Security Analysis and Portfolio Management CIA -II

F INANCIAL I NSTRUMENTS

Financial instruments are cash, evidence of an ownership interest in an entity, or a

contractual right to receive, or deliver, cash or another financial instrument.

Financial instruments can be categorized by form depending on whether they are cash
instruments or derivative instruments:

 Cash instruments are financial instruments whose value is determined directly by

markets. They can be divided into securities, which are readily transferable, and other
cash instruments such as loans and deposits, where both borrower and lender have to
agree on a transfer.
 Derivative instruments are financial instruments which derive their value from the
value and characteristics of one or more underlying assets. They can be divided into
exchange-traded derivatives and over-the-counter (OTC) derivatives.

Alternatively, financial instruments can be categorized by "asset class" depending on whether

they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a
loan the investor has made to the issuing entity). If it is debt, it can be further categorised into
short term (less than one year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity based and
belong in their own category.

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E QUITY I NSTRUMENTS

In business and finance, a share (also referred to as equity share) of stock means a share of
ownership in a corporation (company). In the plural, stocks is often used as a synonym for
shares especially in the United States, but it is less commonly used that way outside of North
America.

In the United Kingdom, South Africa, and Australia, stock can also refer to completely
different financial instruments such as government bonds or, less commonly, to all kinds of
marketable securities.

D EBT I NSTRUMENTS

Debt instruments typically state a repayment schedule, establish a interest rate on outstanding
debt, and explicitly state the issuer's obligation to repay.

Standardize debt instruments make issuing, purchasing and transferring these obligations
easy. Such added liquidity makes the purchase and issuance of debt more attractive, since
purchases gain confidence that they may trade their debt easily in the market, and issuers may
be confident that can find a purchaser of their new debt.

Examples include bills, bonds, notes, CDs, GICs, commercial paper, and banker's
acceptances.

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INITIAL C APITAL : - 30,00,000

I NSTRUMENTS F OR I NVESTMENT

E QUITY

B ULLION

M UTUAL F UNDS

P OST -O FFICE S AVING S CHEME

B ONDS

F IXED D EPOSITS

N ATIONAL S AVING C ERTIFICATE

PORTFOLIO

H IGH RISK (C LIENT – 1)

M ODERATE RISK (C LIENT – 2)

L OW RISK (C LIENT – 3)

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HIGH RISK (C LIENT – 1)

A LLOCATION O F I NVESTMENTS

A SSET A LLOCATION

AMOUNT ` PERCENTAGE (%)

EQUITY 18,00,000 60%
BULLION 4,50,000 15%
MUTUAL FUNDS 2,10,000 7%
POST-OFFICE SAVING SCHEME 1,80,000 6%
BONDS 1,80,000 6%
FIXED DEPOSIT 1,20,000 4%
NATIONAL SAVING CERTIFICATE 60,000 2%
TOTAL 30,00,000 100%

4% 2%
6%
EQUITY
6%
BULLION

MUTUAL FUNDS
7%
POST-OFFICE SAVING SCHEME

BONDS

FIXED DEPOSIT
60%
15%
NATIONAL SAVING
CERTIFICATE

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MODERATE RISK (C LIENT – 2)

A LLOCATION O F I NVESTMENTS

A SSET A LLOCATION

AMOUNT ` PERCENTAGE (%)

EQUITY 12,00,000 40%
BULLION 3,00,000 10%
MUTUAL FUNDS 3,00,000 10%
POST-OFFICE SAVING SCHEME 3,00,000 10%
BONDS 3,00,000 10%
FIXED DEPOSIT 3,00,000 10%
NATIONAL SAVING CERTIFICATE 3,00,000 10%
TOTAL 30,00,000 100%

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10%

EQUITY
10%
BULLION
40%
MUTUAL FUNDS

POST-OFFICE SAVING SCHEME

10%
BONDS

FIXED DEPOSIT

10% NATIONAL SAVING

CERTIFICATE

10% 10%

L OW RISK (C LIENT – 3)

A LLOCATION O F I NVESTMENTS

A SSET A LLOCATION

AMOUNT ` PERCENTAGE (%)

EQUITY 6,00,000 20%
BULLION 1,50,000 5%
MUTUAL FUNDS 1,50,000 5%
POST-OFFICE SAVING SCHEME 6,00,000 20%
BONDS 4,50,000 15%
FIXED DEPOSIT 6,00,000 20%
NATIONAL SAVING CERTIFICATE 4,50,000 15%
TOTAL 30,00,000 100%

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15% 20%

EQUITY

BULLION

MUTUAL FUNDS
5%
POST-OFFICE SAVING SCHEME
20%
BONDS 5%

FIXED DEPOSIT

NATIONAL SAVING
CERTIFICATE
20%
15%

EQUTIY

C OMPANIES -W ISE A LLOCATION

TATA MOTORS
STATE BANK OF INDIA
PUNJAB NATIONAL BANK
BPCL
ONGC
RANBAXY
SUN PHARMA
NTPC
PUNJ LLOYD
BHARTI AIRTEL
INFOSYS

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TCS

R EASONS F OR I NVESTMENT I N E QUITY

 The Company you invested in will pay dividends based on their profits for the year.
The main one is that the investor has proportional share of the dividends generated by
the company in which he bought his stock.

 A company may decide to offer additional stock to its shareholders giving them a
preferential right to subscribe for the shares. The price of a Rights Issue is generally
below the market value of a share.

 A Company may allot shares free of charge to its shareholders. Bonus Issues are
provided when a company has large reserves and wishes to capitalize a part of these
reserves. When a Bonus Issue is announced the price of the share usually increases.

 Other Benefits in the long-term, shares usually provide a higher return to investors
in comparison to maintaining the investment in a fixed deposit at a bank.

 Investments made to get huge rate of return is only possible with the help of equity.
The return is uncertain but it is very efficient.

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R EASONS F OR I NVESTMENT I N G OLD ETF

 Gold exchange-traded funds (ETF) may be new for India, but are gaining in
popularity as investors become aware of the benefits of investing in gold in a non-
material form as opposed to holding it as jewellery.
 ETFs are instruments that trade like shares and are backed by physical holdings of the
commodity.
 India is the world's top consumer of gold, accounting for 20 percent of global
demand. Indians traditionally invest in gold jewellery.
 India has eight gold ETFs currently listed with a total collection of more than 11
tonnes, nearly double compared to last year.
 Gold ETFs are a "must have", according to mutual funds, who typically advise clients
to allocate 10 percent of their portfolios to gold.
 More financial firms are expected to launch gold ETFs in their bid to offer a full
basket of investment products to clients.
 India's gold ETF collection is small compared to its approximately 700 tonnes of
annual gold consumption, but is seen growing by at least 50 percent year-on-year.
 Indians' religious sentiment for gold is visible in ETF purchases as well, as volumes
tend to rise on days that are considered auspicious for buying the metal, officials
managing the ETFs say.
 Gold is considered to be a safe and stable investment compared to other asset classes.
Its return potential is less when compared to an equity investment, so is the risk.

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R EASONS T O I NVEST I N M UTUAL F UNDS

 Professional Management - The primary advantage of funds is the professional

management of your money. Investors purchase funds because they do not have the
time or the expertise to manage their own portfolios. A mutual fund is a relatively
inexpensive way for a small investor to get a full-time manager to make and monitor
investments.
 Diversification - By owning shares in a mutual fund instead of owning individual
stocks or bonds, your risk is spread out. The idea behind diversification is to invest in
a large number of assets so that a loss in any particular investment is minimized by
gains in others.
  Economies of Scale - Because a mutual fund buys and sells large amounts of
securities at a time, its transaction costs are lower than what an individual would pay
for securities transactions. 
  Liquidity - Just like an individual stock, a mutual fund allows you to request that
your shares be converted into cash at any time. 
 Simplicity - Buying a mutual fund is easy. Pretty well any bank has its own line of
mutual funds, and the minimum investment is small.
 Flexibility: The investments pertaining to the Mutual Fund offers the public a lot
of flexibility by means of dividend reinvestment, systematic investment plans and
systematic withdrawal plans.
 Affordability: The Mutual funds are available in units. Hence they are highly
affordable and due to the very large principal sum, even the small investors are
benefited by the investment scheme.

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 The fees pertaining to the custodial, brokerage, and others is very low.

R EASONS F OR I NVESTMENT I N P OST -O FFICE (MIS)

 Safe & sure way to get a regular monthly income.

 The regular income can be used to meet various expenses incurred in maintaining the
portfolio.

 It is healthy have some amount of liquid assets which may be helpful to meet the
uncertainty.

 Premature closure of the account is permitted any time after the expiry of a period of
one year of opening the account.

 Deduction of an amount equal to 5 per cent of the deposit is to be made when the
account is prematurely closed.

 Investors can withdraw money before three years, but a discount of 5%. Closing of
account after three years will not have any deductions.

 Monthly interest can be automatically credited to savings account provided both the
accounts standing at the same post office.

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 The interest income accruing from a post-office MIS is exempt from tax under
Section 80L of the Income Tax Act, 1961. Moreover, no TDS is deductible on the
interest income.

 The balance is exempt from Wealth Tax.

R EASONS F OR I NVESTMENT I N K ISAN V IKAS P ATRA

 It is a safe investment with guaranteed returns

 There is absolutely no risk involves, thus it acts as an anchor to an investment
portfolio.
 Income is assured at the prescribed rate of interest. As mentioned, this is a risk-free
investment channel as the KVP comes with the backing of the Government of India.
 Depending on whether the finance company or the bank from where you are raising
the loan accepts it or not. Some banks accept it for raising house loans.
 It is the only fixed income instrument which guarantees to double your investment
over a few years. So those who are conservative but still aim to create wealth over a
period of time may think of KVP. 

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 KVP accumulates money at a fixed rate, and your money doubles in 7 years and 3
months. But KVP is not meant for regular income. It is for those looking for a safe
avenue of investment without the pressing need for a regular source of income.
 Most of the other post office savings instruments are not liquid but this is not true in
case of KVP. Encashment of the KVP before maturity is possible from two and a half
years. However, one may forgo some interest income. 

R EASONS F OR I NVESTMENT I N F IXED D EPOSITS

 A good investment strategy requires choosing the right mix of safe and risky
investments. Among safe investments, fixed deposits FDs are the most popular
today.
 It is the most conservative and simplest form of investment one can opt for. It is
also one of the oldest and most trusted investments.
 It will provide for the reduction of the risk factor in the portfolio by facilitating
steady, safe and assured returns with no risk.

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 The fixed deposits of reputed banks and financial institutions regulated by RBI
(Reserve Bank of India) the banking regulator in India is very secure and
considered as one of the safest investment methods.
 With the directives of the income tax department stating that investment in fixed
deposits up to a maximum of ` 100,000 for 5 years are eligible for tax deductions
under section 80 C of income tax act, fixed deposits have again become
popular. Fixed deposits save tax and give high returns on invested money.
 Loans up to 75%- 90% of the deposit amount from banks against fixed deposit
receipts. The interest charged will be 2 more than the rate of interest earned by the
deposit.
 With fluctuation in market conditions and the immense effect of the global
scenario on Indian investment avenues, FDs act as a buffer for such factors which
threaten the stability and profitability of a portfolio.

R EASONS F OR I NVESTMENT I N NSC

 Compared with NSC, there is no ignoring the instrument's respectable returns,

which are not only assured, but also tax-exempt (under 80C) and government
guaranteed.
 NSCs do not have a limit of how much one can invest. What's more, interest up to
Rs 1 lakh is tax-free. You read that correctly. NSCs offer you the possibility of
earning up to Rs 1 lakh fully tax-free.

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 Tax benefits are available on amounts invested in NSC under section 88, and
exemption can be claimed under section 80L for interest accrued on the NSC.
 Interest accrued for any year can be treated as fresh investment in NSC for that
year and tax benefits can be claimed under section 88.
 NSCs can be transferred from one person to another through the post office on the
payment of a prescribed fee.
 The scheme has the backing of the Government of India so there are no risks
associated with your investment.
 It is an investment with zero risk and assured returns.

EXPECTED RATE OF RETURN ON INVESTMENTS

RATE OF RATE OF RATE OF
RETURN (%) RETURN (%) RETURN (%)
1ST YEAR 2ND YEAR 3RD YEAR
EQUITY
15% 18% 21%
BULLION
15% 20% 25%
MUTUAL FUNDS
10% 12% 15%

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POST-OFFICE SAVING SCHEME

8% 8% 8%
BONDS
9.75% 9.75% 9.75%
FIXED DEPOSIT
7.50% 7.50% 7.50%
NATIONAL SAVING CERTIFICATE
8% 8% 8%
NOTE:-

 POST-OFFICE SAVING SCHEME is compounded monthly and NSC is

compounded half –yearly.
 These returns are bare minimum and conservative in nature, which respect to equity,
MFs and gold.

PORTFOLIO -OVERVIEW

The investment is widely classified into various financial instruments with the initial capital
30,00,000.00 with a varied risk appetite.

• High risk (Client – 1)

• Moderate risk (Client – 2)

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• Low risk (Client – 3)

The diversification in the investment is done widely in 7 instruments which will give stability
to the short-term and long-term return for the portfolio. These instruments have a strong
presence in the market with good governance by their respective regulatory bodies.

Investments have been well spread in all avenues, having a heavy inclination towards equity
due to their good returns. Besides equity, the funds are also widely diversified in various
instruments when brings a degree of flexibility in our portfolio along with a good risk
management system.

Portfolio’s is well designed in tandem with the micro and macro environment of the
economy, also keeping in mind the future uncertainties and inclinations of the economy.

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