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Investment classes

Equity

Real estate

Precious Objects

Commodities

Fixed Income securities

Derivatives and structured products

Investors

can keep their money in the form of fixed deposits with banks. These fixed or time deposits offer a fixed rate of interest for the entire period. This is the safest instrument for someone looking for a modest rate of growth.

Fixed-Income

Securities are financial claims issued by governments, government agencies, state governments, corporations, municipalities, banks, and other financial intermediaries. These securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument.

Debt

funds are mutual funds that invest in debt instruments. This is another way of taking exposure in the debt markets.

These

schemes are meant to promote savings among masses. Such schemes are usually floated by government or government agencies. The rate of interest is less, but then there are tax exemptions on interest earned.

1.

2.

3.

4.

Investors benefit by investing in debt as they reserve and increase their invested capital and ensure the receipt of regular interest income. Investors can even neutralize the default risk on their investments by investing in government securities. If the risk tolerance level of the investor is low, debt instruments may suit the investment needs better. The prices of debt securities display a lower average volatility as compared to the prices of other financial securities and ensure greater safety of accompanying investments. Debt securities enable wide-based and efficient portfolio diversification and thus assist in portfolio risk mitigation.

Interest

rate risk Reinvestment risk Default risk

This

is the most risky asset class as equity capital is permanent/non-redeemable capital and the payment of dividends is also discretionary. The return comes in the form of dividends and through appreciation in the price of the shares.

A. B.

C. D. E. F.

Dividends Cash Dividends stock dividends and share repurchase Capital Gains Right to subscribe to new shares Right to vote Right to information

A. B. C.

Residual capital Capital Losses Liquidity Risk

Stock

Market classification of Equity Shares Blue chip shares


Shares of large, well established, as well as financially strong companies with an impressive record of earnings and dividends

Income

shares shares

Such shares have stable operations, high dividend payments, and relatively limited growth opportunities Shares of companies that have a fairly entrenched position in a growing market. Such shares enjoy an above average rate of growth as well as profitability.

Growth

Cyclical

shares

Shares of such companies that have a pronounced cyclicality in their operations.

Speculative

shares

Shares that tend to fluctuate widely because there is a lot of speculative trading in them.

Defensive

shares

Shares of such companies are relatively unaffected by the ups and downs in general business conditions.

The

investment decision-making process is carried out while investing in the stocks in three major ways: Fundamental Analysis (what to buy) Technical Analysis (when to buy) Quantitative Analysis (tools to be used)

Top

down approach studies the economic factors like consumer demand, percentage change in business investments, percentage change in government expenditure, changes in net exports, change in inventories, inflation, unemployment, fiscal and monetary policies. Starting with the actual and potential output growth in the economy, the factors that determine the growth in a good portfolio are as below:

Top-Down Approach: Depending on the state of the economy, there can be four phases like: A) Overheat (high growth, high inflation) B) Soft landing (low growth, low inflation) C) Hard landing (low growth, high inflation) D) Recovery (high growth, low inflation) For example, during soft landing, the stock market outlook would be: Positives low interest rate, rising earnings Negatives uncertainty high Positive/subdued outlook for stock market cash position is low

Style: Growth/large

best during periods of falling rates and sluggish economy Current outlook positive for chosen large/growth style
Sector: Defensive/growth

best (cyclical/value worst) during periods of economic sluggishness (recovery) Moving towards underweight consumer stocks

approach: This approach determines what stocks to buy in each sector buy fear and sell greed. The goal of stock analysis is to find the outliers. Buy/sell stocks that will rise/fall more than the industry and sector.
Bottom-up

Bottom-up Approach: Business factors include: A) Competition B) Product and markets C) Production and distribution D) Government regulation E) Labor F) Quality G) Assets H) R&D i) Business Plan J) Management

Financial Factors Include: A) Growth rate B) Payout C) Financial leverage D) Asset Utilization E) Margins F) Life Cycle Valuation factors include: A) Time horizon B) Patience of investors C) Consensus expectations D) Trading E) Value Added F) Previous performance of stock

per the IAS, a derivative has the following features: 1) Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, and such others. It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts. It is settled at a future date.
As

Exchange Traded futures and options Future contracts are organized/standardized contracts, which are traded on the exchanges. The terms like quantity, quality, standard time delivery, place etc. are standardized by the exchange. Futures may be financial futures or commodity futures. Options are instruments whereby the right is given by the option seller to the option buyer to buy or sell a specific asset at a specific price on or before a specific date. Option Terminology Option buyer, Option seller, Call Option, Put Option, American option, European option, Strike price/exercise price, Option premium.

Factors

Affecting Option prices a) Spot Prices b) Strike Price c) Time to expiration d) Volatility e) Risk free rate of interest f) Dividends or structured derivatives - FRAs

OTC

Structured products are synthetic investment instruments. They are created to meet specific needs that cannot be met from the standardized financial instruments available in the market. Structured products typically result in a financial product that is often non-standard and structured to meet the specific financial objectives of a customer. There are usually two components for any structured product:

An at risk element which is called an alpha generator, provides the high performance potential. This alpha generator can be a stock, an index, currencies, or commodities. An element of capital protection, usually a bond product.

The

bond element sets the time horizon and the level of capital protection offered by the product. The alpha generator provides the enhanced performance potential. A lower risk, defensive structured product will allocate the majority of the investors capital to the bond element. A higher risk aggressive product will use derivatives to increase the extent of alpha exposure.

House The total return (rental savings plus capital appreciation) from a residential house is satisfactory. Ownership of a residential property provides psychological satisfaction. Loans are available from various banks and financial institutions for buying or construction of a residential property. Interest on loans taken is tax deductible within certain limits.
Residential

Property The more affluent class of investors may be interested in investing in commercial property. This investment fetches both a good rental value and enjoys capital appreciation.
Commercial

Agricultural Merits: Agricultural

Property

income is not taxable. Loans are available for agricultural operations at a concessional rate. Agricultural land is exempted from wealth tax. Capital gains arising from the sale of agricultural land are not regarded as capital assets or may be taxed at a concessional rate. There is a charm in living in a farmhouse.

Demerits In

many states, land ceiling laws are quite restrictive. In addition, law of some states precludes non-agriculturist from acquiring agricultural land. Farm houses in general are not safe. Many states have laws that confer ownership to the cultivating agent. Agricultural activity is often uneconomical or not that profitable, particularly if done on a part time basis.

Suburban

Land Land within city limits is often very expensive. Investors can buy residential land (converted land) in private layouts in suburban areas at affordable prices. Such investments enjoy high capital appreciation.

Estate Investment Trust (REIT) This class of investments not in existence in India. AMFI and SEBI have agreed to launch Real Estate Mutual Fund Schemes as an initial step. REIT is common in the USA with over 190 publicly traded REITs approved by SEC. REITs offer a source of capital to realty firms. In UK, real estate investments are done through pooled management vehicles (PMVs).
Real

Mutual

fund is a mechanism for pooling resources by issuing units to investors and investing funds in securities, Diversification reduces risk. Investors in proportion to their investments share the profits or losses.

Diversification Professional Liquidity Convenience Economies

Management

of scale

Dilution Fluctuating

returns Evaluating funds Costs

the basis of maturity period On the basis of investment objective Growth/Equity-oriented scheme Income/debt-oriented scheme Balanced fund Money market or liquid fund Gilt funds Index funds Equity-linked savings schemes Load fund Vs. no-load fund
On

The hedge fund industry has grown at an extraordinary pace in the last decade, from 300 funds in 1990 to more than 9000 today. These funds have become highly visible in the markets and manage the capital of around US$ 1.3 trillion. Hedge fund is a private investment vehicle that aggregates the investments of several participants. Hedge funds have very limited public transparency, high minimum investment, investors accreditation standards, and incentive fees for the investment manager. The attraction of hedge funds is their potential to earn attractive returns irrespective of the direction of general market movements. Thus, hedge funds are also called absolute return funds.

Role of Hedge Funds in portfolio construction Since hedge funds are expected to provide a combination of consistently positive return stream and a low correlation to the rest of the portfolio, the addition of this asset class to a standard equity-dominated risky portfolio should result in reduced volatility with little or no diminution of expected return. Investment strategies of Hedge Funds
1. 2. 3. 4. 5. 6. 7. 8. 9.

Long/short equity Market-neutral Event-driven Convertible arbitrage Short selling Fixed-income arbitrage Managed futures Global macro Equity trading

Market benefits of Hedge Funds

The

various types of commodities can be categorised as below: a. Energy the commodities under this category can be classified broadly into three categories
i. ii. iii.

Primary energy sources like coal, crude oil, natural gas and nuclear fuel. Secondary energy sources like electricity, refined oil products, diesel, petrol, LPG Half products such as petrochemicals, ethylene, and naptha which may be included as commodities in a broader sense.

b.

c.

Mineral ores ferrous metals like iron, cast iron, steel, and steel products; non-ferrous metals like aluminum, copper, lead, nickel, tin, zinc; precious metals like gold, silver, platinum. Agricultural food products most commonly agricultural products are cereals, wheat, and corn, beverages like tea, coffee and cocoa; fruits like apple, dates, grapes, bananas, oranges; cotton, jute, wool; rubber and timber; seafood products like fish, shrimps, and crab meat

Not

an efficient Market Traded products are differentiated. Art markets are often very thin with very few works of art of a specific artist traded each year Market transparency is low Large differences in expertise between buyers and sellers Low liquidity Transaction costs are high.

Indian is an emerging story in the global art market Recognition across geographies: good in quality as well as aesthetic appeal. Highly undervalued: both in comparison with emerging markets and developed economies Nearly 3000 art investors in India investing above 2 million in a year. Indian art market is growing at 30-40% today as against the world art market that is growing at 3-4%. Expected to become Rs.1,000 crore industry in the next 5 years. A close ended art fund called Yatra launched by Edelweiss capital.

Very

subjective in terms of quality and valuation No regulation, no recourse Not very liquid High transaction costs Authenticity of art works Long term investment horizon High maintenance costs Sustenance of artists No intrinsic value No accounting standardisation