INVESTMENT ANALYSIS

Investment is putting money into something with the expectation of gain.

Economic investment is investment in goods with are used for the production of other goods. E.g. Plant and machinery.

Financial investment means investment in shares, debentures , FD, ppf ,mutual funds etc . It is allocation of monetary resources to assets that are expected to gain or return over the period over time.

Concepts

EconomicInvestment

Financial investment

Types of INVESTMENTS

Types

•Shares & Debentures

•Gold & Silver

Of

•Money Market securities

•LIC Schemes

Investments

•HDFC Schemes

•Public Deposits

These are different/alternate avenues for Investments.

Types of INVESTMENTS

Types

•Bank Deposits

•National (Postal)Saving Schemes

Of

•Real Estate

•PF & PPF

Investments

•UTI & Mutual Fund

•GOI Saving Bonds

Shares:Share means share capital of company. Shares are issued though IPO. Share of financial sound company is known as BLUE CHIP COMPANY.

Debentures :It is certificate issued by company under its seal, acknowledging a debt due by it to its holder.

Public DepositThe public deposits refer to the deposits that are attained by the numerous large and small firms from the public. The public deposits are generally solicited by the firms in order to finance the working capital requirements of the firm.

As per company Act deposit period is between 6 months to 36 months. Deposit up to 10% of paid up capital and free reserve can be accepted for minimum period of 3 months for meeting short term requirement from existing shareholder and debentures. However it should not accept deposit in excess of 25% of paid up capital and free reserve.

Advantages of Public depositFrom company point of view:Easily and Quickly available.Cheaper source of finance than Bank loan. There is no involvement of restrictive agreement. i.e. Limited Formalities.Since there is no need to pledge security for public deposits, the assets of firm that can be mortgaged can be preserved

From Investor point of view.Less risk if company is creditworthy.Depositor receive interest which is higher than Bank interest on deposit.The fund maturity period is short

Disadvantages of Public depositFrom company point of view:The maturity period is short enoughLimited fund can be obtained from the public deposits

From Investor point of view.The interest that is charged on the public deposits does not enjoy tax exemption.There is no pledging of security against public deposits.

Bank DepositFeature/Advantages of bank Deposit:Simple procedure to open Bank Account.Deposit is Safe and Secured.Money can be deposited at any time except in case of Fixed deposit.Interest income on Bank deposit.High liquidity.Bank offer loan facility against investment made.eg loan against FD.Bank offer various services to the customer.

Bank DepositDisadvantages of bank Deposit:Low rate of interest than other investment.Return on investment do not give protection against the present inflation rate in the country.Capital Appreciation is not possible.

Post office deposit

Post office operate as a financial institution.

Post office saving scheme includesSaving Bank Account: Monthly Income SchemeRecurring DepositTime Deposit : Interest rate is higher due to longer maturity period.Public Provident Fund.Minimum amt Rs500 Maximum Rs70,000.

Advantages of PPF1. These schemes are offered by the Government of India.2. Safe, secure and risk-free investment options.3. Nomination facility is available.4. Nomination can be changed at any time5. The instruments are transferable to any Post Office

anywhere in India.6. Attractive rates of interest. 8% p.a.7. Income from PPF a/c is exempted from Income tax &

Wealth Tax payment.8. Tax exemption under section 80 C on Investment made in

PPF upto 100000/-9. Withdrawal facility at certain intervals which also avoids

frequent withdrawals.10.It is useful as a provision for old age, or as provision for

certain expensed such as marriage of son/daughter, purchase of flat

11.PPF account  is exempted from attachment from the court. This gives security to family members.

12.You can take loan on PPF from third year of opening to sixth year, and loan amount will upto 25% of the balance in account at the end of first financial year.

Mutual FundsMutual Fund is financial Intermediary which collect saving of people for secured and profitable investment.

A mutual fund is nothing more than a collection of stocks and/or bonds. Mutual fund is a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

Monopoly by UTI(1964-87)

Advantages of Mutual FundDiversification: Professional Management:Regulatory oversight: Liquidity:Convenience: Low cost: TransparencyFlexibilityChoice of schemesTax benefitsWell regulated

Disadvantages of Mutual FundRisks and Costs: No Guarantees.   Costs.

Money Market1. Money market means market where money or its

equivalent can be traded.2. Money Market is a wholesale market of short term

debt instrument and is synonym of liquidity.. 3. Money Market is part of financial market where

instruments with high liquidity and very short term maturities ie one or less than one year are traded.

4. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place.

5. Hence, money market is a market where short term obligations such astreasury bills, call/notice money, certificate of deposits, commercial papers and repos are bought and sold.

Some new instruments are:

Money Market

Commercial Papers

Certificate of deposit

Repo instrument

Repurchase Agreement

Banker's Acceptance

Treasury Bill

Call Money MarketBanks borrow in this market for the following

purpose• To fill the gaps or temporary mismatches in funds • To meet the CRR & SLR mandatory requirements

as stipulated by the Central bank • To meet sudden demand for funds arising out of

large outflows.• Rate of interest is higher. Say 13 percent or

more.• Duration is very low.• One day is overnight market.

Treasury BillsTreasury bills, commonly referred to as T-Bills are

issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days.

All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

Who can invest in T-BillBanks, Primary Dealers, State Governments,

Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.

Treasury Bills cont…………………• At present, the Government of India issues

three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.

• Amount• Treasury bills are available for a minimum

amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par.

Certificate of DepositCDs are negotiable money market instruments

and are issued in dematerialised form or a usance promissory note, for funds deposited at a bank or other eligible financial institution for a specified time period.

They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits

Certificate of deposit (CD)A CD is a time deposit with a bank.

Like most time deposit, funds can not withdrawn before maturity without paying a penalty

CDs have specific maturity date, interest rate and it can be issued in any denomination

The main advantage of CD is their safety.

Anyone can earn more than a saving account interest

Features of CD

• (i) CDs can be issued by all scheduled commercial banks except RRBs (ii) selected all India financial institutions, permitted by RBI

• Minimum period 7 days• Maximum period 1 year• Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac• CDs are transferable by endorsement• CRR & SLR are to be maintained• CDs are to be stamped • CDs may be issued at discount on face value• No loan is granted against security of these deposit. And

bank can not buyback their own CDs before maturity.

Commercial PaperCommercial Paper (CP) is an unsecured money market instrument issued in

the form of a promissory note.Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs)

To whom issuedCP is issued to and held by individuals, banking companies, other corporate

bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

Denomination: min. of 5 lakhs and multiple thereof.Maturity: min. of 7 days and a maximum of up to one year from the

date of issueTotal Amount should be raised within 2 week from date on which issue

opens.

Eligibility for issue of CP

the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;

(b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore

and the borrowal account of the company is classified as a Standard Asset by the financing bank/s.

All eligible participants should obtain the credit rating for issuance of Commercial Paper

The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

Repos• It is a transaction in which two parties agree to

sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price

• The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

Banker's Acceptance A banker’s acceptance (BA) is a short-term credit investment created by a non-financial firm

BAs are guaranteed by a bank to make payment.

Acceptances are traded at discounts from face value in the secondary market

BA acts as a negotiable time draft for financing imports, exports or other transactions in goods

This is especially useful when the credit worthiness of a foreign trade partner is unknown.

Example:

Exporter-A

Bank-B

Importer-C

Bank- D

1. Importer C ordered goods from Exporter A. Exporter A make the goods ready but do not deliver unless guarantee is given by Importer C for payment.

2. Importer C deposit money in Bank D to be paid after specific month say 3 months to A.

3. Bank D issue an acceptance that after specific month say 3 month specific amount will be paid to Exporter A. This acceptance is deliver to Exporter Bank B.

4. Bank B deliver acceptance to A.5. After receiving acceptance Exporter A deliver the goods to

Importer. C6. Exporter A will wait until 3 month to receive amount or sell

this acceptance at discount for immediate cash.

1.C ordered the goods.

5.A delivered the goods

2.C deposit money with his Bank

3. Bank D issue certificate to Bank B

4. Bank deliver certificate to A

Bills of ExchangeThe bill of exchange (B/E) is used for

financing a transaction in goods which means it is essentially a trade related instrument.

According to Negotiable Instruments Act, 1881: “The bills of exchange is an instrument is writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money, only to, or to the order of, a certain person, or to the bearer of that instrument”.

Types of Bills1. Demand Bill – Payable immediately on

presentment to employee.2. Usance Bill – Bills have certain period of

maturity, and bank has to retain the bill till due date and realised the amount on due date.

Creation of B/ETwo parties i.e. seller sells goods or

merchandise to a buyer.Seller would like to be paid immediately but

buyer would like to pay after sometime.Seller draws a B/E of a given maturity on the

buyer.Seller (Creditor) becomes drawer of the bill and

buyer (Debtor) becomes drawee of the bill.Seller sends the bill to buyer for his acceptance.Acceptor may be buyer himself or third party.

Discounting of B/EHolder of an accepted B/E has two options1. Hold on to B/E till maturity and then take

the payment from the buyer.2. Discount the B/E with discounting agency.The act of handing over an endorsed B/E for

ready money is called discounting the B/E.The margin between the ready money paid and

face value of the bill is called the discount

Contd….The maturity of a B/E is defined as the date

on which payment falls due.Normal maturity periods are 30, 60, 90 or

120 days.Bills maturing within 90 days are most

popular.Discounting agencies are banks, NBFC,

company, high net worth individuals etc.

Advantages to investorsShort-term source of finance.Since it is not lending, no tax at source is

deducted while making the payment charges which are very convenient.

Rates of discount are better than those available on ICDs.

Flexibility, not only in the quantum of investments but also the duration of investments.

Advantages to Banks1. Safety Funds – B/E is a negotiable

instrument bearing the signature of two parties considered good for the amount of bill, so he can enforce his claim easily.

2. Certainty of Payment – A B/E is a self liquidating asset with the banker knowing in advance the date of its maturity.

3. Profitability – The discount on bill is front ended, the yield is much higher than in the other loans and advances, where interest paid quarterly or half yearly.

Contd….4. Evens out inter-bank liquidity problem – The

development of healthy parallel bill discounting market would have stabilized the violent fluctuations in the call money market as banks could buy and sell bills to even out their liquidity mismatches.

FACTORING Factoring is of recent origin in Indian Context.

Kalyana Sundaram Committee recommended introduction of factoring in 1989.

Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services.

SBI/Canara Bank have set up their Factoring Subsidiaries:-

SBI Factors Ltd., (April, 1991) CanBank Factors Ltd., (August, 1991).

RBI has permitted Banks to undertake factoring services through subsidiaries.

WHAT IS FACTORING ?Factoring is the Sale of Book Debts by a firm (Client) to a financial

institution(Factor) on the understanding that the Factor will pay for the Book Debts

asand when they are collected or on a guaranteed payment date.

Normally, theFactor makes a part payment (usually upto 80%) immediately after the

debts are purchased thereby providing immediate liquidity to the Client.

PROCESS OF FACTORINGCLIENT CUSTOMER

FACTOR

Factoring Cont……..So, a Factor is,

a) A Financial Intermediaryb) That buys invoices of a manufacturer or a trader,

at a discount, andc) Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:-

d) Supplier or Seller (Client)e) Buyer or Debtor (Customer)f) Financial Intermediary (Factor)

SERVICES OFFERED BY A FACTOR

1. Follow-up and collection of Receivables from Clients. with or without recourse

2. Purchase of Receivables.

3. Help in getting information and credit line on customers (credit protection)

4. Sorting out disputes, if any, due to his relationship with Buyer & Seller.

Recourse v. Non-Recourse FactoringWhen factoring invoices, there are typically two types of accounts receivable factoring offered by factors - recourse and non-recourse factoring. Factoring with recourse is where the client selling the invoice is required to buy the invoice back from the factor if it goes uncollected for a fixed number of days, thus sharing the risk between the client and the factor. Factoring without recourse is where the client sells the invoice to the factor and the factor bears all the risk for collection of the invoice.

PROCESS INVOLVED IN FACTORING

Client concludes a credit sale with a customer.

Client sells the customer’s account to the Factor and notifies the customer.

Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance.

Factor maintains the customer’s account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

CHARGES FOR FACTORING SERVICES

Factor charges Commission (as a flat percentage of value of Debts purchased) (0.50% to 1.50%)

Commission is collected up-front.

For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks.

If interest is charged up-front, it is called discount.

Life Insurance PolicyLife insurance is a contract between the policy holder and the insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person.

Advantages of Life Insurance Scheme.

Protection to Family members.Retirement provisions.Compulsory saving over long term.Loan facility from bank.Bonus to policy holder on yearly basis.Tax benefit.Comfortable and financially independent life after retirement. 

Investment in Real EstateInvestment in land and Building. Real estate property.

Advantages of Investment in Real Estate:

1. Cash Flow from Rental Income2. Increases in Value Due to Appreciation3. Improving Your Investment Property - More Value at Sale 4. Inflation is Your Friend When it Comes to Rent5. Paying Off Your Mortgage6. No risk but no liquidity also.7. Tax advantages in case of residential house.

Investment in Gold & SliverBenefits of precious metals 1. Against inflation : When inflation occurs, the price of

goods and services goes up. This means your money is worth less, where as a precious metal's worth like gold does not change, it keeps its value.

2. Liquidity3. Protection against currency variations4. Safety  

Investment criteriaPeriod of Investment: It concern with liquidityShort term – less than 1 year- less return . E.g.. Saving Bank Account Deposit.– less return more liquidity. Medium term- 1 to 3 yearsLong tem – more than 3 years– more return. E.g. LIC policy

Risk in Investments:Risk relates to non payment of Principal and Interest.Select investment with minimum risk and maximum return.Market risk , political risk, business risk , Inflation Risk.Less risk if borrower is credit worthy.

Investment ObjectivesShort term high priority objectives: Certain objectives to be achieved in short time but it is

very important. Exp. Buying house,Long term high priority objectives: Investment for long term needs , Exp. post retirement

period , investment for education of children, provision for daughter marriage.

Low priority objectives . Exp provision for tours, domestic appliances etcMoney making objectives. Maximise wealth and minimised risk . Exp. Investment in share.

Portfolio managements

Other Objectives:

Stability Of Income

Capital Appreciation of Investment.

Liquidity

Safety by way of Diversification.

Tax incentives by investing in tax saving Bonds.

Basic Objectives is to minimise risk and maximise return

Approaches to Investment Decision Making

Fundamental Approach

Technical Approach

Efficient Market theory Approach

Psychological Approach:Exp. Investment in shares of Beverage company , Tobacco company.