A and

B
Note: E[RA] = 12.5%, E[RB] = 20%, sA = 5.12%, and sB = 20.49%.

Using either the correlation coefficient or the covariance, the Variance on a Two-Asset
Portfolio can be calculated as follows:

The standard deviation on the portfolio equals the positive square root of the the variance.

Variance and Standard Deviation on a Portfolio of Stocks A and B

Note: E[RA] = 12.5%, E[RB] = 20%, sA = 5.12%, sB = 20.49%, and rAB = -1.

Portfolio consisting of 50% Stock A and 50% Stock B

79
 Portfolio consisting of 75% Stock A and 25% Stock B

Notice that the portfolio formed by investing 75% in Stock A and 25% in Stock B has a lower
variance and standard deviation than either Stocks A or B and the portfolio has a higher expected
return than Stock A. This is the essence of Diversification, by forming portfolios some of the risk
inherent in the individual stocks can be eliminated.

RISK RETURN TRADE OFF

The risk/return tradeoff could easily be called the "ability-to-sleep-at-night test." While some
people can handle the equivalent of financial skydiving without batting an eye, others are
terrified to climb the financial ladder without a secure harness. Deciding what amount of risk you
can take while remaining comfortable with your investments is very important.
In the investing world, the dictionary definition of risk is the chance that an investment's actual
return will be different than expected. Technically, this is measured in statistics by standard
deviation. Risk means you have the possibility of losing some, or even all, of our original
investment. Low levels of uncertainty (low risk) are associated with low potential returns. High
levels of uncertainty (high risk) are associated with high potential returns.

The risk/return tradeoff is the balance between the desire for the lowest possible risk and the
highest possible return. This is demonstrated graphically in the chart below. A higher standard
deviation means a higher risk and higher possible return.

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 Fig.3.8: risk return trade off

Diversification

A portfolio formed from risky securities can have a lower standard deviation than either of the
individual securities. The benefits of diversification, i.e., the reduction in risk, depends upon the
correlation coefficient (or covariance) between the returns on the securities comprising the
portfolio.

Consider stocks C and D. Stock C has an expected return of 8% and a standard deviation of 10%.
Stock D has an expected return of 16% and a standard deviation of 20%. The concept of
diversification will be illustrated by forming portfolios of stocks C and D under three different
assumptions regarding the correlation coefficient between the returns on stocks C and D.

Correlation Coefficient = 1

The table below provides the expected return and standard deviation for portfolios formed from
stocks C and D under the assumption that the correlation coefficient between their returns equals

Table3.4 expected return

Portfolio Portfolio
Weight of
Expected Standard
Stock C
Return Deviation
100% 8% 10%
90% 8.8% 11%
80% 9.6% 12%
70% 10.4% 13%
60% 11.2% 14%
50% 12% 15%
40% 12.8% 16%
30% 13.6% 17%

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 20% 14.4% 18%
10% 15.2% 19%
0% 16% 20%

Fig3.9 expected return graph

When the correlation coefficient between the returns on two securities is equal to +1 the returns
are said to be perfectly positively correlated. As can be seen from the table and the plot of the
opportunity set, when the returns on two securities are perfectly positively correlated, none of the
risk of the individual stocks can be eliminated by diversification. In this case, forming a portfolio
of stocks C and D simply provides additional risk/return choices for investors.

Correlation Coefficient = -1 The table below provides the expected return and standard
deviation for portfolios formed from stocks C and D under the assumption that the
correlation coefficient between their returns equals -1.

Table3.5 Expected Return on stock

Portfolio Portfolio
Weight of
Expected Standard
Stock C
Return Deviation
100% 8% 10%
90% 8.8% 7%
80% 9.6% 4%

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 70% 10.4% 1%
66.67% 10.67% 0%
60% 11.2% 2%
50% 12% 5%
40% 12.8% 8%
30% 13.6% 11%
20% 14.4% 14%
10% 15.2% 17%
0% 16% 20%

Fig3.10: expected return graph

When the correlation coefficient between the returns on two securities is equal to -1 the returns
are said to be perfectly negatively correlated or perfectly inversely correlated. When this is the
case, all risk can be eliminated by investing a positive amount in the two stocks. This is shown in
the table above when the weight of Stock C is 66.67%.

Shortcomings of CAPM

The model assumes that asset returns are (jointly) normally distributed random variables. It is
however frequently observed that returns in equity and other markets are not normally

83
 distributed. As a result, large swings (3 to 6 standard deviations from the mean) occur in the
market more frequently than the normal distribution assumption would expect.

The model assumes that the variance of returns is an adequate measurement of risk. This
might be justified under the assumption of normally distributed returns, but for general return
distributions other risk measures (like coherent risk measures) will likely reflect the
investors' preferences more adequately.

The model does not appear to adequately explain the variation in stock returns. Empirical
studies show that low beta stocks may offer higher returns than the model would predict.
Some data to this effect was presented as early as a 1969 conference in Buffalo, New York in
a paper by Fischer Black, Michael Jensen, and Myron Scholes. Either that fact is itself
rational (which saves the efficient markets hypothesis but makes CAPM wrong), or it is
irrational (which saves CAPM, but makes EMH wrong – indeed, this possibility makes
volatility arbitrage a strategy for reliably beating the market).

The model assumes that given a certain expected return investors will prefer lower risk (lower
variance) to higher risk and conversely given a certain level of risk will prefer higher returns to
lower ones. It does not allow for investors who will accept lower returns for higher risk. Casino
gamblers clearly pay for risk, and it is possible that some stock traders will pay for risk as well.

The model assumes that all investors have access to the same information and agree about the
risk and expected return of all assets. (Homogeneous expectations assumption)

The model assumes that there are no taxes or transaction costs, although this assumption may be
relaxed with more complicated versions of the model.

The market portfolio consists of all assets in all markets, where each asset is weighted by its
market capitalization. This assumes no preference between markets and assets for individual
investors, and that investors choose assets solely as a function of their risk-return profile. It also
assumes that all assets are infinitely divisible as to the amount which may be held or transacted.

The market portfolio should in theory include all types of assets that are held by anyone as an
investment (including works of art, real estate, human capital...) In practice, such a market
portfolio is unobservable and people usually substitute a stock index as a proxy for the true
market portfolio. Unfortunately, it has been shown that this substitution is not innocuous and can
lead to false inferences as to the validity of the CAPM, and it has been said that due to the in

84
absorbability of the true market portfolio, the CAPM might not be empirically testable. This was
presented in greater depth in a paper by Richard Roll in 1977, and is generally referred to as
Roll's Critique. Theories such as the Arbitrage Pricing Theory (APT) have since been formulated
to circumvent this problem. Because CAPM prices a stock in terms of all stocks and bonds, it is
really an arbitrage pricing model which throws no light on how a firm's beta gets determined.

Modern Portfolio Theory - MPT

A theory on how risk-averse investors can construct portfolios to optimize or maximize expected
return based on a given level of market risk, emphasizing that risk is an inherent part of higher
reward.

Investopedia Says:

According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios
offering the maximum possible expected return for a given level of risk. This theory was
pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952.

There are four basic steps involved in portfolio construction:

-Security valuation
-Asset allocation
-Portfolio optimization
-Performance measurement

Capital Market Line - CML

A line used in the capital asset pricing model to illustrate the rates of return for efficient
portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a
particular portfolio.

85
 fig3.11: determination of market port folio

Investopedia Says:

The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to
the point where the expected return equals the risk-free rate of return.

The CML is considered to be superior to the efficient frontier since it takes into account the
inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM)
demonstrates that the market portfolio is essentially the efficient frontier. This is achieved
visually through the security market line (SML).

Security Market Line - SML

The line that graphs the systematic, or market, risk versus return of the whole market at a certain
time and shows all risky marketable securities.

The SML essentially graphs the results from the capital asset pricing model (CAPM) formula.
The X-axis represents the risk (beta), and the Y-axis represents the expected return. The market
risk premium is determined from the slope of the SML.

It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable
expected return for risk. Individual securities are plotted on the SML graph. If the security's risk
versus expected return is plotted above the SML, it is undervalued since the investor can expect a
greater return for the inherent risk. And a security plotted below the SML is overvalued since the
investor would be accepting less return for the amount of risk assumed.

Optimal portfolio theory

86
On proportionately more risk for a lower incremental return. On the other end, low risk/low
return portfolios are pointless because you can achieve a similar return by The optimal
portfolio concept falls under the modern portfolio theory. The theory assumes (among other
things) that investors fanatically try to minimize risk while striving for the highest return
possible. The theory states that investors will act rationally, always making decisions aimed at
maximizing their return for their acceptable level of risk.

The optimal portfolio was used in 1952 by Harry Markowitz, and it shows us that it is possible
for different portfolios to have varying levels of risk and return. Each investor must decide how
much risk they can handle and than allocate (or diversify) their portfolio according to this
decision.

The chart below illustrates how the optimal portfolio works. The optimal-risk portfolio is usually
determined to be somewhere in the middle of the curve because as you go higher up the curve,
you take investing in risk-free assets, like government securities.

fig3.12: optimal portfolio strategy

You can choose how much volatility you are willing to bear in your portfolio by picking any
other point that falls on the efficient frontier. This will give you the maximum return for the
amount of risk you wish to accept. Optimizing your portfolio is not something you can calculate
in your head. There are computer programs that are dedicated to determining optimal portfolios
by estimating hundreds (and sometimes thousands) of different expected returns for each given
amount of risk.

Diversification

87
An investor can reduce portfolio risk simply by holding instruments which are not perfectly
correlated. In other words, investors can reduce their exposure to individual asset risk by holding
a diversified portfolio of assets. Diversification will allow for the same portfolio return with
reduced risk.

If all the assets of a portfolio have a correlation of 1, i.e., perfect correlation, the portfolio
volatility (standard deviation) will be equal to the weighted sum of the individual asset
volatilities. Hence the portfolio variance will be equal to the square of the total weighted sum of
the individual asset volatilities.

If all the assets have a correlation of 0, i.e., perfectly uncorrelated, the portfolio variance is the
sum of the individual asset weights squared times the individual asset variance (and volatility is
the square root of this sum).

If correlation is less than zero, i.e., the assets are inversely correlated, the portfolio variance and
hence volatility will be less than if the correlation is 0. The lowest possible portfolio variance,
and hence volatility, occurs when all the assets have a correlation of −1, i.e., perfect inverse
correlation.

Capital allocation line

The capital allocation line (CAL) is the line of expected return plotted against risk (standard
deviation) that connects all portfolios that can be formed using a risky asset and a riskless asset.
It can be proven that it is a straight line and that it has the following equation

CAL: E( rc ) = rf +σc [E(rp)- rf]/ σ p

In formula P is the risky portfolio, F is the riskless portfolio, C is the combination of P & F.

Applications to Project Portfolios and Other "Non-Financial" Assets

Some experts apply MPT to portfolios of projects and other assets besides financial instruments.
When MPT is applied outside of traditional financial portfolios, some differences between the
different types of portfolios must be considered.

1. The assets in financial portfolios are, for practical purposes, continuously divisible while
portfolios of projects like new software development are "lumpy". For example, while we
can compute that the optimal portfolio position for 3 stocks is, say, 44%, 35%, 21%, the
optimal position for an IT portfolio may not allow us to simply change the amount spent
on a project. IT projects might be all or nothing or, at least, have logical units that cannot
be separated. A portfolio optimization method would have to take the discrete nature of
some IT projects into account.
2. The assets of financial portfolios are liquid can be assessed or re-assessed at any point in
time while opportunities for new projects may be limited and may appear in limited
windows of time and projects that have already been initiated cannot be abandoned
without the loss of the sunk costs (i.e., there is little or no recovery/salvage value of a
half-complete IT project).

88
Neither of these necessarily eliminate the possibility of using MPT and such portfolios. They
simply indicate the need to run the optimization with an additional set of mathematically-
expressed constraints that would not normally apply to financial portfolios.

Furthermore, some of the simplest elements of MPT are applicable to virtually any kind of
portfolio. The concept of capturing the risk tolerance of an investor by documenting how much
risk is acceptable for a given return could be and is applied to a variety of decision analysis
problems. MPT, however, uses historical variance as a measure of risk and portfolios of assets
like IT projects don't usually have an "historical variance" for a new piece of software. In this
case, the MPT investment boundary can be expressed in more general terms like "chance of an
ROI less than cost of capital" or "chance of losing more than half of the investment". When risk
is put in terms of uncertainty about forecasts and possible losses then the concept is perfectly
transferable to any type of investment.

Some tools applied in portfolio management

Jensen's Alpha

In finance, Jensen's alpha (or Jensen's Performance Index) is used to determine the excess
return of a stock, other security, or portfolio over the security's required rate of return as
determined by the Capital Asset Pricing Model. This model is used to adjust for the level of beta
risk, so that riskier securities are expected to have higher returns. The measure was first used in
the evaluation of mutual fund managers by Michael Jensen in the 1970's.

To calculate alpha, the following inputs are needed:

• the realized return (on the portfolio),

• the market return,
• the risk-free rate of return, and
• the beta of the portfolio.

Jensen's alpha = Portfolio Return - (Risk Free Rate + Portfolio Beta * (Market Return -
Risk Free Rate)

Alpha is still widely used to evaluate mutual fund and portfolio manager performance, often in
conjunction with the Sharpe ratio and the Treynor ratio.

Treynor ratio
The Treynor ratio is a measurement of the returns earned in excess of that which could have
been earned on a riskless investment (i.e. Treasury Bill) (per each unit of market risk assumed).

The Trey nor ratio (sometimes called reward-to-volatility ratio) relates excess return over the
risk-free rate to the additional risk taken; however systematic risk instead of total risk is used.
The higher the Treynor ratio, the better the performance under analysis.

T = ( rp - rf)/ ß
89
Where:

T= Treynor

rp= Portfolio return

rf = Risk free return

ß = Portfolio beta
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active
portfolio management. It is a ranking criterion only. A ranking of portfolios based on the
Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader,
fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but
different total risk, will be rated the same. But the portfolio with a higher total risk is less
diversified and therefore has a higher unsystematic risk which is not priced in the market.

An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the
added return as the excess return above the security market line in the capital asset pricing
model.

Sharpe ratio

The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a

measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a
trading strategy. Since its revision made by the original author in 1994, it is defined as :

S = E[R-Rf ] / σ = E[ R- Rf ]/√ var[ R- Rf ]

where R is the asset return, Rf is the return on a benchmark asset, such as the risk free rate of
return, E[R − Rf] is the expected value of the excess of the asset return over the benchmark
return, and σ is the standard deviation of the excess return (Sharpe 1994).

Note, if Rf is a constant risk free return throughout the period,

√ var[R-Rf] = √ var[R]

Sharpe's 1994 revision acknowledged that the risk free rate changes with time. Prior to this
revision the definition was S = (E[R]-Rf) / σ assuming a constant Rf.

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor
for the risk taken. When comparing two assets each with the expected return E[R] against the
same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the
same risk. Investors are often advised to pick investments with high Sharpe ratios.

Sharpe ratios, along with Treynor ratios and Jensen's alphas, are often used to rank the
performance of portfolio or mutual fund managers.

90
This ratio was developed by William Forsyth Sharpe in 1966. Sharpe originally called it the
"reward-to-variability" ratio in before it began being called the Sharpe Ratio by later academics
and financial professionals. Recently, the (original) Sharpe ratio has often been challenged with
regard to its appropriateness as a fund performance measure during evaluation periods of
declining markets (Scholz 2007).

Research Methodology

When we talk about the research methodology we not only talk of the research method but also consider
the logic behind the method.

It is ways to systematically solve the research problem that may be understand as a science of study how
research is done scientifically, it is necessary for the researcher to know not only the research method or
techniques but also methodology.

Type of the study:

Our type of study is Descriptive. Descriptive research is to describe something- usually market
characteristics or functions. A vast majority of marketing research studies involves descriptive research,
which incorporates the following major methods:

• Secondary data
• Surveys

Sample Size:

Sample size refers to the number of elements to be included in the study. Our sample size was
50respondents.

Research approach: Survey method

Survey method

The survey method involves a structured questionnaire given to respondents of different sector and
designed to elicit specific information. Thus, this method of obtaining information is based on the
questioning of respondents.

Research Instruments - Questionnaire

Questionnaire
91
A Questionnaire consists of a number of questions printed or typed in definite order on a form or set of
forms. The questionnaire includes multiple questions, open ended questions.

Data Collection Method’s -

The data required for the research would be from Primary and Secondary sources.

Primary Data:

Primary data have collected through a structured questionnaire, doing market survey, telephonic survey
and personally meetings.

Secondary Data:

Secondary data have collected by two sources.

1- Internally: Provided by the company/organization

2- Externally

• Books
• Websites(Internet)

Age of the investor

Table5.1: Age of the investor

Age
N. Of respondent
18-25 8

92
 25-35 10
35-45 8
24
Above 45
50
Total

AGE OF THE INVESTOR

30

25
N. OF INVESTOR

20

15 Series1

10

0
18-25 25-35 35-45 above 45
AGE

Fig5.1

Analysis:

As from the survey result it has been cleared the mostly person who
invest is above the 45 years age group

Occupation of the investor

Table5.2: Occupation of the investor

Occupation N. of the investor

Businessman 20
Serviceman 12
House hold 8
Student 8
Others 2 93

Total 50
 Occupation of the investor

25

20

NO. of invester 15
Series1
10

0
BUSINESS SERVICEMAN STUDENT HOUSE HOLD OTHER
Occupation

fig5.2

Analysis:
Mostly person who invest in securities is the business man and service man is
followed by business man

Income Group of the investor

Table5.3: Income Group of the investor

INCOME GROUP N. OF INVESTOR

(Annual)
Less Than 2.5 Lacks 8

2.5 lacks – 4.5 Lacks 20

4.5 lacks - 6.5 lacks 12

Above 6.5 lacks 10

Total 50

94
 10 8

LESS THAN 2.5

LAKH
2.5 LAKHTO 4.5
LAKH
4.5 LAKH TO
12 6.5 LAKH
20 MORE THAN
6.5 LAKHS

fig5.3: Income Group of the investor

Analysis:

Mostly person who invest in different securities their income group is above
2.5 lacks to 4.5 lacks.

1. Which type of investment you prefer?

Table 5.4: type of investment you prefer

LONG TERM 10
MEDIUM TERM 20
SMALL TERM 20
type of Investment you prefer
Total 50
25

20
N. Of Investor

15

10

0 95
LONG TERM MEDIUM TERM SMALL TERM
Type of Investment
 Fig.5.4

Analysis:

The survey result shows that normally persons invest in small and medium term
securities. 20 out of 50 persons invest in small and medium term securities. 10
out of 50 persons invest in long term securities.

2.Where do you park your money?

Table5.5: Type Of The Investment Alternatives

Investment alternatives N. of investors

Mutual funds 8
Insurance 8
Property 5
Share market 20
Bank 5
Other 4
Total 50

96
 Types of investment alternatives

25

20
N. of investor
15
Series1
10

0
Mutual fund Insurance property share banks other
market
Investment alternatives

Fig.5.5

Analysis: The survey result shows that 20 out of 50 persons invest in share
market. 8 out of 50 persons invest in mutual fund and insurance respectively

3. What would be your expected rate of return per annum?

Table5.6: Expected rates of return

Expected rates of return N. of investor

LESS TAN 50% 10
50% - 100% 20
100% - 150% 15
MORE THAN 150% 5
Total 50

Expected Rate of return

25

20
N.of Investor

15
Series1
10

0 97
Less than 50% 50%-100% 100%-150% More Than250%
Rate of return
fig 5.6

Analysis

It has been concluded normally persons expect 50%-100% per annum. 20

out of each 50 persons.15 out of each 50 person expect 100%- 150% per
annum.

4.“How much to invest” depends upon?

table5.7: Dependent factor of investment

Depend factor N. of Investor

Risk pro file 10

Time horizon 10
Saving 10
Rate of return 20
Depedent factor of investment
Total 50
25

20
N. of investor

15
Series1
10

0 98
Time horizon risk profile Saving Rate of return
Depedent factor
 Fig5.7

Analysis :

Survey result shows that “rate of return is most” influencing factor of

investing.

4. The main purpose of your investment is

Table5.8: The main purpose of your investment

Purpose Total Number

Future Needs 15
Risk Protection 10
Tax Shelter 20
Others 5
Total 50

The main purpose of your investment

25

20
N. of Investment

15
Series1
10

0 99
Future needs risk protection Tax shelter Other
Purpose of your investment
 Fig 5.8

Analysis :

It can be concluded The Tax shelter is the main aim of Investing. 20 out of 50
investors invest for tax saving. And future needs is the secondary. 15 out 50
investors invest for future needs.

6. Are you having a D-Mat account?

Table5.9: D-Mat account

Yes 40
No 10
Total 50

10

yes

No

40

fig.N.5.9: D-Mat account

100
Analysis :

As from the are having the survey result it is cleared 80% persons are
having the D-Mat a/c

7. Which DP (depository participant) you prefer?

Table5.10: Depository participant) you prefer

Depository Participant N. of investment

Religare securities 20
Indian bulls 8
ICICI DIRECT 5
Share khan 5
Others 2
None of these 10
Total 50

Depostiory participant you prefer

25

20
N. of the investor

15
Series1
10

0
religare india bulls icici direct share khan other none
Fig 5.10
Depostiory participant
fig 5.10

Analysis :

101
 It can be concluded that mostly person prefer the Religare Securities Ltd.
for depository services. 40% people prefer only Religare.

8.Under which market condition you like to invest?

Table5.11: Market condition while investing

Market condition N. Of Investor

Bull market (up market 25
Bear market (down market) 10
None Of These 15

Market condition while investing

30

25
N. of investors

20

15

10

0
Bull market Bear market none of these
Market conditioan

Fig 5.11

Analysis :

102
Survey result shows that while the market trend goes up, people like to invest.
50% persons invest under bull market condition.

9. What is your trading motive?

Table5.12: trading motive

Trading motives N. of investor

Speculative 15
arbitrage 20
Investment 15
Total 50

Tading MOtives

25

20
N. of investor

15
Series1
10

0
Speculative Arbitrage investment
Tading MOtives
fig 5.12

Analysis :

Arbitrage is the main trading motive. Speculative and investment is the

secondary motive.

103
 10 Whom you consult while investing.
Table5.13:your investment advisior

Your friends and 15

relatives

Financial 25
Consultants
News papers and 8
magazines
OTHERS 2

Total 50

Your investment advisior

30

25
N. of investor

20

15 Series1

10
5

0
friends finincial consultant News paper Others
investment advisior

Fig5.13

Analysis : Mostly Investors take the advice from financial consultants

while investing. 50% persons take help from financial consultants. And
30% prefer the friends and relative.

104
 11. Are you aware about portfolio management?
Table5.14: awareness about portfolio management

Yes 40
No 10
Total 50

10

yes no
40

Fig 5.14: awareness about portfolio management

Analysis :

80% people are aware about portfolio management.

12. Do you think in portfolio you will get more return than other
investment?

105
 Table5.15: Portfolio can give better return

Yes 35
No 5
Cant` say 10
Total 50

port folio can give better return

yes
no
cant`say

fig 5.15

Analysis:

Survey result shows that 70% people believe that a sound portfolio will give the
better return. 10% said no. and 20% said cant say.

13.You manage yours portfolio with the help of

Table5.16: takes help while managing portfolio

Portfolio Managers N. of the investor

Financial Consultants 5

106
 Depository Participants 20
Fund manager 10
Yourself 15
Total 50

Takes help while managing portfolio

25

20
N. of investor

15
Series1
10

0
Finincial consultant Depository Fund manager your self
participant
Portfolio manager

Fig 5.16

Analysis :

40% person manage their portfolio with the help of depository participants.
30% person manage their portfolio their selves.

CONCLUSIONS

 Now the trend shows that persons are moving towards share market.
 Liquidity continues to be the key driver for many emerging markets

107
  Given the influence of the domestic and international factors, the markets will continue to
be volatile in the short run.
 A return of 50-100 per cent per annum can be expected from the markets over the next 5-
10 years
 Earnings growth has mostly outpaced stock price gains.
 Religare is the first choice of share market investor.
 Over the next five years, stock market returns will be led not just by continuing earnings
growth, but also by a re-rating of the market in terms of its valuation.
 Before investing make a sound portfolio Strategy for best return.

SUGGESTION FOR THE INVESTMENT DECISION

Basic guide line – the Ten Commandments
I here are the ten commandments of investing which should serve as basic guidelines for all
invest ors. They a re as follows:

1. Accord top priority to a residential house

2. Integrate life insurance in your insurance plan.

3. Choose a risk posture consistent with your stage in investor lifecycle.

4. Tiptoe through the world of precious object.

5. Avail for tax shelter.

6. Adopt a suitable formula plan.

7. Select fixed income group judiciously.

8. Focus on fundamental, but keep an eye on technical.

9. Diversify moderately.

10. Periodically review and revise the portfolio.

Limitations
 This is a two months study only.

108
  Data available was not sufficient, there was lack of availability of data as most of it
was confidential for the companies.
 Sample size is two small.
 This study is for long-term purpose not to bring out returns for short-term investors.
 Study has been basically done taking into consideration the retail investors.
 Study has been done on Indian environment only.
 Common ratios have been taken up for the entire sectors in the study.
 Data have been taken of from different sources so there may be biasness in the study.
 Portfolio requires the churning of proportion of investment in each sector as well as
company from time to time to give better returns.

APPENDIX

109
 QUESTIONNAIRE

Q1. In which of these Financial Instruments do you invest into?

Shares Mutual Funds Bonds

Derivatives

Q2. Are you aware of online Share trading?

Yes No

Q3. Heard about India Infoline Ltd.?

Yes No

Q4. Do you know about the facilities provided by India Infoline

Ltd.?

Yes No

Q5. With which company do you have your DEMAT account?

Reliance Money ICICI Direct INDIA INFOLINE LTD.

India Bulls

Others (please specify)

Q6. What differentiates your Share trading company from

others? (in regards of brokerage, satisfaction, services,
products )

110
Q7. Are you currently satisfied with your Share trading
company?

Yes No

Q8. How often do you trade?

Daily Weekly Monthly

Yearly

Q9. What percentage of your earnings do you invest in share

trading?

Up to 10% Up to 25% Up to 50%

Above 50%

Q13. How do you rate these share trading companies?

a. Reliance money
b. ICICI Direct
c. India Bulls
d. India Infoline
1. 2. 3. e. Others (Please
specify)

4. 5.

Q14. What more facilities do you think you require with your
DEMAT account?

Personal
Information

Name :

Age :

111
 Sex : Male Female

Phone No :

Occupation :

BIBLOGRAPHY

Books:

1. NCFM- Derivatives market module

2. Richard I. Levin, David S. Rubin, Statistics For Management; Prentice Halt
Publication, 7th edition 2006
3. Schindler & Kooper, Research Methods In Business; Pearson Education
Publication, 6h edition 2007

Websites:-

www.nseindia.com
www.igidr.ac.in/~ajayshah
www.derivativesindia.com
www.capitalmarket.com
www.wikipedia.com
www.religare.in
www.bloomberg.com

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