Investment management
- 2. Meaning of Investment • Sacrifice of certain present value for uncertain future reward is known as investment. • To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future. • In finance, the expected future benefit from investment is a return. The return may consist of capital gain and/or investment income, including dividends, interest, rental income etc.
- 3. Continued… • Most of the people earn the money. The income that a people receive may be used for purchasing goods and services. It is rare that people's current income exactly imbalances with their consumption. The imbalances will lead them either borrow or to save money. • When current income exceeds current consumption desired, people tend to save the excess money. They can do any of several things with these savings. This result ,is investment.
- 4. Investment Environment • The investment environment refers to various marketable securities available for purchase or sale and how and where these securities are traded. Investment environment mostly includes securities, security markets, and financial intermediaries.
- 5. 1. The securities: piece of papers represent investors claim for future benefits and assets. 2. security markets: mechanism or where securities are traded. – primary market: A market where newly issued securities are traded. – secondary market : a market where previously issued securities are traded – Money market: The short term security market. – Capital Market: In which long term securities are traded. 3. Financial Intermediaries: Institutions that connect borrowers and lenders by accepting funds from lenders and lending funds to borrowers. Investments are often made indirectly through intermediary financial institutions. These intermediaries include pension funds, banks, brokers, and insurance companies. They may pool money received from a number of individual end investors into funds such as investment trusts, unit trusts, etc. to make large scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied.
- 6. Reasons For Investment (why Investor Invest) • Income: Regular Income, Capital gain • Appreciation: Value Increment • Safety And Liquidity : safety of assets and liquid purpose. • Hedge Against Inflation: safety from Inflation. • Methods of tax planning: saving of tax like provided fund, citizen saving fund, insurance policy. • Excitement : self interest, enjoyment.
- 7. 2. Investment alternatives • A wide range of investment alternatives available for both individual and institutional investors. Similarly domestic and international instruments are available for investor as investment alternatives. The investment alternative first we divide into two categories: 1. Financial Assets 2. Real Assets
- 8. 1. Financial Assets i-Money Market Instruments a) T-bill: b) CD's c) Commercial Paper d) Eurodollars e) Euro Deposits: f) Repo ii) Capital Market Instruments a) Common Stock b) Preferred Stock c) Long-term Debt Security d) Government Securities e) Corporate Bonds
- 9. 2 Derivative Securities a. Option b. A future Contract c. Forward Contract d. Warrant e. Convertibles 3. Real Assets a. Precious Metal : Gold, Silver, Copper b. Real Estate: Land Building, Housing. c. Collectives: Diamond, old Stamp, Old Coins, celebrity's used goods, fine arts, prints etc. 4. Other Investment Alternatives a. Mutual Funds b. Employees' Provident fund c. Pension Funds d. Insurance Policy
- 10. i-Money Market Instruments • a) T-bill: Treasury Bills are an obligation issued by government, sold at discount from the face value. T-bill is the most marketable of all money market instrument. T-bills represent the simplest form of borrowing. The main aim of issuing t-bill is to satisfy short term financial need and regulate money market or balances the liquidity in the market. The NRB issues T-bill maturity period of 7,28, 45, 91, 182,364 days from the date of issue. Face Value of t-bill is in the US is 10000$ & in Nepal Rs.25000. Generally every week T- bills and its periferals issues in Nepal. • b) CD's: Certificate of Deposit is fixed maturity instrument sold by a bank to a depositors , it pays principle and interest at maturity. Fixed deposits of banks is known as CD's. before 1961, CDs were liquid because they were negotiable.
- 11. c) Commercial Paper:- commercial papers are issued by the corporation at their credit worthy basis. It is short term liquid security issued at discount basis; some time at interest basis as well. The interest rate is generally higher than of T-bill. d) Eurodollars : The commercial paper issued outside the US market but the denomination is in US $. Initially the Commercial Paper is issued in the Europe denomination in US $ and called EURO – DOLLAR. It is issued by a blue chip corporation or renowned organization because it is issued without any collateral.
- 12. e) Euro Deposits: The deposit in the US $ but ou side the US market. Eurodeposit is the fixed deposit account in the US $. For Eg. Nepalese investors opens a fixed dollar account at Nepal Bank Ltd. f) Repo: Repurchase agreement is a sale of a security in which the seller agrees to buy back (repurchase) the security at a specified price at a specific price at specified sate. Repos are usually executed using government securities, and the repurchase price is higher than the initial sale price. The difference between the sale price and purchase price is the source of return to the holder of the security. By entering into the repurchase agreement, the investor ( the buyers )knows exactly how much will be made on the investment and the funds will be returned.
- 13. ii) Capital Market Instruments: • Money market securities are purchased primarily to earn interest on temporary cash balances. These investments are of short duration and offer a high degree of safety for their principle amount, because the issuers generally have the highest credit ratings. Capital market instruments, however, include debt instruments with longer maturities as well as equities, which theoretically have no maturity. In the capital market, therefore, investor can commit funds for longer periods of time and purchase securities with a greater degree of risk in exception of higher returns. Capital market investment alternatives include various kinds of bonds and stocks. These securities will be further analyzed.
- 14. a) Common Stock:- common stock holders simply have an equity in the corporation, therefore the common stock holders are the true owners of the corporation. Each share of common stock represent fractional ownership interest in the firm. Generally it is issued at Rs. 100 par value in Nepal. Common stock investment alternatives is a popular investment alternative in Nepal. Common stock are traded in Nepal Stock Exchange (NEPSE). Only the listed companies' common stocks are traded in NEPSE. b) Preferred Stock A hybrid form of security that has feature of both of common stock and bonds owner of preferred stock generally receive fixed income as a dividend. They have prior claim on income and other assets . c) Long-term Debt Security: Long-term debt securities include various kinds of bonds. Investors can commit funds for longer periods of time and purchase long-term securities with a greater degree of risk in expectation of higher return.
- 15. d) Government Securities : govt. securities are the fixed income securities issued by governments. These securities are among the safest of all investments, as the government is unlikely to default on interest or on principal repayments. They are as follows: Treasury Notes : Life 1-10 Years Treasury Bonds Over 10 Years Saving Bonds: Non negotiable saving instruments issued by Govt. Development Bonds National Saving Bonds Citizen Saving Bonds Special Bonds Local Govt. Bonds: Issued By Local Govt. for special purpose.
- 16. e) Corporate Bonds: A corporate bond is long term promissory notes issued by a corporation. A corporate bond has more risk and return than that of government bonds. Bondholders receive a fixed return and the principle amount at the maturity date and have priority before common stock and preferred stock in the event of liquidation.
- 17. 2 Derivative Securities: Derivative Securities are financial contract that derives its value from some other security or assets, such as stock, bonds, commodities or interest rates. Derivatives securities allow an investor to speculate on movements in the value of the underlying assets without having to purchase those assets. Derivative securities can be used to reduce a firms risk. • Option • A future Contract • Forward Contract • Warrant • Convertibles
- 18. Real Assets • Precious Metal : Gold, Silver, Copper • Real Estate: Land Building, Housing. • Collectives: Diamond, old Stamp, Old Coins, celebrity's used goods, fine arts, prints etc.
- 19. Other Investment Alternatives • Mutual Funds • Employees' Provident fund • Pension Funds • Insurance Policy
- 20. Investment Process 1. Setting Investment Policy 2. Performing Security Analysis Technical analysis Fundamental Analysis 3. Constructing A Portfolio 4. Revising Portfolio 5. Evaluating the portfolio performance
- 21. Factor Affecting Investment Alternatives Investment alternative • Rate of Return • Risk • Taxes • Investment Horizon • Liquidity
- 22. Career Opportunities in Investment • Security Analyst: financial professional who analyses and makes recommendations regarding stocks and other financial assets • Portfolio manager: financial professional in charge of making buy, sell and hold decision for a portfolio. • Financial planner: Financial professional who helps individual identify and meet financial needs • Investment banker: Financial professional who helps companies and govt. organization acquire capital through the issuance of financial assets. • Stock broker: Financial agent who assists investors with buying and selling financial assets. • Investment researcher: A professional that studies different phenomena associated in the securities.