Program – M-Com -2 year

Name: P.Thandapani Roll Number: 522253002

Subject: Investment Analysis and Portfolio Management

Semester – 3 – Assessment.
1.What do you mean by investment?

Answer: An investment is an asset or item accrued with the goal of generating income or recognition. In an
economic outlook, an investment is the purchase of goods that are not consumed today but are used in the
future to generate wealth. In finance, an investment is a financial asset bought with the idea that the asset
will provide income further or will later be sold at a higher cost price for a profit.
Investment is elucidated and defined as an addition to the stockpile of physical capital such as:

Machinery
Buildings
Roads etc.,
i.e. anything that sums up to the future productive ability of the economy and changes in the catalogue (or
the stock of finished commodities) of a manufacturer. Note that ‘investment commodities’ (such as
machines) are also part of the final commodities – they are not intermediate commodities like raw materials.
Machines manufactured in an economy in a given year are not ‘used up’ to produce other commodities but
yield their services over a number of years.

Investment decisions by manufacturers, such as whether to buy new machinery, rely to a large extent, on
the market place rate of interest. However, for simplicity, we presume here that enterprises plan to invest
the same amount every year. We can write the ex-ante investment demand as:

I=ī

Whereas, ī is a positive constant which represents the autonomous (given or exogenous) investment in the
economy in a given year.

The financial aspect of the term ‘investment’ has several features. First of all, investment involves the
purchase of an asset for long-term financial advantages. Therefore, an individual has the option to invest
money in a company’s resources. These resources are financial in nature and typically include bonds, stocks,
and equities.

Investment is thus the act of channelling one’s capital to any business project or government activity. In
addition, the invested funds are exposed to the money market as well. Therefore, investors are eligible to
receive periodic dividends from their financial investments.

All these characteristics make investment a process to generate wealth. For instance, investors anticipate
that the monetary value of an asset will increase over time. As a result, they can sell their assets after a
stipulated time to gather profit.

For example, suppose that an investor channels Rs.5,000 to buy stocks at a company with a high growth
performance. Therefore, after a period of time, the investor expects the value of the stocks to be Rs.6,000.
Therefore, the asset that he/she has invested in experiences appreciation, making his/her investment
profitable.

Investment and Consumption

Experts define investment differently from consumption. It is mainly because consumption does not create
additional value for a product. Whereas, investment is subject to time constraints and usually generates
returns after a point of time.

Investment meaning also includes infrastructural activities undertaken by the government. It is often seen
that municipal authorities and government bodies invest in bridges, roadways, and railways to improve
connectivity and infrastructure. Consequently, these organizations can increase the scale of their business
processes, thus raking in higher profit. Therefore, their initial investment enables the appreciation of the
value of an asset.

What are the Risk Factors in Investment?

Individuals invest only when there is an assurance of appreciation in an asset’s value. Therefore, the
investment definition also includes the risk factors that investments are exposed to.

For instance, different investment instruments have distinct risk factors. However, risk and return on
investment have a directly proportional relationship. When an investment option is riskier, the return on
such investment or the appreciation of the assets value is higher.

On the other hand, when an investment avenue is considerably safer, investors receive lower returns. As a
result, risk-prone investors tend to invest their money in risky assets for higher profit. Whereas, individuals
who do not want exposure to market risks typically purchase low-risk assets. Thus, the definition of
investment actively takes into account the risk factors that individuals have to deal with.

In addition, scale and volume of investment depends largely upon the return expectations of an individual.
Therefore, some of the well-known avenues for safe investment are land, real estate, and gold. It is because
investors expect the appreciation in their value with the passage of time. As a result, when the market prices
of these assets reach the highest, they can sell these off to generate profit.

2. What are the three main avenues for investing?

Answer:
Avenues of investing money in India
There are multiple investment options to choose from in India:
There are a large number of investment avenues for savers in India. Some of them
are marketable and liquid while others are non-marketable. Some of them are highly risky
while some others are almost riskless. The investor has to choose proper avenues from
among them depending on his preferences, needs and ability to assume risk.
The investment avenues can be broadly categorized under the following heads:
1. Corporate securities
2. Deposits in banks and non-banking companies
3. UTI and other mutual fund schemes
4. Post office deposits and certificates- Recurring Deposits
5. Public Provident Fund
6. Provident fund schemes
7. Government and semi-government securities.
8.Stocks.
1.Corporate Securities
Corporate securities are the securities issued by joint stock companies in the private
sector. These include equity shares, preference shares and debentures. Equity shares have
variable divided and hence belong to the high risk-high return category, while preference
shares and debentures have fixed returns with lower risk.

2. Fixed Deposits
Fixed deposits are regarded as one of the most popular investments in India. They provide a fixed rate of
return for a specific period and considered as a low-risk option.

Banks offer FDs. The interest rate varies from one deposit to another and changes from time to time.
Although FDs have a lock-in period, most financial institutions permit loans and overdraft facilities against
them.

3. Mutual Funds
Investing in mutual funds is a prudent choice as there are different types of funds to suit the short- and long-
term needs of various investors. Before making investment decisions, it is advisable to make use of a mutual
fund calculator to understand how it aligns with your financial objectives.

4. Recurring Deposits
Like FDs, Recurring Deposits (RDs) allow an investor to save a specific sum in periodic instalments. You can
deposit a fixed sum every month for a specific period with a bank. Like FDs, RDs are also low-risk and provide
guaranteed returns.

5. Public Provident Fund

The PPF is a long-term savings scheme backed by the Government of India with a lock-in period of 15 years.
However, PPF investments are eligible for tax deductions and are also relatively safe. The government
usually revises the PPF interest rate every quarter. Investors are also eligible for partial withdrawals and
loans against the PPF upon meeting certain conditions.

6. Employee Provident Fund

The EPF is a retirement savings scheme specifically for salaried employees. Monthly contributions are made
from an employee’s salary, while the employer contributes an equivalent amount to the corpus. EPFs are
eligible for a tax deduction under Section 80C of the Income Tax Act, 1961 and the final amount after
maturity is tax-free.

7. National Pension Scheme

NPS is a retirement pension scheme introduced by the Government of India. Through regular investments,
you can build a corpus that can provide you with a regular pension after retirement. Investors can also
withdraw from the fund partially after retirement.

8.Stocks
Stocks refer to purchasing shares in a company, giving the investor ownership stake. It can be profitable
when the company grows in future. Investing in stocks for the long-term aids in capital appreciation. Short-
term trading, however, can be riskier.

3. What are the five main categories of risk?

Answer:
Types of Risks
Risk can be referred to like the chances of having an unexpected or negative outcome. Any action or activity
that leads to loss of any type can be termed as risk. There are different types of risks that a firm might face
and needs to overcome. Widely, risks can be classified into three types: Business Risk, Non-Business Risk, and
Financial Risk.

Business Risk
These types of risks are taken by business enterprises themselves in order to maximize shareholder value
and profits. As for example, companies undertake high-cost risks in marketing to launch a new product in
order to gain higher sales.

Non- Business Risk

These types of risks are not under the control of firms. Risks that arise out of political and economic
imbalances can be termed as non-business risk.

Financial Risk
Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally
arises due to instability and losses in the financial market caused by movements in stock prices, currencies,
interest rates and more.

Making a career in project management has never been this easy! Enroll in our Post Graduate Program in
Project Management to get started today!

Types of Financial Risks

Risk Types: The different types of risks are categorized in several different ways. Risks are classified into
some categories, including market risk, credit risk, operational risk, strategic risk, liquidity risk, and event
risk.

Financial risk is one of the high-priority risk types for every business. Financial risk is caused due to market
movements and market movements can include a host of factors. Based on this, financial risk can be
classified into various types such as Market Risk, Credit Risk, Liquidity Risk, Operational Risk, and Legal Risk.

Market Risk:
This type of risk arises due to the movement in prices of financial instrument. Market risk can be classified as
Directional Risk and Non-Directional Risk. Directional risk is caused due to movement in stock price, interest
rates and more. Non-Directional risk, on the other hand, can be volatility risks.

Credit Risk:
This type of risk arises when one fails to fulfill their obligations towards their counterparties. Credit risk can
be classified into Sovereign Risk and Settlement Risk. Sovereign risk usually arises due to difficult foreign
exchange policies. Settlement risk, on the other hand, arises when one party makes the payment while the
other party fails to fulfill the obligations.to face financial losses out of legal proceedings, it is a legal risk.

4. Who are the players in capital market?

Answer:
Four Key Players in the Primary Market

Below we outline the four key players and their roles in the capital markets: corporations, institutions, banks,
and public accounting.
Example of Key Players in the Capital Markets

1. Corporations
In the capital markets, corporations behave as operating businesses that require capital to grow and run
their operations. These corporations can vary in industry, size, and geographical location. Careers at
corporations that relate to the markets include corporate development, investor relations, and financial
planning and analysis (FP&A).

2. Institutions (“Buy Side” Fund Managers)

Institutions consist of fund managers, institutional investors, and retail investors. These investment
managers provide capital to corporations that need the money to grow and operate their businesses. In
return for their capital, corporations issue debt or equity to the institutions in the forms of bond and shares,
respectively. The exchange of capital and debt or equity completes the cycle of the two key players in the
capital markets.

3. Investment Banks (“Sell Side”)

Acting as an intermediary, investment banks are hired to facilitate deals between corporations and
institutions. The job of investment banks is to connect institutional investors with corporionss, based on risk
and return expectations, and investment styles. Careers in investment banking involve extensive financial
modeling and valuation analysis.

4. Public Accounting Firms

Depending on their divisions, public accounting firms can engage in multiple roles in the primary market.
These roles include financial reporting, auditing financial statements, taxes, consulting on accounting
systems, M&A advisory, and capital raising. Therefore, public accounting firms are usually hired by
corporations for their accounting and advisory services.

Key Players in the Secondary Market

Unlike the primary market, where there is an initial issuance of debt or equity in exchange for capital, the
secondary market allows for the sale and trade of issued bonds and shares. The secondary market allows
players to enter and exit securities easily, making the market liquid.

Example of Key Players in the Secondary Market

Screenshot from CFI’s FREE Corporate Finance 101 Course.

1. Buyers and Sellers

In the secondary market, fund managers or any investors who wish to purchase securities or debts will have
to locate a seller. Transactions are facilitated through a central marketplace, including a stock exchange or
over the counter (OTC).

2. Investment Banks
While investment banks facilitate the issuance of bonds and shares in the primary market, they expedite the
sales and trading of issued debts and equities between buyers and sellers in the secondary market.

Investment banks provide equity research coverage on each stock’s upside potential, downside risk, and
rationale to help buyers and sellers make a judgment. Moreover, investment banks sell and trade securities
on behalf of the clients to maximize their profits.
5.What are the 5 methods of valuation?
Answer:
METHODS OF VALUATION: The method of valuation available to fix a price on a piece of land or property
are :
1. Residual Method .
2. Investment Method .
3. Comparative Method.
4. Profit Method.
5. Contractor Method

1. The Residual Method of Valuation This method involves calculating the gross development value of a
building scheme (or) the market price that is expected to realize when the land has been developed
and disposed of by selling or leasing and deducting from this gross development value all the cost
that would be incurred during its development including development profit. The residual figure
represents the amount that it is possible to pay for the land in order that it can be developed and
disposed of at a profit.

2. Investment Method: This method is used where property produced an income for example a shop.
The income from the investment in the shop must prove to be more profitable than the investment
in other places eg. Building society.

3. Comparative Method: This involves direct comparison with similar types of properties to this one
being valued in the vicinity. The price paid on the open market for comparable properties forms a
basis for fixing a price. Differences occur in size, amount of accommodation, quality and extent of
finishes and fittings, condition of the property and its situation. Additions and subtractions are to be
made from the price paid for the comparative property for such things as rear extensions. Standard
of decoration and fitting must take into consideration the value will have to breakdown the property
into suitable unit for comparison purposes.

4. Profit Method: This is used for properties that have an earning capacity for eg. Cinema, clubs,
theatre. It involves establishing the gross earning of the property and deducting from this all
expenses including profit that are likely to be incurred by the tenant. The residual figure is the
amount available for rent.

5. Contractors Method this is based on the principle that the value of a building and the land on which
it stands is equal to the cost of construction plus the value of the site. This is not true however,
because the value of a building is the price that people are allowed to pay for it on the open market.
The only instance it may be true is for properties that really are offered for sale on the open market
for example schools, hospitals. Simplified Residual Calculation The basis of calculation is :value of
completed development. less cost of carrying out development. equals amount available to pay for
the land.