Unit - 1

1.1 INVESTMENT DECISIONS

1.1.1 PROJECT INVESTMENT MANAGEMENT
1.1.1.1 INVESTMENT MANAGEMENT
Investment management is the professional management of various securities (shares,
bonds etc) assets (e.g. real estate), to meet specified investment goals for the benefit of
the investors. Investors may be institutions (insurance companies, pension funds,
corporations etc.) or private investors (both directly via investment contracts and more
commonly via collective investment schemes e.g. mutual funds).
The term asset management is often used to refer to the investment management of
collective investments, whilst the more generic fund management may refer to all forms
of institutional investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary management on behalf
of (normally wealthy) private investors may often refer to their services as wealth
management or portfolio management often within the context of so-called private
ban!ing.
The Investment "anagement (I") component provides functions to support the planning,
investment, and financing processes for capital investment measures in your enterprise. The
term capital investment in this context does not refer only to investments you capitalize for
boo!!eeping or tax purposes. # capital investment can be any measure that initially causes costs
and that may only generate revenue or provide other benefits after a certain time period has
elapsed (for example, research and development or plant maintenance pro$ects).
The provision of %investment management services% includes elements of financial
analysis, asset selection, stoc! selection, plan implementation and ongoing monitoring of
investments. Investment management is a large and important global industry in its own
right responsible for careta!ing of trillions of dollars, euro, pounds and yen. &oming
under the remit of financial services many of the world%s largest companies are at least in
part investment managers and employ millions of staff and create billions in revenue.
'und manager (or investment advisor) refers to both a firm that provides
investment management services and an individual(s) who directs %fund management%
decisions.
1.1.2 SUB-COMPONENTS
The I" component consists of the following sub-components(
#ppropriation re)uests, for the management of capital investments in the planning phase
and decision-ma!ing phase
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Investment programs, for the cyclical planning of investment budgets for a number of
measures, throughout your whole enterprise
Investment measures, for the parallel handling of cost accounting and financial
accounting needs for individual capital investments. Investment measures are handled in
the form of internal orders or pro$ects.
Information *ystem (refer to I" Information *ystem)
INTEGRATION
The sub components of the Investment "anagement (I") component are integrated in numerous
ways with each other and with other +,- components
The investment program and the appropriation re)uest are ob$ects that originate in the I"
component. In order to represent the measure, the I" component uses internal orders from
.verhead &ost &ontrolling - .verhead .rders (&.-."-./#) and /lant "aintenance (/"), or
wor! brea!down structure (01*) elements from the /ro$ect *ystem (/*). The integration with
*#/ +,- #sset #ccounting ('I-##) enables you to easily capitalize the costs of internal orders
and 01* elements that re)uire capitalization to a fixed asset. &osts that do not re)uire
capitalization can be settled to cost accounting.
*ub-&omponents of Investment "anagement and their Integration
The integrated planning process allows you to roll up planned values from appropriation re)uests
and measures on the investment program to which they are assigned. &arry out budgeting of
measures, on the other hand, from the top down within the investment program.
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Transfer expected depreciation on all planned investments to management accounting in the
form of planned costs.
IMPLEMENTATION
Investment /rograms and #ppropriation +e)uests
There is a complete separate Implementation 2uide for investment programs, and one for
appropriation re)uests as well. In these I"2s, you can ma!e all necessary system settings.
Investment .rders
These are the steps you need if you have already implemented the &.-."-./# *ystem (.rder
/ro$ect #ccounting), in order to manage investment orders in addition to normal internal
orders.
'or the general setting up of the component, you should also see the Implementation 2uide for
the &.-."-./# component. 3ou find this Implementation 2uide under &ontrolling 4 Internal
orders.
Investment Pr!e"ts
The system settings necessary for managing investment pro$ects, in addition to normal
(customer) pro$ects are described here. These steps are necessary if you already implemented the
/ro$ect *ystem (/*) component.
'or the general implementation of the component, you should also use the Implementation 2uide
for the /ro$ect *ystem (/*) component. The /* Implementation 2uide contains all the system
settings that are necessary for internal pro$ects.
0hen implementation pro$ects for the /* *ystem are filtered to ma!e them I"-specific, all the
logistical functions such as networ!s, capacity re)uirements planning and resource planning are
hidden, since they are primarily re)uired for customer pro$ects.
The I" component contains functions for managing capital investments in the area of fixed
assets. The *#/ +,- Treasury component is intended for managing financial assets.
1.2 INVESTMENT MANAGERS AND PORT#OLIO STRUCTURES

#t the heart of the investment management industry are the managers who invest and
divest client investments. # certified company investment advisor should conduct an assessment
of each client%s individual needs and ris! profile. The advisor then recommends appropriate
investments.
Asset $%%"$tin
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The different asset classes are stoc!s, bonds, real-estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within each asset
class) is what investment management firms are paid for. #sset classes exhibit different
mar!et dynamics, and different interaction effects5 thus, the allocation of monies among
asset classes will have a significant effect on the performance of the fund. *ome research
suggests that allocation among asset classes has more predictive power than the choice of
individual holdings in determining portfolio return.
#rguably, the s!ill of a successful investment manager resides in constructing the asset
allocation, and separately the individual holdings, so as to outperform certain benchmar!s (e.g.,
the peer group of competing funds, bond and stoc! indices).
Ln&-term ret'rns
It is important to loo! at the evidence on the long-term returns to different assets, and to
holding period returns (the returns that accrue on average over different lengths of
investment).
'or example, over very long holding periods (eg. 678 years) in most
countries, e)uities have generated higher returns than bonds, and bonds have generated
higher returns than cash. #ccording to financial theory, this is because e)uities are ris!ier
(more volatile) than bonds which are, more ris!y than cash.
Diversi(i"$tin
#gainst the bac!ground of the asset allocation, fund managers consider the degree of
diversification that ma!es sense for a given client (given its ris! preferences) and
construct a list of planned holdings accordingly. The list will indicate what percentage of
the fund should be invested in each particular stoc! or bond. The theory of portfolio
diversification was originated by "ar!owitz and effective diversification re)uires
management of the correlation between the asset returns and the liability returns, issues
internal to the portfolio (individual holdings volatility), and cross-correlations between
the returns.
Investment st)%es
There are a range of different styles of fund management that the institution can
implement. 'or example, growth, value, mar!et neutral, small capitalization, indexed, etc.
9ach of these approaches has its distinctive features, adherents and, in any particular
financial environment, distinctive ris! characteristics.
'or example, there is evidence that
growth styles (buying rapidly growing earnings) are especially effective when the
companies able to generate such growth are scarce5 conversely, when such growth is
plentiful, then there is evidence that value styles tend to outperform the indices
particularly successfully.
1.* PROJECT MANAGEMENT
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/ro$ect management is the discipline of planning, organizing, motivating, and controlling
resources to achieve specific goals. # pro$ect is a temporary endeavor with a defined beginning
and end (usually time-constrained, and often constrained by funding or deliverables), underta!en
to meet uni)ue goals and ob$ectives, typically to bring about beneficial change or added value.
The temporary nature of pro$ects stands in contrast with business as usual (or operations), which
are repetitive, permanent, or semi-permanent functional activities to produce products or
services. In practice, the management of these two systems is often )uite different, and as such
re)uires the development of distinct technical s!ills and management strategies.
The primary challenge of pro$ect management is to achieve all of the pro$ect goals and ob$ectives
while honoring the preconceived constraints. The primary constraints are scope, time, )uality
and budget. The secondary :and more ambitious: challenge is to optimize the allocation of
necessary inputs and integrate them to meet pre-defined ob$ectives.
.ver the past few decades pro$ect management has been introduced into !nowledge wor!places
to enable increased discipline to the way investments are shaped and managed. /ro$ect
management methodologies were originally developed to increase the certainty that a defined
solution would be implemented as planned (whether it is a piece of infrastructure or a program of
some sort).
In doing this, pro$ect management enables the following )uestions to be answered(
0ill the pro$ect complete within budget;
0ill it deliver to its planned schedule;
0ere the expected products delivered;
'rom the perspective of the investor, what is missing are answers to the following(
1efore an investment decision is made
Is the logic for the planned investment clear;
Is there a sound case to invest;
#fter the pro$ect is delivered
0ere the expected benefits delivered;
The I"* enables investors to shape potential investments and define the preferred solution.
/ro$ect management then assists the investor to implement the defined solution on time and to
budget. The I"* then validates whether or not the investment delivered the expected benefits.
Investment management and pro$ect management are complementary disciplines that, together,
enable an investor to shape and implement good investments.
1.*.1 A++r$",es
There are a number of approaches to managing pro$ect activities including lean, iterative,
incremental, and phased approaches.
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+egardless of the methodology employed, careful consideration must be given to the overall
pro$ect ob$ectives, timeline, and cost, as well as the roles and responsibilities of all participants
and sta!eholders.
T,e tr$-itin$% $++r$",
# traditional phased approach identifies a se)uence of steps to be completed. In the traditional
approach, five developmental components of a pro$ect can be distinguished (four stages plus
control)(
T)+i"$% -eve%+ment +,$ses ( $n en&ineerin& +r!e"t
6. initiation
<. planning and design
-. execution and construction
=. monitoring and controlling systems
>. completion
?ot all pro$ects will have every stage, as pro$ects can be terminated before they reach
completion. *ome pro$ects do not follow a structured planning and,or monitoring process. #nd
some pro$ects will go through steps <, - and = multiple times.
"any industries use variations of these pro$ect stages. 'or example, when wor!ing on a bric!-
and-mortar design and construction, pro$ects will typically progress through stages li!e pre-
planning, conceptual design, schematic design, design development, construction drawings (or
contract documents), and construction administration. In software development, this approach is
often !nown as the waterfall model, i.e., one series of tas!s after another in linear se)uence. In
software development many organizations have adapted the +ational @nified /rocess (+@/) to
fit this methodology, although +@/ does not re)uire or explicitly recommend this practice.
0aterfall development wor!s well for small, well defined pro$ects, but often fails in larger
pro$ects of undefined and ambiguous nature. The &one of @ncertainty explains some of this as
the planning made on the initial phase of the pro$ect suffers from a high degree of uncertainty.
This becomes especially true as software development is often the realization of a new or novel
product. In pro$ects where re)uirements have not been finalized and can change, re)uirements
management is used to develop an accurate and complete definition of the behavior of software
that can serve as the basis for software development. 0hile the terms may differ from industry to
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industry, the actual stages typically follow common steps to problem solving:defining the
problem, weighing options, choosing a path, implementation and evaluation.
1.*.2 CRITICAL C.AIN PROJECT MANAGEMENT
&ritical chain pro$ect management (&&/") is a method of planning and managing pro$ect
execution designed to deal with uncertainties inherent in managing pro$ects, while ta!ing into
consideration limited availability of resources (physical, human s!ills, as well as management A
support capacity) needed to execute pro$ects.
&&/" is an application of the theory of constraints (T.&) to pro$ects. The goal is to increase the
flow of pro$ects in an organization (throughput). #pplying the first three of the five focusing
steps of T.&, the system constraint for all pro$ects is identified as are the resources. To exploit
the constraint, tas!s on the critical chain are given priority over all other activities. 'inally,
pro$ects are planned and managed to ensure that the resources are ready when the critical chain
tas!s must start, subordinating all other resources to the critical chain.
The pro$ect plan should typically undergo resource leveling, and the longest se)uence of
resource-constrained tas!s should be identified as the critical chain. In some cases, such as
managing contracted sub-pro$ects, it is advisable to use a simplified approach without resource
leveling.
In multi-pro$ect environments, resource leveling should be performed across pro$ects. Bowever,
it is often enough to identify (or simply select) a single drum. The drum can be a resource that
acts as a constraint across pro$ects, which are staggered based on the availability of that single
resource.
.ne can also use a virtual drum by selecting a tas! or group of tas!s (typically integration
points) and limiting the number of pro$ects in execution at that stage.
Event ",$in met,-%&)
9vent chain methodology is another method that complements critical path method and critical
chain pro$ect management methodologies.
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9vent chain methodology is an uncertainty modeling and schedule networ! analysis techni)ue
that is focused on identifying and managing events and event chains that affect pro$ect schedules.
9vent chain methodology helps to mitigate the negative impact of psychological heuristics and
biases, as well as to allow for easy modeling of uncertainties in the pro$ect schedules. 9vent
chain methodology is based on the following principles.
/robabilistic moment of ris!( #n activity (tas!) in most real-life processes is not a
continuous uniform process. Tas!s are affected by external events, which can occur at some
point in the middle of the tas!.
9vent chains( 9vents can cause other events, which will create event chains. These event
chains can significantly affect the course of the pro$ect. Cuantitative analysis is used to
determine a cumulative effect of these event chains on the pro$ect schedule.
&ritical events or event chains( The single events or the event chains that have the most
potential to affect the pro$ects are the Dcritical eventsE or Dcritical chains of events.E They
can be determined by the analysis.
/ro$ect trac!ing with events( 9ven if a pro$ect is partially completed and data about the
pro$ect duration, cost, and events occurred is available, it is still possible to refine
information about future potential events and helps to forecast future pro$ect performance.
9vent chain visualization( 9vents and event chains can be visualized using event chain
diagrams on a 2antt chart.
Pr"ess-/$se- m$n$&ement
A&i%e +r!e"t m$n$&ement
Le$n +r!e"t m$n$&ement
E0treme +r!e"t m$n$&ement
In critical studies of pro$ect management it has been noted that several /9+T based models are
not well suited for the multi-pro$ect company environment of today. "ost of them are aimed at
very large-scale, one-time, non-routine pro$ects, and currently all !inds of management are
expressed in terms of pro$ects.
@sing complex models for pro$ects (or rather tas!s) spanning a few wee!s has been proven
to cause unnecessary costs and low maneuverability in several cases. Instead, pro$ect
management experts try to identify different lightweight models, such as 9xtreme
/rogramming and *crum.
The generalization of 9xtreme /rogramming to other !inds of pro$ects is extreme pro$ect
management, which may be used in combination with the process modeling and management
principles of human interaction management.
Bene(its re$%is$tin m$n$&ement
1enefits realization management (1+") enhances normal pro$ect management techni)ues
through a focus on agreeing what outcomes should change (the benefits) during the pro$ect, and
then measuring to see if that is happening to help !eep a pro$ect on trac!. This can help to reduce
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the ris! of a completed pro$ect being a failure as instead of attempting to deliver agreed
re)uirements the aim is to deliver the benefit of those re)uirements.
#n example of delivering a pro$ect to re)uirements could be agreeing on a pro$ect to deliver a
computer system to process staff data with the re)uirement to manage payroll, holiday and staff
personnel records. @nder 1+" the agreement would be to use the suppliers suggested staff data
system to see an agreed reduction in staff hours processing and maintaining staff data (benefit
reduce B+ headcount).
1.*.* PROJECT MANAGEMENT PROCESS
1. #gree precise specification for the pro$ect - %Terms of +eference%
2. /lan the pro$ect - time, team, activities, resources, financials - using suitable pro$ect
management tools.
3. &ommunicate the pro$ect plan to your pro$ect team - and to any other interested people
and groups.
4. #gree and delegate pro$ect actions.
5. "anage and motivate - inform, encourage, enable the pro$ect team.
6. &hec!, measure, monitor, review pro$ect progress - ad$ust pro$ect plans, and inform the
pro$ect team and others.
7. &omplete pro$ect - review and report on pro$ect performance5 give praise and than!s to
the pro$ect team.
8. /ro$ect follow-up - train, support, measure and report results and benefits.
1.*.1 PROJECT PLANNING
/ro$ect planning generally consists of5
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determining how to plan (e.g. by level of detail or rolling wave)5
developing the scope statement5
selecting the planning team5
identifying deliverables and creating the wor! brea!down structure5
identifying the activities needed to complete those deliverables and networ!ing the
activities in their logical se)uence5
estimating the resource re)uirements for the activities5
estimating time and cost for activities5
developing the schedule5
developing the budget5
ris! planning5
gaining formal approval to begin wor!.
1.*.2 PROJECT CONTROLLING AND PROJECT CONTROL S3STEMS
/ro$ect controlling should be established as an independent function in pro$ect management. It
implements verification and controlling function during the processing of a pro$ect in order to
reinforce the defined performance and formal goals. The tas!s of pro$ect controlling are also(
the creation of infrastructure for the supply of the right information and its update
the establishment of a way to communicate disparities of pro$ect parameters
the development of pro$ect information technology based on an intranet or the
determination of a pro$ect !ey performance index system (F/Is)
divergence analyses and generation of proposals for potential pro$ect regulations
the establishment of methods to accomplish an appropriate the pro$ect structure, pro$ect
wor!flow organization, pro$ect control and governance
creation of transparency among the pro$ect parameters
'ulfillment and implementation of these tas!s can be achieved by applying specific methods and
instruments of pro$ect controlling. The following methods of pro$ect controlling can be applied(
investment analysis
costGbenefit analyses
value benefit #nalysis
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expert surveys
simulation calculations
ris!-profile analyses
surcharge calculations
milestone trend analysis
cost trend analysis
target,actual-comparison
1.*.4 PROJECT MANAGERS
# pro$ect manager is a professional in the field of pro$ect management. /ro$ect managers can
have the responsibility of the planning, execution, and closing of any pro$ect, typically relating to
construction industry, engineering, architecture, computing, and telecommunications. "any
other fields in production engineering and design engineering and heavy industrial have pro$ect
managers.
# pro$ect manager is the person accountable for accomplishing the stated pro$ect ob$ectives. Fey
pro$ect management responsibilities include creating clear and attainable pro$ect ob$ectives,
building the pro$ect re)uirements, and managing the triple constraint for pro$ects, which is cost,
time, and scope.
# pro$ect manager is often a client representative and has to determine and implement the exact
needs of the client, based on !nowledge of the firm they are representing. The ability to adapt to
the various internal procedures of the contracting party, and to form close lin!s with the
nominated representatives, is essential in ensuring that the !ey issues of cost, time, )uality and
above all, client satisfaction, can be realized.
1.*.5 P.ASES O# PROJECT MANAGEMENT
/ro$ect management as the application of !nowledge, s!ills, tools and techni)ues to a broad
range of activities in order to meet the re)uirements of a particular pro$ect. The process of
directing and controlling a pro$ect from start to finish may be further divided into > basic phases(
1. Pr!e"t "n"e+tin $n- initi$tin
#n idea for a pro$ect will be carefully examined to determine whether or not it benefits the
organization. Huring this phase, a decision ma!ing team will identify if the pro$ect can
realistically be completed.
2. Pr!e"t -e(initin $n- +%$nnin&
# pro$ect plan, pro$ect charter and,or pro$ect scope may be put in writing, outlining the wor! to
be performed. Huring this phase, a team should prioritize the pro$ect, calculate a budget and
schedule, and determine what resources are needed.
*. Pr!e"t %$'n", r e0e"'tin
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+esources% tas!s are distributed and teams are informed of responsibilities. This is a good time to
bring up important pro$ect related information.
1. Pr!e"t +er(rm$n"e $n- "ntr%
/ro$ect managers will compare pro$ect status and progress to the actual plan, as resources
perform the scheduled wor!. Huring this phase, pro$ect managers may need to ad$ust schedules
or do what is necessary to !eep the pro$ect on trac!.
2. Pr!e"t "%se
#fter pro$ect tas!s are completed and the client has approved the outcome, an evaluation is
necessary to highlight pro$ect success and,or learn from pro$ect history.
/ro$ects and pro$ect management processes vary from industry to industry5 however, these are
more traditional elements of a pro$ect. The overarching goal is typically to offer a product,
change a process or to solve a problem in order to benefit the organization.
In addition the following factors to be consider for pro$ect management5
/ro$ect management is chiefly associated with planning and managing change in an organization,
but a pro$ect can also be something unrelated to business - even a domestic situation, such as
moving house, or planning a wedding.
/ro$ect management methods and tools can therefore be useful far more widely than people
assume.
/ro$ect management techni)ues and pro$ect planning tools are useful for any tas!s in which
different outcomes are possible - where ris!s of problems and failures exist - and so re)uire
planning and assessing options, and organizing activities and resources to deliver a successful
result.
/ro$ects can be various shapes and sizes, from the small and straightforward to extremely large
and highly complex.
In organizations and businesses, pro$ect management can be concerned with anything,
particularly introducing or changing things, in any area or function, for example(
people, staffing and management
products and services
materials, manufacturing and production
IT and communications
plant, vehicles, e)uipment
storage, distribution, logistics
buildings and premises
finance, administration, ac)uisition and divestment
purchasing
sales, selling, mar!eting
human resources development and training
customer service and relations
)uality, health and safety,
legal and professional
technical, scientific, research and development
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new business development and anything else which needs planning and managing within
organizations.
*uccessful pro$ect management, for pro$ects large or small, tends to follow the process outlined
below.
The same principles, used selectively and appropriately, also apply to smaller tas!s.
/ro$ect management techni)ues are not $ust for pro$ect managers - they are available for anyone
to use.
1.1 PRO#ITABLE PROJECTS
/ro$ect management is an exercise in maximizing effectiveness - doing the correct things
correctly. /rocess management, on the other hand, through standardization, repeatability and
continuous incremental improvement (sometimes monumental improvement), strives for
efficiency - doing the correct things without waste.
There are a lot of programs out there that address process standardization and improvement -
programs such as Iean, *ix *igma, 1usiness /rocess 9ngineering, *I/.& (*upplier, Input,
/rocess, .utput, &ustomer), and so on. "ore study on any of these topics will certainly yield
positive benefits, especially at an #J integration firm characterized by many similar activities
and deliverables over multiple pro$ects (including service and warranty calls). 1ut for now, letKs
!eep it simple.
/rofitable /ro$ects is about transforming the way ma$or capital and construction pro$ects are
managed. /roven and innovating approaches to managing and procuring pro$ects way that
believe is uni)uely beneficial to all parties involved in the pro$ect.
"ore companies than ever are see!ing to understand pro$ect accounting costs as they realize that
!nowledge of this data impacts their bottom line and exposes areas where costs can be cut and
profits can be made. 1y understanding pro$ect accounting costs, companies can discover
financial problems with pro$ects early on and fix them. This can potentially save millions of
dollars. 1ut $ust because companies see! to understand these costs doesn%t mean they !now the
best way to go about finding the information.
*ay, for example, that &ompany L3M decides to pay more attention to pro$ect financials and
discovers an out-of-control pro$ect. "aybe &ompany L3M can do something about it -- li!e
cancel the pro$ect, put different resources on it, or change the scope. .r maybe they didn%t
discover the problem until it was too late to save the pro$ect, because they missed some !ey
steps.
/ro$ects that get rescued often do so because they have accurate pro$ect accounting cost data,
which allows for discovery of the problem early enough to fix it. +ead on to find out how to
manage your pro$ect accounting costs accurately.
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1. Un-erst$n- T,$t Time Is Mne)
To understand pro$ect costs, you have to !now who wor!ed on the pro$ect and for how long. This
is achieved through a good time-trac!ing system. Time-trac!ing data (payroll, billing, pro$ect
management, and strategy) feeds a number of operations(
/ro$ect cost accounting - Bow much have we spent;
Trac!ing - #re we done yet;
"anagement - 0hat should we do next;
9stimation improvement - Bow much is this going to cost us;
Trac!ing time is often viewed with a somewhat negative connotation. #t best, it is a necessary,
though disli!ed, factor in the determination of wages and billing. #t worst, it is seen as a method
of !eeping employees under totalitarian scrutiny, a waste of time, and inefficient. Bowever, the
truth is that time trac!ing, when instituted properly, can have massive financial benefits for a
company and for its individual employees.
2. Use 6e) Per(rm$n"e In-i"$trs t Me$s're Intermittent S'""ess
# !ey performance indicator, or F/I, measures an organization%s progress toward a strategic
goal. 0hen leveraged correctly, F/Is can ma!e a huge impact. /ercentage of pro$ects
profitable is a F/I that can really affect your business in a positive way.
#s an analogy, consider 1ritish /etroleum and its experiences in drilling for oil. 1/ created a
strategic vision for the company called no dry holes. Hrilling for oil and not finding it is
expensive. +ather than try to ma!e up for all the dry holes by finding an occasional gusher, 1/
decided to try to never have a dry hole in the first place. &hanging the attitude that dry holes
were an inevitable cost of doing business fundamentally changed its culture in very positive
ways.
If you set a strategic goal for your company of no unprofitable pro$ects, it will change the
nature of discussions in your business. 'or example, it empowers frontline employees to
legitimately push bac! when a pro$ect is being ta!en on for political reasons. &onversely, having
the attitude that the winners will ma!e up for the losers doesn%t do this.
"easuring this F/I is easy, because you can obtain direct per-pro$ect cost data from your
timesheet system. &orrectly applying indirect data (such as sales or accounting time) to the
direct costs is a bit more complicated. &onnecting all of this to revenue data gives you per-
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pro$ect profitability. .nce you have that data, you can wor! on your F/I of percentage of
profitable pro$ects to try to maximize it.
The formula for this F/I for a given time period (usually a )uarter or a year)( N of profitable
pro$ects,N of pro$ects
*. Estim$te A""'r$te%) $n- Estim$tes
"any companies do a poor $ob of bidding pro$ects appropriately. In order to avoid underbidding
or overbidding, you can use the formula O(9-#),9P(
9 Q 9stimated hours to complete pro$ect
# Q #ctual hours used to complete pro$ect
Improving this number can be difficult for some companies until they understand a simple truth(
*imilar pro$ects often have a stri!ingly similar ratio of early phase cost to overall pro$ect cost.
The early phases of a pro$ect are usually referred to as the re)uirements, design, or
specification phases. If after carefully trac!ing time on a batch of similar pro$ects, you find that
the first two phases usually ta!e about 67 percent of the total pro$ect time, you can then use that
data to predict the length of future pro$ects.
The following diagram shows how trac!ing the time it ta!es to complete a pro$ect helps in
planning future pro$ects. 1y trac!ing time and subse)uently learning that the first two phases of
/ro$ects 6 and < too! approximately 67 percent of all pro$ect time to complete, the pro$ected
length of /ro$ect - becomes easy to determine. If the first two phases of /ro$ect - ta!e 6.R
months to complete, you can estimate that the entire pro$ect will be completed in 6R months.
This pro$ect estimation techni)ue has proven itself to be extremely accurate for similar pro$ects
in a variety of companies.
1. 7'$%it) D$t$ In 8 7'$%it) D$t$ O't
In order for pro$ect accounting data to be accurate, the data that is put into the system must be
accurate. 9mployees are often resistant to the idea of trac!ing their time for all of their activities.
This is understandable5 no one has ever gotten a promotion for their exemplary ability to fill out
a timesheet. Bowever, the value of this data is tremendous if you need to loo! bac! into a
pro$ect%s activities or budget or timeline.
9mployees need to understand that there are tangible benefits to trac!ing their time. 0ithout
trac!ing time to specific pro$ects, it is impossible to calculate the real worth of their time and the
real value of their contributions to the pro$ect. #dditionally, not providing accurate time-trac!ing
information will s!ew the accounting data for the entire pro$ect.
15
1ad pro$ect accounting leads to unnecessary overtime, stressful, blown schedules, bad estimates
and canceled pro$ects. &iting specific examples from your company%s history when accurate time
collection could have made things easier for your employees helps to get them on board.
Tying bonuses or other benefits to complete data collection is often used in customer relationship
management tools to ad$ust sales commissions. The same can be done for other forms of data
collection. 9ven if you don%t li!e to dangle a carrot to get results, providing employees with a
template for future success can prove the value of accurate time and resource trac!ing.
2. Limite- Visi/i%it)
#ny pro$ect time-trac!ing system that is worth its salt will be able to limit an employee or
department%s visibility into the pro$ect list. #n employee confronted with >77 entries will usually
enter bad data on a timesheet. /ushing this burden up to an administrator will vastly improve
data accuracy.
3ou can also use this mechanism to assign people to pro$ects, limit hours on pro$ects, and see
who has been assigned to which tas!s. Timesheet systems are unli!ely to be as fully functional in
drawing 2antt charts as systems li!e "icrosoft /ro$ect, but can be integrated with those systems
for the departments that absolutely re)uire it.
Time, money, and resources need to be precisely applied in order to achieve the best results in
any pro$ect setting. 'ortunately, the tools exist to ma!e the determination of that amount
relatively simple. This common-sense approach can ma!e the entry and application of pro$ect
data seamless and simple.
The !ey elements of /rofitable /ro$ects have been proven across a wide range of industries,
bringing significant improvements in performance and returns. 0hy these methods do not seem
to have been exploited in the construction and capital pro$ects fields; Identified some substantial
inhibitors to innovation in the way ma$or pro$ects have traditionally been managed, and
/rofitable /ro$ects methodology overcomes these issues.
&ompanies that want to implement ma$or infrastructure pro$ects such as power plants, airports,
or hospitals need steady nerves - not to mention solid financing and completely reliable partners.
1.1.1 EVALUATION O# INVESTMENT OPPORTUNITIES
These tools are(
S /aybac! /eriod
S Internal +ate of +eturn
16
S ?et /resent Jalue
?et /resent Jalue, while a good method, is complex to calculate and seldom used, therefore only
the first two methods will be discussed.
P$)/$"9 Peri-
/aybac! period is the simplest method of evaluating an investment. It measures the length of
time an investment ta!es to pay for itself by dividing the cost of the investment by the annual
cash flows generated by the investment. The shorter the paybac! period the better and while
there is no exact benchmar!, a general rule of thumb is to invest in opportunities with a paybac!
of less than three years.
# company that is loo!ing for a )uic! turnaround on their investment will find paybac! period to
be very useful5 however it has a ma$or wea!ness. It ignores the cash flow beyond the paybac!
period. If the investment will only create revenue for three years, it has no long-term value and
could eventually become a financial drain.
Intern$% R$te ( Ret'rn
The internal rate of return loo!s at the cash flows over the life of the pro$ect. &ompanies should
invest in opportunities with rates of return higher than the interest rate paid on capital plus a
premium for ris!.
/ro$ected internal rate of return is the most commonly used method of evaluating investments
because it is still relatively easy to calculate and provides information about the long-term
viability of the investment. #nother benefit of the internal rate of return is that it considers the
interest expense of the investment.
The interest expense, or time-value of the money, is a measure of what the company could be
earning had they invested elsewhere. Interest expense is important to ta!e into account when
considering various alternatives, because a business wants to invest in an opportunity with the
highest possible return in relation to other opportunities.
The best way to evaluate an alternative is a combination of paybac! period and internal rate of
return, but how do cooperatives really evaluate alternatives;
S Important factors
S &riterion used
S #cceptable paybac! period
S #cceptable return on investment
S Hecision tools used
17
S Hifficulties of ma!ing a decision
Ret'rns n Investment
"anagers and directors were as!ed what their cooperative considered to be a minimum
acceptable rate of return and paybac! period. The rate of return ranged from T to <>U, and
averaged 6<.6VU. The paybac! period ranged from <-6> years, and averaged >.V- years. This is
slightly higher than the benchmar! - years discussed earlier.
De"isin T%s Uti%i:e-
The )uality of information used in ma!ing an investment decision is an important consideration.
0hen as!ed to indicate what tools boards used in ma!ing a decision, the overwhelming response
was that their primary tool was the general manager. It also indicated that boards relied on verbal
recommendations as opposed to written recommendations.
1.1.2 EVALUATING SUCCESS#UL INVESTMENT OPPORTUNITIES
"a!ing investment decisions are perhaps the most important decision that top management of
companies has to ma!e. 1y ma!ing a decision to invest or not to invest, it often results in huge
conse)uences that will ma!e or brea! a business.
0e are able to assist you in evaluating various !inds of investment opportunities from business
and financial angles and help you determine if they can meet your ob$ectives. 0e can help you
build financial models, evaluate models, conduct scenario anlaysis or go through the complete
investment evaluation process.
#s mentioned, our approach can consist of the following seven )uic! steps (or a selection of the
steps depending on each case)
6. 2o through your ob$ectives(
This is an important step so that we !now what you are trying to achieve from this investment or
whether the investment will enable you to achieve your ob$ectives.
<. Hiscuss the opportunity(
0e will discuss the opportunity with you in great depth to understand the various aspects of the
opportunity such as costs drivers, revenue drivers and sensitivities and assumptions. 0e will use
your proprietary method to let you discover and thin! about issues that you might have missed
otherwise. *ometimes, you might realize from our discussions that you should drop the
investment opportunity and not proceed further. That is great.
-. Hevelop the plan(
0e will help you develop a detailed investment plan that ta!es into account the !ey aspects from
our discussions. This is to crystallize the ideas and points that we have discussed earlier so that
you can evaluate them.
=. Hevelop the financial model(
.nce we !now about the investment opportunity in detail including the appropriate drivers and
assumptions, we will build the financial analysis model that will )uantify the potential returns
and ris!s.
18
>. Hevelop scenario analysis model(
#fter a financial model has been developed, we will build analyze the outcome based on the
various scenarios that you have told us earlier. This will enable you to better understand the
volatility of the potential outcomes and the associated ris!s.
T. 'ine tune and negotiate the investment amount and structure(
If you so decide to fine tune your investment amount or structure, we can help you to do that so
that you can minimize your ris! or improve your returns. This is an important step as often
overloo!ed especially if the counter party is sophisticated and uses exotic instruments or
complicated terms. 1ase on our earlier analysis with you, we can help you fine tune your
investment amount and structure.
V. &omplete the investment(
The actual investing wor! usually involves intense negotiations of commercial terms which will
involve further changes in the plan, financial model and legal agreements. 0e can help you
pro$ect manage the completion process that will often involve other professionals so as to free up
your time to manage your existing business.
Ot,ers
a. #rranging programs
b. /roviding information about mar!et potential
c. *election
d. /roperty re)uirements
e. 2overnment services
f. *upport in home mar!et
1.1.* ;.3 GO T.ROUG. PROPER INVESTMENT EVALUATION<
Prevent m$9in& B$- Investments
0e have seen many companies ma!e a lot of money and then descend into difficulties or even go
bust when they ma!e one wrong investment decision. The decision can be setting up starting a
new product, setting up a new shop, buying a new property or ac)uiring a new business.
'rom our experience, many of such problems can be avoided if you have another experienced
third party provide you with careful and in-depth analysis prior to ma!ing such a decision.
*ometimes the alternative opinion of a third party will help you loo! at your investments in a
different way or help you build in safe guards so that you will not suffer when your investments
turn sour.
*ometimes the decision to invest is right but the structure of the investment or execution is not
carried out in the right way and it resulted in huge problems down the road. These problems
could have been avoided with sound advice from experienced professionals.
0in "oney "a!ing .pportunities
19
.n the flip side, we have seen many companies miss big money ma!ing opportunities because
they did not analyze the opportunities presented to them properly. The reasons given for such
oversight are often lac! of time or expertise to evaluate potential money ma!ing opportunities.
0e have seen many companies are overly conservative in its approach as well so they are not
able to generate higher growth rates as when compared to their competitors. 0hile conservatism
is not a bad thing in general, but too much of it could see you being left behind or the survival of
your business being threatened by others.
1.2 INVESTMENT DECISIONS UNDER CONDITIONS O# UNCERTAINT3
The problem is a very complex one. It involves not only the intrinsic uncertainties of the pro$ect
under review, but also the composite uncertainties of the overall portfolio of investments in
relation to the resources available to the business as a whole and the willingness of the decision-
ma!er to ta!e ris!s.
1ecause of the complexity of the problem there is a tendency to by-pass it by assuming a state of
%)uasi-certainty%. Thus it is common practice to incorporate a ris! premium into the yield criterion
used to demarcate the 2.,?. 2. decision boundary. 9ven after the time and effort expended in
determining a probabilistic outcome, the tendency is to %simplify% by reverting to a single
composite criterion such as %the expected value% or even %the expected utility value% 6-=, *uch
apparent simplification is retrogressive in that it obscures the true nature of the problem, and it
negates much of the potentially valuable information that may be derived from a recognition of
the intrinsic uncertainty of the situation.
1efore an attempt is made to rationalize this problem, some considerations that will
fundamentally affect the decision-ma!ing logic must be critically examined.
#ACTORS A##ECTING T.E INVESTMENT DECISION
Un"ert$int) $n- Ris9
/orterfield distinguishes between uncertainty and ris! as follows(
+is! refers to a situation wherein the possible future outcomes of a present decision are plural5
however, the dimensions and probabilities of these outcomes are !nown in advance.
@ncertainty refers to a situation wherein the possible future outcomes are also plural5 however,
their dimensions and,or the probabilities cannot be ob$ectively specified in advance.
In terms of this concept, ris! simply refers to a situation in which the uncertainties are
probabilistically )uantified. The magnitude of the ris! is undefined.
Bowever, these criteria are inade)uate as a measure of ris! because it is the possibility of ma!ing
a loss that is of fundamental importance to the businessman.
20
T.E INVESTMENT DECISION
It is proposed that an investment proposal should be sub$ected to two tests of acceptability( the
short term test covering the negative cash flow period, and the long-term test covering the
positive cash flow period.
The short-term test is an assessment of the ability to finance the investment without over-
straining the financial resources of the company over the period for which it is practicable to
ma!e a realistic year-by-year forecast of the cash flow within reasonable limits of confidence. If,
under adverse circumstances, cash inade)uacy appears li!ely within the period considered, then
it would be unwise to assume the additional burden of a new investment, regardless of its
ultimate attractiveness. Timing is of the essence in the above context.
# suitable shift in the timing of a new investment may avoid the superimposition of
commitments, thus dampening possible fluctuations in cash demand.
The long-term test is one of general ris! limitation.
'or instance, the probability of a negative ?/J of +6T million is approximately twice that of the
acceptable limit5 hence, the investment proposal in its present form carries too much ris! of
financially crippling the company.
0hile this investment proposal is not acceptable in its existing form, it does not mean that the
pro$ect itself is intrinsically unacceptable. There are many ways and means of %tailoring% the
proposal to bring its ris! characteristics more into line with the re)uirements and constraints of
the company. *ome of these possibilities are considered below.
@ncertainty and ris! are not the same thing. 0hereas uncertainty deals with possible
outcomes that are un!nown, ris! is a certain type of uncertainty involving a real
probability of loss for a given outcome. +is!s can be accounted for more
comprehensively than uncertainty.
Hecision ma!ing under conditions of ris! should see!, wherever possible, to identify,
)uantify, and absorb ris!.
The )uantity of ris! is e)ual to the sum of the probabilities of a ris!y outcome (or various
outcomes) multiplied by the anticipated loss as a result of the outcome.
The ability of a firm to absorb, transfer, and manage ris! will often define management%s
ris! appetite so that once ris!s are identified and )uantified, decisions may be made as to
whether ris!y outcomes may be tolerated and to what extent.
#r"e m$!e're
21
#n unavoidable catastrophe, especially one that prevents someone from fulfilling a legal
obligation. #n unforeseeable act of nature.
.e-&e
# contract or arrangement reducing one%s exposure to ris!.
eg., @ncertainty can be usefully reduced to Dsubway uncertaintyE or Dcoconut uncertainty.E
*ubway uncertainty captures that part of uncertainty that is fairly predictable : for example, the
)uantity of water that will be used by Hubai or Iondon between certain hours of the day or the
prospects of catching a subway train on time. *tatistical properties in subway uncertainty are
well-!nown and fall into specified limits.
&oconut uncertainty is )uite different and refers to events that we can imagine occurring but
certainly not with any fre)uency, such as being hit by a coconut or eaten by a crocodile. 'or
example, a prominent Ja+ model, using data between 6W6T and <77- and excluding the most
turbulent periods, finds that the How Xones should only have exhibited daily movements of VU
once in -77,777 years. 3et this has, in fact, happened =R times over the period. These cannot be
blac! swan events, which by definition are very rare. These are Dcoconuts constantly falling on
our heads, and we are ignoring them,E 2aba says.
#nother step in 2abaKs solution is to understand the danger of the Dillusion of control,E
particularly that supplied by )uantitative wor!. D&omplex models can fit the past data well, but
that doesnKt necessarily mean that they fit the future well,E he says. It is no big deal to fit a
function to a data series, but it does not mean that it will predict as well as simple models, he
added. # !ey point raised about forecasting was that we have a strong tendency to ma!e our high
estimate too high and our low estimate too low, which is hard to argue with.
@nder 2abaKs theory of illusion of control, things that we assume depend on s!ill and graft in
fact depend mostly on chance. D9ven when the dangers of illusion of control are high and the
sta!es are very high, we still !eep on falling into this trap,E 2aba says. DIf we fall into this trap,
we underplay the role of chance, we underestimate uncertainty.E The corresponding benefit is
that if we realise our limits to predictability and we do not try to control it, then paradoxically we
can have more beneficial outcomes.
1.4 RIS6 ANAL3SIS IN CAPITAL INVESTMENT DECISION
Bow can business executives ma!e the best investment decisions; Is there a method of ris!
analysis to help managers ma!e wise ac)uisitions, launch new products, modernize the plant, or
avoid overcapacity; D+is! #nalysis in &apital InvestmentE ta!es a loo! at )uestions such as
these and says DyesE-by measuring the multitude of ris!s involved in each situation.
"athematical formulas that predict a single rate of return or Dbest estimateE are not enough. The
authorKs approach emphasizes the nature and processing of the data used and specific
combinations of variables li!e cash flow, return on investment, and ris! to estimate the odds for
each potential outcome.
22
"anagers can examine the added information provided in this way to rate more accurately the
chances of substantial gain in their ventures. The article, originally presented in 6WT=, continues
to interest B1+ readers. In a retrospective commentary, the author discusses the now routine use
of ris! analysis in business and government, emphasizing that the method can-and should-be
used in any decision-re)uiring situations in our uncertain world.
.f all the decisions that business executives must ma!e, none is more challenging:and none
has received more attention-than choosing among alternative capital investment opportunities.
0hat ma!es this !ind of decision so demanding, of course, is not the problem of pro$ecting
return on investment under any given set of assumptions. The difficulty is in the assumptions and
in their impact.
9ach assumption involves its own degree-often a high degree-of uncertainty5 and, ta!en together,
these combined uncertainties can multiply into a total uncertainty of critical proportions. This is
where the element of ris! enters, and it is in the evaluation of ris! that the executive has been
able to get little help from currently available tools and techni)ues.
There is a way to help the executive sharpen !ey capital investment decisions by providing him
or her with a realistic measurement of the ris!s involved. #rmed with this gauge, which
evaluates the ris! at each possible level of return, he or she is then in a position to measure more
!nowledgeably alternative courses of action against corporate ob$ectives.
1.4.1 NEED #OR NE; CONCEPT
The evaluation of a capital investment pro$ect starts with the principle that the productivity of
capital is measured by the rate of return we expect to receive over some future period. # dollar
received next year is worth less to us than a dollar in hand today. 9xpenditures three years hence
are less costly than expenditures of e)ual magnitude two years from now.
'or this reason we cannot calculate the rate of return realistically unless we ta!e into account
(a) when the sums involved in an investment are spent and
(b) when the returns are received.
&omparing alternative investments is thus complicated by the fact that they usually differ not
only in size but also in the length of time over which expenditures will have to be made and
benefits returned.
These facts of investment life long ago made apparent the shortcomings of approaches that
simply aver-aged expenditures and benefits, or lumped them, as in the number-of-years-to-pay-
out method. These shortcomings stimulated students of decision ma!ing to explore more precise
methods for determining whether one investment would leave a company better off in the long
run than would another course of action.
It is not surprising, then, that much effort has been applied to the development of ways to
improve our ability to discriminate among investment alternatives. The focus of all of these
investigations has been to sharpen the definition of the value of capital investments to the
company. The controversy and furor that once came out in the business press over the most
appropriate way of calculating these values have largely been resolved in favor of the discounted
cash flow method as a reasonable means of measuring the rate of return that can be expected in
the future from an investment made today.
23
Thus we have methods which are more or less elaborate mathematical formulas for comparing
the outcomes of various investments and the combinations of the variables that will affect the
investments. #s these techni)ues have progressed, the mathematics involved has become more
and more precise, so that we can now calculate discounted returns to a fraction of a percent.
1ut sophisticated executives !now that behind these precise calculations are data which are not
that precise. #t best, the rate-of-return information they are provided with is based on an average
of different opinions with varying reliabilities and different ranges of probability. 0hen the
expected returns on two investments are close, executives are li!ely to be influenced by
intangibles-a precarious pursuit at best.
#s the 'inancial #nalyst for the company one must analyze two mutually exclusive capital
investment proposals. *hareholders in organizations li!e to invest in pro$ects that are worth more
than they cost. The difference between the two is called ?et /resent Jalue (?/J). #ssuming you
will be maximizing the shareholders wealth, when calculating the ?/J, the pro$ect with the
positive outcome will be the pro$ect that should be pursued.
In capital budgeting, the profitability index (/I) measures the dollar return for the amount
invested. Bence, /I is useful for capital rationing. The investment in net wor!ing capital is an
important part of any capital budgeting analysis. ?/J calculates all cash flows rather than
profits, however, used alone can result in a false sense of security.
In capital budgeting there should not be total confidence placed in ?/J calculations alone,
several analysisK exist to provide additional support for goof investment analysis. The sensitivity
analysis is one approach, which examines how sensitive a particular ?/J calculation is to
changes in underlying assumptions. # downside to sensitivity analysis is that it treats each
variable in isolation. *cenario analysis, a variant of sensitivity analysis allows several factors to
be considered at the same time. 1rea!-even analysis helps to narrow the pro$ect selection by
calculating the amount of sales needed.
1.4.2 RIS6 ANAL3SIS IN INVESTMENT DECISION
The main ob$ective of any company is to maximize shareholder%s wealth. The main way
companies achieve this ob$ective is through investments in real and financial assets. # company
loo!s at various external strategies which include mergers and ac)uisitions as well as internal
strategies such as increasing production from within. 1efore ma!ing a final decision on what
type of assets to invest in or what strategy should be used, a company should apply various
valuation techni)ues to these pro$ects or proposals in order to see which pro$ect adds the most
value to the company.
9xternal Investment *trategies
Increase its mar!et share
Feep pace with technology
&urrent mar!et share
&apital budgets evaluations
24
+is! level
?et /resent Jalue (?/J)
/ro$ect cash flow
Hivided
Hiscount rate
&ash flow including depreciated assets and liabilities
'inancial business decisions
#verage #ccounting +eturn (##+)
Internal +ate of +eturn (I++)

Intern$% Investment Str$te&ies
Increase profit
"ar!et share
Hecrease overall cost of capital
&ost of e)uity capital
*hort-term solvency
&ost of capital investment
1eta, or difference
9xpected mar!et return
&hange financial leverage
1usiness ris!
'orecast the probability
1usiness outcomes
/otential sales increase
Investment Ris9
+is! is inherent in conducting business. 0hile some investments are safer than others no one can
guarantee that a particular venture will be profitable for a firm. 9ven with extensive mar!et
analysis and detailed revenue pro$ections, external and internal factors can arise that can change
a seemingly profitable pro$ect into a loss.
9xpand
&ritical part of choosing pro$ect
25
+is!
1.5 INVESTMENT AND T3PES O# INVESTMNET
*hares (stoc!s),mutual funds, fixed deposits, bonds and gold( the main investments available to
the Indian investor.
'ixed Heposits
1onds
2old
"utual 'unds
*toc!s
i. #i0e- De+sits
0hat is a fixed deposit;
Investing in fixed deposits is probably the most common form of investment in India. # fixed
deposit is a deposit made with a ban! for a fixed period of time. The investor is usually not
allowed to withdraw this money till the end of the period (!nown as term) without paying a
penalty. The interest rate paid on the deposit is pre decided at the beginning of the period and an
investor has the option to withdraw interest either at regular periods or ta!e a lump sum at
maturity.
Bow much do fixed deposits return;
'ixed deposit returns vary over time. In early <76<, most ban!s offered between R-67.>U p.a. for
a 6 year term.
@nfortunately very few people understand the dynamics of investing in fixed deposits and forget
that variables li!e tax and inflation affect real returns. These underlying hidden costs can
virtually erode all the returns you earn from them.
Bow ris!y are fixed deposits;
'ixed deposits tend to be very safe, especially at nationalized ban!s.
26
Bow can I invest in fixed deposits;
3ou can go to any ban! and open a fixed deposit at that ban!.
1enefits Hrawbac!s
*afety Iower rate of return
+egular Income in the form of interest Interest income is taxable
*aves tax (deductible under section R7-&) Bigh inflation can wipe out all the benefits
ii. Bn-s
2rouped under the general category called fixed-income securities, the term bond is commonly
used to refer to any securities that are founded on debt. 0hen you purchase a bond,
you are lending out your money to a company or government. In return, they agree to
give you interest on your money and eventually pay you bac! the amount you lent
out.
The main attraction of bonds is their relative safety. If you are buying bonds from a
stable government, your investment is virtually guaranteed, or risk-free. The safety
and stability, however, come at a cost. 1ecause there is little risk, there is little
potential return. #s a result, the rate of return on bonds is generally lower than other
securities.
0hat is a bond;
# bond is a type of investment that provides a return in the form of fixed regular payments and
the eventual return of the invested principal at maturity. The periodic payment is called a coupon.
1onds are issued by governments, government agencies and corporations. They issue bonds
because they need money. 3ou, as a buyer of the bond, are actually lending the money to the
issuer under specific conditions, written in the prospectus of the bond. *ome bonds (mainly
government) even carry tax benefits along with them. 9xample( The IH'& 1onds issued in
Xanuary, <76< carried an exemption of +s <7,777 from the investorKs taxable income.
Bow much do bonds return;
Bistorically, bonds have returned more than cash investments but less than stoc!s. 1ond returns
vary with the interest rate cycle and credit )uality. 1ut on an average, they returned R.>-66U p.a.
in <766.
Bow ris!y are bonds;
1onds in general, are less ris!y than stoc!s but more ris!y than fixed deposits or savings account
deposits. 1onds issued by the government (central, state and agencies) are for all practical
purposes, ris! free. 1onds issued by private corporations carry some ris! of default (not paying
coupon payments or principal on time). This ris! is !nown as credit ris!.
27
+ating agencies such as &+I*I and I&+# issue credit ratings for bonds. ### grade bonds are
the safest and anything below 111 grade bonds are non-investment grade. 0e do not
recommend that you invest in anything below 111 grade-bonds.
Bow can I invest in bonds;
"any bonds can be bought online via your demat account, directly by applying to the
issuer.
"any bonds can be bought from the secondary mar!et via your demat account.
3our financial advisor may be able to apply directly to the issuer on your behalf.
1enefits Hrawbac!s
&apital /reservation- #t
maturity you get your principal
bac!
&redit +is!- This usually applies to corporations.*ome
of the corporations may default on their payments.
+egular Income- Interest is paid
on regular basis and can
complement your income
Interest +ate +is!- The price of the bond is based on
the mar!et interest rate. Thus if the mar!et interest rate
increases, the price of bond may decrease.
Tax 9xemption- *ome bonds
provide tax benefits.
Ii)uidity +is!- *ome bonds are illi)uid and do not
trade actively on exchanges.
iii. G%-=
0hat is gold;
2old is a precious metal. "illions of people, financial institutions and governments globally,
invest in gold as a store of value. 'rom gold mutual funds to gold exchange-traded funds (9T's),
from gold stoc!s to physical gold in form of gold coins, gold bars, etc., investors now have
several different options when it comes to investing in the royal metal.
Bow much does gold return;
2old, returned 6-W.=6U over the last > years. +eturns from gold tend to vary over the years and
it is possible that gold can lose value over certain periods. 2old returns are lin!ed to the
performance of Indian +upee v,s the @* Hollar since gold prices in international mar!ets are
)uoted in @*Y. Investments in physical gold donKt pay dividends or interest. Thus, the only
return you get from investing in gold, is price appreciation. 2old "utual funds or 9T's may pay
dividends.
Bow ris!y is gold;
Theoretically, gold is $ust as ris!y as any other commodity. Bowever, for all practical purposes in
the Indian context, gold is )uite safe. It is ris!ier than fixed deposits but safer than stoc!s.
2old prices rise when there is high inflation. Thus, historically, gold has always served as an
inflation hedge. # large number of investors floc! to gold during political and economic
28
uncertainties. Thus, it is considered a safe haven. +ecently when @*# had been downgraded by
*A/ in #ugust <766, in matter of < wee!s, gold rallied almost 67U from approx. +s <>,>77 to
+s <R,777(per 67 grams). 2old is not highly correlated to stoc!s, bonds or other assets. Bence it
serves as a classic diversification asset.
Bow can you invest in gold;
3ou can buy physical gold in the form of coins or bars from ban!s,post offices.
3ou can buy gold mutual funds or gold 9T's via your demat account. 9.g. +eliance 2old
"utual 'und. These investments closely trac! the price of physical gold.
1enefits Hrawbac!s
Cuite a safe investment in the Indian context HoesnKt pay dividends or interest
/rotects against inflation and financial turmoil ?ot as safe as fixed deposits
9xcellent diversification tool
iv. M't'$% #'n-s=
# mutual fund is a collection of stoc!s and bonds. 0hen you buy a mutual fund, you are pooling
your money with a number of other investors, which enables you (as part of a group) to pay a
professional manager to select specific securities for you. "utual funds are all set up with a
specific strategy in mind, and their distinct focus can be nearly anything( large stoc!s, small
stoc!s, bonds from governments, bonds from companies, stoc!s and bonds, stoc!s in certain
industries, stoc!s in certain countries, etc.
The primary advantage of a mutual fund is that you can invest your money without the time or
the experience that are often needed to choose a sound investment. Theoretically, you should get
a better return by giving your money to a professional than you would if you were to choose
investments yourself. In reality, there are some aspects about mutual funds that you should be
aware of before choosing them, but we won%t discuss them here.
0hat is a mutual fund;
# mutual fund is a bas!et of investments (usually stoc!s) managed by professionals. 0hen you
invest in a mutual fund, you are investing in that bas!et of investments indirectly. 9ach unit of a
mutual fund represents a piece of that bas!et of investments. "utual funds are of several types G
e)uity funds that invest in stoc!s, bond funds that invest in bonds, commodity funds that invest
in commodities such as gold etc. 3ou even have funds with specific mandates such as growth
funds that invest in fast growing companies, dividend funds that invest in high-dividend paying
stoc!s and so on.
Bow much do mutual funds return;
"utual funds return as much as their underlying investments. Therefore, e)uity(stoc!) mutual
funds return as much as stoc!s, bond funds return as much as bonds, etc. Iong term funds with a
minimum loc!-in period of - years give investors income tax benefits under *ection R7c.
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Bow ris!y are mutual funds;
"utual funds in general are as ris!y as their underlying investments. Bowever, investing in a
mutual fund is much safer than investing in a single stoc! or a single bond. "utual funds invest
in a variety of investments and thus spread the ris! among them, giving the investor
diversification benefits and reducing the overall ris!. *toc! (e)uity) mutual funds are ris!ier than
fixed deposits and can give negative returns when the mar!ets fall.
Bow can I invest in mutual funds;
3ou can buy mutual fund units directly from the fund manager or on the secondary mar!et. This
can be done via(
3our demat account.
3our financial adviser,approaching the fund management company directly.
1enefits Hrawbac!s
/rofessional "anagement- 'unds are managed by
professionals
9ntry and exit loads, if charged by
the fund, reduce fund returns
Hiversification- "utual funds provide you an
exposure to a diversified set of e)uities, bonds and
commodities
'und management fees that are
charged by the fund, reduce fund
returns.
Ii)uidity( *imilar to stoc!s, mutual funds allow
investors to li)uidate their holdings at will
9I** funds give investors tax benefits under
*ection R7c
v. St"9s >s,$res?=
0hen you purchase stoc!s, or e)uities, as your advisor might put it, you become a part owner of
the business. This entitles you to vote at the shareholders% meeting and allows you to receive any
profits that the company allocates to its owners. These profits are referred to as dividends.
0hile bonds provide a steady stream of income, stoc!s are volatile. That is, they fluctuate in
value on a daily basis. 0hen you buy a stoc!, you aren%t guaranteed anything. "any stoc!s don%t
even pay dividends, in which case, the only way that you can ma!e money is if the stoc!
increases in value - which might not happen. &ompared to bonds, stoc!s provide relatively high
potential returns. .f course, there is a price for this potential( you must assume the ris! of losing
some or all of your investment.
0hat is a share , stoc!;
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*toc!s are extremely popular investments in India and all over the world. # stoc! of a company
represents a small piece of ownership of that company. 3esZ If you own a share of Infosys, you
do own a small piece of Infosys (the company). *hares are traded on stoc! exchanges. In order
for a company to enable its shares to be traded on an exchange, it has to list its shares on the
exchange.
Bow much do shares , stoc!s return;
+eturns on stoc!s can be earned either via dividends or capital gains. &ompanies often pay their
shareholders a part of their income. This is !nown as a dividend. In the Indian context, dividends
are usually )uite small (usually about 7.>-<U of the mar!et price of the share).Increases in the
price of shares are called capital gains.
*toc! returns vary widely. *toc!s of different companies return different amounts of money and
this return is not fixed or !nown in advance. *toc!s in general (?ifty) returned 6<.<U over the
last > years and ==7.<VU over the last 67 years. In general, stoc!s return more than fixed
deposits, bonds and real estate.
Bow ris!y are shares , stoc!s;
In general, stoc!s are much more ris!y than fixed deposits. +is!iness depends on individual
companies and stoc!s. Investing in shares can be a ris!y proposition due to the high volatility in
prices. If investors are not cautious about the companies they invest in, they can end up with
negative returns.
This ris! can be reduced through diversification, i.e. investing in many stoc!s instead of $ust 6
stoc!, to spread the ris!. 0hen investing, people often loo! for a rationale behind the mar!et
movements but remember, in the short run mar!ets tend to get driven by speculators and act
irrationally. Bowever in the long run, the irrationality is ironed out and mar!ets tend to trade at
fair valuations. 9xample( Huring the <77R subprime crisis, the Indian economy was one of the
most robust economies. 3et the stoc! mar!ets crashed from <7,R77 (in Xanuary <77R) to R,-77
(>7U decrease from highs) in a matter of 6= months. Bowever when the panic settled down, we
bounced bac! to 6V>77 (677U increase from lows) by end of the same year.
Bow can I invest in shares , stoc!s
*toc!s can be bought,sold on stoc! exchanges via your demat account, though a stoc! bro!er.
3our demat account.
3our financial adviser,approaching the fund management company directly.
1enefits Hrawbac!s
Bigh returns Bign ris!
Bigh li)uidity 9xtremely volatile
vi. A%tern$tive Investments= O+tins@ #'t'res@ #OREA@ G%-@ Re$% Est$te@ Et".
*o, you now !now about the two basic securities( e)uity and debt, better !nown as stoc!s and
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bonds. 0hile many (if not most) investments fall into one of these two categories, there are
numerous alternative vehicles, which represent the most complicated types of securities and
investing strategies.
The good news is that you probably don%t need to worry about alternative investments at the start
of your investing career. They are generally high-ris!,high-reward securities that are much more
speculative than plain old stoc!s and bonds. 3es, there is the opportunity for big profits, but they
re)uire some specialized !nowledge. *o if you don%t !now what you are doing, you could get
yourself into a lot of trouble. 9xperts and professionals generally agree that new investors should
focus on building a financial foundation before speculating.
1.5.1 DISINVESTMENTS AND T3PES O# DISINVESTMENT
In finance and economics, divestment or divestiture is the reduction of some !ind of asset for
financial, ethical, or political ob$ectives or sale of an existing business by a firm. # divestment is
the opposite of an investment.
;.AT IS DISINVESTMENT
Hisinvestments, also !nown as divestments, are processes utilized by companies when there is a
need or desire to initiate a reduction in capital investment. 9ssentially functioning as the polar
opposite of an investment, the process of divestment involves selling off current investments in
order to generate assets that can be used to better advantage in some other manner. 1usinesses
sometimes use disinvestment as a means of changing the direction of the company in order to
meet changing consumer needs and remain competitive.
.ne of the easiest ways to understand divestment is to thin! in terms of a company that has
successfully produced a product for many years. Bowever, changing technology is shrin!ing the
demand for the companyKs product. # new product is developed that is anticipated to recapture
the interest of consumers. Bowever, this will leave the company with several physical facilities
and a great deal of e)uipment that is not re)uired for the production of the new product.
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In order to generate revenue that will aid in the manufacturing of the new product, the company
will undergo a period of disinvestment. The plants and other facilities that are no longer re)uired
for production are sold off, along with the now obsolete e)uipment. 1y generating income from
the sale of these divested holdings, the company creates resources that constitute a capital
investment in the new product.
#t times, a company may choose to sell off a subsidiary or business unit as part of strategy.
Hoing so allows the company to begin the migration from focusing on one mar!et sector to a
different sector that holds more promise. In some cases, disinvestment involves selling the
business unit to another company. #t other times, the business unit is spun off into a separate
company altogether.
Hisinvestment can also occur when there is a decision to ma!e changes in the regulation of an
industry. /erhaps the most well !nown example of this type of disinvestment application would
be the deregulation of the communications industry in the @nited *tates during the 6WR7Ks. #s
part of the process, the 1ell *ystem was completely divested and emerged as eight different
entities( the new #TAT, and seven regional 1ell companies that were !nown collectively as the
1aby 1ells.
1ecause disinvestment does involve the sale of resources, companies often loo! very closely at
the process before actually implementing any type of divestiture action. It is important to ma!e
sure that the investments that are released are not li!ely to be re)uired in the future, and that the
revenue generated from the sale of the investments is highly li!ely to result in
increased profitability for the company in the long run.
DE#INITION O# DISINVESTMENT
6. The action of an organization or government selling or li)uidating an asset or subsidiary. #lso
!nown as divestiture.
<. # reduction in capital expenditure, or the decision of a company not to replenish depleted
capital goods.
-. # company or government organization will divest an asset or subsidiary as a strategic move
for the company, planning to put the proceeds from the divestiture to better use that garners a
higher return on investment.
=. # company will li!ely not replace capital goods or continue to invest in certain assets unless it
feels it is receiving a return that $ustifies the investment. If there is a better place to invest, they
may deplete certain capital goods and invest in other more profitable assets.
#lternatively a company may have to divest unwillingly if it needs cash to sustain operations.
1.5.2 CRITERIA #OR DISINVESTMENT
The decision regarding disinvestment or li)uidation viewed in the light of following criteria(
a) 0hether the ob$ectives of the company are achieved
b) 0hether there is decrease in number of beneficiaries
c) 0hether serving the national interest will be affected because of disinvestment
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d) 0hether private sector can efficiently operate and manage the underta!ing.
e) 0hether the original rate of return targeted could not be possible to achieve.
f) 0hether socio-economic ob$ectives lots its purpose
1.5.* MERITS O# DISINVESTMENT
In /rivate *ector, the decision ma!ing process is )uic! and decisions are lin!ed with the
competitive mar!et changes.
The disinvestment process would bring in better corporate governance, exposure to
competitive, corporate responsibility, improvement in wor! environment etc.
The mar!et participation in capital of /*@s through stoc! exchanges would enable the
mar!et to discover the latent worth of /*@s.
The Ioss ma!ing /*@s can be successfully revived by as!ing the strategic partner to
infuse fresh capital and exercising excellent management control over sic! /*@s
To achieve greater inflow of private capital.
This revenue can be used to compensate the deficit finance.
#llows new firms to enter into the mar!et and thus increases competition.
1rings the low productivity /*@s bac! on trac! thereby improving the )uality of goods,
eliminating excessive manpower utilization and enabling high profits.
[1.5.1 DEMERITS O# DISINVESTMENT
*elling of profit-ma!ing and dividend paying /*@ would result in loss of regular source
of income to the government.
There would be chances of \asset strippingK by the strategic partner.
"ost of the /*@s have valuable assets in the shape of plant and machinery, land and
buildings etc.
The 2overnmentKs /olicy or disinvestment includes the disposal of both profit ma!ing, as
well potentially viable /*@s.
Ioss of public interests
/*@s are resources of the nation. They belong to the people. 1y selling them to private
companies, government is seriously affecting the people%s welfare.
'ear of foreign control
*elling e)uities to foreign companies result in serious conse)uences shifting the nation%s
wealth, and control to outsiders.
Issues with wor!ers
The $obs of Ia!hs of wor!ers in the /*@s will fall in danger by privatization.
Iess number of bidders
9ven though government plans to disinvest, there are actually less number of people
34
willing to place their bids.
#part from these, it is the government and not /*@s who receive funds from
disinvestment. This raises conflicts between the government and the employment union
of the /*@.
1.5.2 MOTIVES #OR DIVESTITURES=
'irst, a firm may divest (sell) businesses that are not part of its core operations so that it
can focus on what it does best. 'or example, 9astman Foda! 'ord "otor &ompany, 'uture
2roup and many other firms have sold various businesses that were not closely related to
their core businesses.
# second motive for divestitures is to obtain funds. Hivestitures generate funds for the
firm because it is selling one of its businesses in exchange for cash. 'or example, &*L
&orporation made divestitures to focus on its core railroad business and also to obtain funds
so that it could pay off some of its existing debt.
# third motive for divesting is that a firm%s brea!-up value is sometimes believed to be
greater than the value of the firm as a whole. In other words, the sum of a firm%s individual
asset li)uidation values exceeds the mar!et value of the firm%s combined assets. This
encourages firms to sell off what would be worth more when li)uidated than when retained.
# fourth motive to divest a part of a firm may be to create stability. /hilips, for example,
divested its chip division called ?L/ because the chip mar!et was so volatile and
unpredictable that ?L/ was responsible for the ma$ority of /hilips%s stoc! fluctuations while
it represented only a very small part of /hilips ?J.
# fifth motive for firms to divest a part of the company is that a division is under-
performing or even failing.
# sixth reason to divest could be forced on to the firm by the regulatory authorities, for
example in order to create competition.
# seventh reason is pressure from shareholders for social reasons (sometimes also
called Hisinvestment). Bistorical example( there was a movement to divest from companies
who dealt with apartheid *outh #frica, see Hisinvestment from *outh #frica. &urrent
example( divestment from fossil fuels (similar to boycott).
1.5.4 Investment (r (in$n"i$% -e"isin
.ften the term is used as a means to grow financially in which a company sells off a business
unit in order to focus their resources on a mar!et it $udges to be more profitable, or promising.
*ometimes, such an action can be a spin-off. ('or the @nited *tates( Hivestment of certain parts
of a company can occur when re)uired by the 'ederal Trade &ommission before a merger with
another firm is approved. # company can divest assets to wholly owned subsidiaries.)
35
The largest, and li!ely most famous, corporate divestiture in history was the 6WR= @.*.
Hepartment of Xustice-mandated brea!up of the 1ell *ystem into #TAT and the seven 1aby
1ells.
1.5.5 Met,- ( -ivestment
*ome firms are using technology to facilitate the process of divesting some divisions. They post
the information about any division that they wish to sell on their website so that it is available to
any firm that may be interested in buying the division.
'or example, #lcoa has established an online showroom of the divisions that are for sale. 1y
communicating the information online, #lcoa has reduced its hotel, travel, and meeting expenses.
1.5.B PROCESS O# DISINVESTMENT
There are two ways of disinvestment.
6.Transfer of complete management to private enterprises.
"odern 'ood Industries, 1harat #luminum &ompany Iimited (1#I&.),J*?I, &entaur Botel
#irport are examples of this !ind.
<./artial selling of shares
Bere government sells some part of shares. 1ut still it retains ma$ority of them(>6U or
higher).This has been adopted in ma$ority of cases.
T;O MAR6S 7UESTIONS AND ANS;ERS
1. ;,$t is investment m$n$&ement<
Investment management is the professional management of various securities (shares,
bonds etc) assets (e.g. real estate), to meet specified investment goals for the benefit of
the investors. Investors may be institutions (insurance companies, pension funds,
corporations etc.) or private investors (both directly via investment contracts and more
commonly via collective investment schemes e.g. mutual funds).
The Investment "anagement (I") component provides functions to support the planning,
investment, and financing processes for capital investment measures in your enterprise. The
term capital investment in this context does not refer only to investments you capitalize for
boo!!eeping or tax purposes. # capital investment can be any measure that initially causes costs
and that may only generate revenue or provide other benefits after a certain time period has
elapsed (for example, research and development or plant maintenance pro$ects).
2. ;,$t is Asset $%%"$tin<
The different asset classes are stoc!s, bonds, real-estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within each asset
class) is what investment management firms are paid for. #sset classes exhibit different
mar!et dynamics, and different interaction effects5 thus, the allocation of monies among
asset classes will have a significant effect on the performance of the fund.
36
3. E0+%$in Ln&-term ret'rns
It is important to loo! at the evidence on the long-term returns to different assets, and to
holding period returns (the returns that accrue on average over different lengths of
investment). 'or example, over very long holding periods (eg. 678 years) in most
countries, e)uities have generated higher returns than bonds, and bonds have generated
higher returns than cash. #ccording to financial theory, this is because e)uities are ris!ier
(more volatile) than bonds which are, more ris!y than cash.
1. ;,$t is Diversi(i"$tin<
#gainst the bac!ground of the asset allocation, fund managers consider the degree of
diversification that ma!es sense for a given client (given its ris! preferences) and
construct a list of planned holdings accordingly. The list will indicate what percentage of
the fund should be invested in each particular stoc! or bond. The theory of portfolio
diversification was originated by "ar!owitz and effective diversification re)uires
management of the correlation between the asset returns and the liability returns, issues
internal to the portfolio (individual holdings volatility), and cross-correlations between
the returns.
2. ;,$t is +r!e"t m$n$&ement<
/ro$ect management is the discipline of planning, organizing, motivating, and controlling
resources to achieve specific goals. # pro$ect is a temporary endeavor with a defined beginning
and end (usually time-constrained, and often constrained by funding or deliverables), underta!en
to meet uni)ue goals and ob$ectives, typically to bring about beneficial change or added value.
4. E0+%$in +r(it$/%e +r!e"ts.
/ro$ect management is an exercise in maximizing effectiveness - doing the correct things
correctly. /rocess management, on the other hand, through standardization, repeatability and
continuous incremental improvement (sometimes monumental improvement), strives for
efficiency - doing the correct things without waste.
/rofitable /ro$ects is about transforming the way ma$or capital and construction pro$ects are
managed. /roven and innovating approaches to managing and procuring pro$ects way that
believe is uni)uely beneficial to all parties involved in the pro$ect.
5. E0+%$in ris9 $n$%)sis in investment -e"isin.
The main ob$ective of any company is to maximize shareholder%s wealth. The main way
companies achieve this ob$ective is through investments in real and financial assets. # company
loo!s at various external strategies which include mergers and ac)uisitions as well as internal
strategies such as increasing production from within. 1efore ma!ing a final decision on what
type of assets to invest in or what strategy should be used, a company should apply various
valuation techni)ues to these pro$ects or proposals in order to see which pro$ect adds the most
value to the company.
37
B. ;,$t is -isinvestment<
Hisinvestments, also !nown as divestments, are processes utilized by companies when there is a
need or desire to initiate a reduction in capital investment. 9ssentially functioning as the polar
opposite of an investment, the process of divestment involves selling off current investments in
order to generate assets that can be used to better advantage in some other manner. 1usinesses
sometimes use disinvestment as a means of changing the direction of the company in order to
meet changing consumer needs and remain competitive.
C. De(ine -isinvestment
6. The action of an organization or government selling or li)uidating an asset or subsidiary. #lso
!nown as divestiture.
<. # reduction in capital expenditure, or the decision of a company not to replenish depleted
capital goods.
REVIE; 7UESTIONS
6. 9xplain the concept of pro$ect investment management.
<. 0hat are the !ey differences between investment management and pro$ect management;
-. &riteria for selecting profitable pro$ects - 9xplain.
=. Hescribe clearly about evaluation of investment opportunities.
>. +is! analysis in investment decision G 9xplain.
T. 0hat are the types of investment;
V. 9xplain the concept and motives of disinvestment.
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