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SECURITIES ANALYSIS 
III Semester M.Com 
and 
PORTFOLIO MANAGEMENT
SECUTIY 
ANALYSIS AND 
PORTFOLIO 
MANAGEMENT 
To provide students with a conceptual framework of 
evaluating various investment avenues. 
To provide students with a conceptual and analytical 
framework of different financial. 
instruments, markets, regulations, their risk and returns 
and strategies in managing funds. 
To familiarize students with portfolio management 
techniques that challenges a financial manager. 
To give an overview of the global markets and their 
impact on the domestic markets 
Why learn this Subject? 
Objectives
SECUTIY 
ANALYSIS 
AND 
PORTFOLIO 
MANAGEMEN 
T 
Course 
Preview 
Unit 1 Introduction to Investments 10 Hours 
Investment management, nature and scope, investment avenues, types of 
financial assets and real assets, Security return and risk – Systematic and 
unsystematic risk; sources of risk, Measurement of risk and return; courses of 
investment information; Profile of Indian investors. 
Unit 2 Fixed Income Securities 10 Hours 
Fixed income securities – bonds, preference shares-sources of risk, valuation, 
duration of bond-theory of interest rates-yield curve; Bond innovations and their 
valuation; Analysis of variable income securities. 
Unit 3 Methods of Security Analysis 15 Hours 
Fundamental analysis – analysis of economy, industry analysis, company 
analysis – financial and non-financial; Equity valuation models - options, futures, 
forwards, warrants and their valuations; Technical analysis – Dow theory; 
Efficient market hypothesis and its implications. 
Unit 4 Introduction to Portfolio Management 05 Hours 
Meaning of portfolio management; portfolio analysis; Importance; Portfolio 
objectives; Portfolio management process; selection of securities. 
Unit 5 Modern Portfolio Theories 
Portfolio theory; Markowitz model; Sharpe’s single index model; Efficient frontier 
with lending and borrowing, optimal portfolio, capital asset pricing model; 
Arbitrage pricing theory, two factor and multifactor models. 
Unit 6 Portfolio Management Strategies & Portfolio Evaluation 08 Hours 
Bond Portfolio management strategies; Equity portfolio management strategies, 
strategies using derivatives, hedging; Portfolio revision – rebalancing plans, 
Portfolio evaluation- Sharpe’s index, Treynor’s measure and Jenson’s measure.
SECUTIY 
ANALYSIS 
AND 
PORTFOLIO 
MANAGEMEN 
T 
Reference Books 
♠ Alexender & Bailey. (2001). Fundamentals of Investments. New Delhi: 
PHI . 
♠ Bhalla V K. (2008). Investment Management. New Delhi: S Chand & 
Co. 
♠ Fischer and Jordan (2006). Security Analysis and Portfolio 
Management. New Delhi: Prentice- Hall. 
♠ Prasanna Chandra.(2011). Investment Analysis and Portfolio 
Management .New Delhi: Mcgraw-Hill. 
♠ Preeti Singh. (2000). Investment Management. New Delhi: HPH . 
♠ Punithavathy Pandian .(2010). Security Analysis and Portfolio 
Management. New Delhi: Vikas Publishing House. 
♠ SudhindraBhat.(2011). Security Analysis and Portfolio Management. 
New Delhi: Excel Books. 
Finance portals 
 Moneycontrol.Com 
 Btvin.Com 
 Profit.Ndtv.Com 
 Indiainfoline.Com 
 Apnapaisa.Com
Unit : 1 
INTRODUCTION 
TO INVESTMENTS
What is 
Investment? 
In simple terms, Investment refers to process of investing 
money in financial or real assets for profit or material result. 
 Investment made in buying financial instruments such as 
new shares, bonds, securities, etc. is considered as a 
Financial Investment. Investment made in plant and 
equipment, land and building and other infrastructure facilities 
is considered as Real Investment. 
 Investment decisions refers to application of funds in long-term 
assets in anticipation of future benefits and maximization 
of long-term profitability. 
Investment refers to 
a money 
commitment of 
some sort.
Difference between Savings and Investment 
Difference Savings Investment 
Meaning Saving money means keeping aside a 
part of your income regularly in order 
to deal with unexpected expenses. 
Investment means putting your saved 
money in various products in order to earn 
returns and grow your wealth. 
Time Savings are usually used to meet your 
short term needs. People save in 
order to deal with emergency 
situations and meet unexpected 
expenses. 
However, investment generally entails a 
longer horizon of six months or more. It is 
designed to provide returns and grow your 
money over a period of time. 
Risk and 
reward 
savings stored in a safety vault are 
very safe, they will not generate any 
returns over the years. Even if money 
is kept in a savings account, it will 
provide a negligible rate of return. 
money invested in various products like 
stocks, mutual funds, gold, etc. is subject to 
more risks, but has the potential to grow 
over time. If invested wisely, your money 
can grow manifold over years. 
Liquidity savings are the most liquid assets, as 
they can be accessed at any time. 
It takes a few days for the money to reach 
your bank account after you decide to sell 
your investments.
CLASSIFICATIO 
N OF 
INVESTMENT 
• A: On the Basis of Physical Investments 
• House 
• Land 
• Building 
• Gold and Silver 
• Precious stones 
Investment refers to a 
money commitment of 
some sort. 
• B: On the Basis of Financial Investment 
• Marketable and Transferable investments 
• Non-Marketable Investments 
B.1: Marketable and Transferable investments 
• Shares 
• Debentures 
• Bonds 
• Government Securities 
• Derivatives 
B.2: Marketable and Transferable investments 
• Bank Deposits 
• Provident and Pension Funds 
• Insurance Certificates 
• Post office Deposits 
• National Saving Certificates 
• Company Deposits
Share 
• Features and rights of equity share holders 
Residual claim 
Voting rights 
Ownership rights 
Pre-emptive right (Right issue) 
Par value The capital of a company is 
divided into shares. Each 
share forms a unit of 
ownership of a company 
and is offered for sale so as 
to raise capital for the 
company. 
Merits 
1. Easily transferable 
2. Liability 
3. Profit potential 
4. Purchasing power risk 
De-merits 
1. Uncertain and Irregular Income 
2. Capital loss During Depression Period 
3. Loss on Liquidation
Preference 
Shares 
Preference shares are 
those, which enjoy 
preferential rights. 
• Features and rights of equity share holders 
Dividends 
Voting rights 
Ownership rights 
 Pre-emptive right (Right issue) 
 Par value 
 Retirement of debt through sinking fund 
 Convertibility 
 Hybrid 
De-merits 
1. No Voting Right 
2. Fixed Income 
3. No claim over surplus 
4. No Guarantee of Assets 
Merits 
1. Regular Fixed Income 
2. Lesser Capital Losses 
3. Preferential Rights 
4. Voting Right for Safety of Interest. 
5. Fair Security 
Preference shares. Sec. 
85(1) of the Companies 
Act defines preference 
shares as those shares 
which carry preferential 
rights as the payment of 
dividend at a fixed rate 
and as to repayment of 
capital in case of winding 
up of the company. 
Classification of preference shares 
1. Cumulative or non cumulative 
2. Participating or Non-participating 
3. Redeemable or Non-Redeemable 
4. Convertible or Non-convertible
Classification of Equity Shares 
According to Stock Market 
Stock market has classified equity shares as follows: 
Type Key feature 
Blue chip 
shares 
Share of large, well established and financially strong companies 
shares with an impressive record of earnings and dividends. 
Growth 
shares 
Enjoy an above average rate of growth as well as profitability. 
Income 
shares 
fairly stable operations, relatively limited growth opportunities, and 
high dividend payout ratios. 
Cyclical 
shares 
A Cyclical stock is a stock highly correlated to the economic activity. 
Defensive 
shares 
Relatively unaffected by the ups and downs in general business 
conditions. 
Speculative 
shares 
tend to fluctuate widely because there is a lot of speculative trading 
in them.
Concept of Debentures in India 
• According to Indian Company’s Act, 1956, defined the 
term ‘Debentures.’ 
• Debentures includes debenture stock, bonds and any 
other securities of a company, whether constituting a 
charge on the assets of the company or not, in 
common parlance, debenture is an instrument issued 
by a company under its common seal, acknowledging 
its debt to the holder, and containing an undertaking to 
repay the debt on or after a specified period and to pay 
interest on the debt at a fixed rate at regular intervals, 
usually, half yearly, until the debt is repaid. 
• The person to whom the debentures are issued are 
called debenture holders. The debenture holders are 
not the owners of the company. They are just the loan 
creditors of the company.
Debenture 
A type of debt instrument 
that is not secured by 
physical assets or 
collateral. 
Merits 
1. Higher rates of financial return 
2. Choice of converting 
3. Fixed interest 
4. Transferable 
De-merits 
1. Credit Risk 
2. Bankruptcy 
3. Unsecured 
Classification of Debentures 
1. Convertible debentures 
2. Non-convertible debentures
Corporate 
FDs 
• The deposit placed by investors with companies for a fixed term 
carrying a prescribed rate of interest is called Company Fixed 
Deposit. 
• Financial institutions and Non-Banking Finance Companies 
(NBFCs) also accept such deposits. Deposits thus mobilized are 
governed by the Companies Act under Section 58A. 
• These deposits are unsecured, i.e., if the company defaults, the 
investor cannot sell the documents to recover his capital, thus 
making them a risky investment option. 
Companies that find it 
difficult to get loans from 
banks raise money from 
the public. 
1. Company fixed deposits offer better interest rates than 
banks 
2. Additional risk 
3. Company fixed deposits are rated by Rating Agencies 
4. TDS on Company Fixed Deposits 
5. You could keep a shorter horizon 
1. Cumulative 
2. Non-Cumulative
Bonds 
A debt investment 
in which an 
investor loans 
money to an entity 
(corporate or 
governmental) that 
borrows the funds 
for a defined 
period of time at a 
fixed interest rate. 
Features of Bonds 
1. Indenture 
2. Covenants: Affirmative & Negative 
3. Maturity 
4. Par Value 
5. Coupon Rate 
Types of Bonds 
1. Serial Bonds 
2. Sinking Fund bonds 
3. Registered bonds 
4. Mortgage bond 
5. Collateral trust bonds 
6. Convertible bonds 
7. Zero-coupon bonds 
8. Callable Bonds
Symbols Rating Definition Remarks 
CRISIL AAA Highest Safety Timely servicing of financial obligations-lowest 
credit risk. 
CRISIL AA High Safety Timely servicing of financial obligations 
very- low credit risk. 
CRISIL A Adequate safety Adequate degree of safety- low credit risk. 
CRISIL BBB Moderate Safety carry moderate credit risk. 
CRISIL BB Moderate Risk risk of default -financial obligations 
CRISIL B High Risk 
CRISIL C Very High Risk 
CRISIL D Default
Fixed 
Deposits 
• The main features of fixed deposit account are as 
follows: 
• Tenure ranges between six months to 10 years 
• Guaranteed Returns 
• Interest income monthly, quarterly or annually. 
• Reinvest interest income and gain the influence of 
compounding 
• Partial or full withdrawal facility is available with penalty 
interest rates 
• Loan against deposits 
• Senior citizens get higher coupon rates in the range of 0.25 - 
100 %. 
The term 'fixed 
deposit' means 
that the deposit 
is fixed and is 
repayable only 
after a specific 
period is over. 
Pros Cons 
Safety Lower rate of returns 
Regular Income Taxes 
Saves tax inflation 
Convenience Risk 
Deposit Insurance 
& Credit Guarantee 
Scheme of India
Recurring deposits 
• Recurring deposits are special kind of Term Deposits and are suitable for people 
who do not have lump sum amount of savings, but are ready to save a small 
amount every month. 
Difference Fixed Recurring 
Rate of Return Approximately 8%-8.5% 
for a period of 1 year 
Approximately 8%-8.5% for 
a period of 1 year 
Additional 
Benefits 
Loan facility available Loan facility available 
Tenure Tenure ranges from 7 
days to 10 years 
Tenure ranges from 1 years 
to 10 years 
Minimum 
investment 
Rs. 10,000 (may differ 
from Bank to Bank) 
Rs. 100 
Maximum 
investment 
No limit No Limit 
Premature 
withdrawal 
Interest penalty levied, 
varies from Bank to Bank 
Interest penalty levied, 
varies from Bank to Bank 
Tax benefit Incase of a Tax saver FD, 
a tax exemption u/s 80c 
is applicable 
No tax benefit 
Interest Income Taxable and subject to Taxable but no TDS
MONEY MARKET 
INVESTMENTS
It provides a parking place to employ short term surplus 
funds. 
It is a market purely for short term funds or financial 
assets called near money. 
It deals with debt instrument which have a maturity of less 
than one year at the time of issue are called money market 
instruments. 
Money market instruments are highly liquid and have 
negligible risk. 
The money market is dominated by the government, 
financial institutions, banks and corporates. 
Features of a 
Money Market
TREASURY 
BILLS 
• Treasury Bills are money market instruments to finance the 
short term requirements of the Government of India. 
• These are discounted securities and thus are issued at a 
discount to face value. 
• The return to the investor is the difference between the maturity 
value and issue price. 
• Treasury Bills are issued for the following tenors 91-days, 182- 
days and 364-days Treasury bills. 
Benefits of Investment In Treasury Bills 
1. No tax deducted at source 
2. Zero default risk being sovereign paper 
3. Highly liquid money market instrument 
4. Better returns especially in the short term 
5. Transparency 
6. Simplified settlement 
7. High degree of tradability
Treasury Bills 
 Form 
 The treasury bills are issued in the form of promissory note in physical form or by 
credit to Subsidiary General Ledger (SGL) account or Gilt account in 
dematerialized form. 
 Minimum Amount of Bids 
 Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only 
and in multiples thereof. 
 Eligibility 
 All entities registered in India like banks, financial institutions, Primary Dealers, 
firms, companies, corporate bodies, partnership firms, institutions, mutual funds, 
Foreign Institutional Investors, State Governments, Provident Funds, trusts, 
research organizations, Nepal Rashtra bank and even individuals are eligible to bid 
and purchase Treasury bills. 
 Repayment 
 The treasury bills are repaid at par on the expiry of their tenor at the office of the 
Reserve Bank of India, Mumbai. 
 Availability 
 All the treasury Bills are highly liquid instruments available both in the primary and 
secondary market. 
 Day Count 
 For treasury bills the day count is taken as 365 days for a year. 
How to 
BUY 
treasury 
Bills?
Yield Calculation 
• A cooperative bank wishes to buy 91 Days Treasury on Oct. 12, 20014, Bill Maturing on Dec. 6, 
2014. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. 
The yield of a Treasury Bill is calculated as per the following formula: 
YTM 
(100-P)x365x100 
PxD 
Wherein 
Y = discounted yield 
P= Price 
D= Days to maturity 
YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70%
Salient Features of The Auction 
Technique 
• The auction of treasury bills is done only at Reserve Bank of India, 
Mumbai. 
• Bids are submitted in terms of price per Rs 100. 
• For example, a bid for 91-day Treasury bill auction could be for Rs 
97.50. Auction committee of Reserve Bank of India decides the cut-off 
price and results are announced on the same day. 
• Bids above the cut-off price receive full allotment; bids at cut-off price 
may receive full or partial allotment and bids below the cut-off price are 
rejected.
Types of Auctions 
There are two types of auction for treasury 
bills: 
1. Multiple Price Based or French Auction: Under this method, all bids equal to 
or above the cut-off price are accepted. However, the bidder has to obtain the 
treasury bills at the price quoted by him. 
2. Uniform Price Based or Dutch auction: Under this system, all the bids equal 
to or above the cut-off price are accepted at the cut- off level. However, unlike 
the Multiple Price based method, the bidder obtains the treasury bills at the 
cut-off price and not the price quoted by him.
Working Capital 
INADEQUACY OF WC 
Under-utilization of capacity 
Creditworthiness is hit 
Cannot utilize business opportunity 
Modernization and Maintenance 
Discounts and Perks
Money Market Instruments 
1. Certificate of deposit - Time deposit, commonly offered to consumers by 
banks, thrift institutions, and credit unions. 
2. Repurchase agreements - Short-term loans—normally for less than two 
weeks and frequently for one day 
3. Commercial paper - Unsecured promissory notes with a fixed maturity of 
one to 270 days; usually sold at a discount from face value. 
4. Treasury bills - Short-term debt obligations of a national government that are 
issued to mature in three to twelve months
Certificates of Deposit 
• Certificate of Deposit (CD) is a negotiable money market instrument and issued in 
dematerialized form or as a Usance Promissory Note against funds deposited at a bank 
or other eligible financial institution for a specified time period. 
• Guidelines for issue of CDs are presently governed by various directives issued by the 
Reserve Bank of India (RBI), as amended from time to time. 
Difference FD CD 
Negotiability No Yes 
Return Low High 
Rating No Yes 
Key Features 
1. Eligibility-Who can issue? 
2. Aggregate Amount- How much? 
3. Denominations-Pricing? multiples of Rs. 1 lakh thereafter. 
4. Investors-Who can buy? 
5. Maturity 7d-1y 
6. Coupon Rate 
7. Reserve Requirements 
8. Settlement-DVP
Commercial Paper (CP) 
• A Commercial Paper (CP) is an unsecured, short-term debt instrument 
issued by a corporation, typically for meeting short-term liabilities. 
• It was introduced in India in 1990. 
• It was aimed at providing highly rated corporates with a borrowing 
option. 
• So while they could borrow from a bank, now with the help of a CP, 
they could also borrow from the open market. 
• This process is also called Financial Disintermediation or in other 
words getting rid of the mediator.
RBI Guidelines 
Who can issue CP? Corporates, primary dealers (PDs) and the All-India Financial 
Institutions (FIs) are eligible to issue CP. 
Rating requirement All eligible participants shall obtain the credit rating for issuance of 
Commercial Paper. 
In what denominations a CP 
that can be issued? 
CP can be issued in denominations of Rs.5 lakh or multiples thereof. 
minimum and maximum 
period of maturity 
a minimum of 7 days and a maximum of up to one year from the date 
of issue 
Who can invest in CP? a Individuals, banking companies, other corporate bodies (registered 
or incorporated in India) and unincorporated bodies, Non-Resident 
Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can 
invest in CPs. However, investment by FIIs would be within the limits 
set for them by Securities and Exchange Board of India (SEBI) from 
time-to-time. 
What is the mode of 
redemption? 
Initially the investor in CP is required to pay only the discounted value 
of the CP by means of a crossed account payee cheque to the 
account of the issuer through IPA. On maturity of CP. 
DVP.
REPO 
• An agreement with a commitment by the seller (dealer) to buy a security 
back from the purchaser (customer) at a specified price at a designated 
future date. 
• The repurchase price should be greater than the original sale price, the 
difference effectively representing interest, sometimes called the repo rate. 
• The party that originally buys the securities effectively acts as a lender. The 
original seller is effectively acting as a borrower, using their security as 
collateral for a secured cash loan at a fixed rate of interest. 
• Legal title to the collateral security which is used in repo transaction, passes 
to the buyer during the repo period. As a result in case the seller defaults the 
buyer does not require to establish right on the collateral security.
Gilt Edged Securities 
• Gilts, short for Gilt Edged Securities, are securities issued by the 
Government with a fixed interest rate for a predetermined length of 
time. 
• Gilt-edged securities are a high-grade investment with very low risk. 
Typically, these are issued by blue chip companies that dependably 
meet dividend or interest payments because they are well-established 
and financially stable .
RISK MANAGEMENT 
AND INSURANCE
Concept of 
RISK 
“Risk is defined as the chance of 
having a loss due to occurrence of an 
event” 
“The risk is always associated with the 
loss aspects since the word itself has 
the association of DANGER OF LOSS” 
The definition can be “ 
PROBABAILITY OF THE 
OCCURRENCE OF AN EVENT 
RESULTING IN LOSS/ GAIN
Types of Risk 
Speculative RISK 
Results in loss, or break even or 
Making a profit 
Pure RISK Produces only loss or in some 
cases break even. 
Fundamental RISK 
Particular RISK 
Outside the control & 
Fall on masses 
Exposure to loss from a 
situation associated with 
specific individual events 
Dynamic and Static Risk 
1. Personal Risk 
 Premature Death 
 Dependent Old Age 
 Sickness and Disability 
 Unemployment 
2. Property Risk 
 Loss or Damage 
 Loss on use of property 
 Additional expenses on 
loss 
3. Liability Risk 
 Human Mistake/Civil 
Wrong 
4. Default Risk
Activity 
1. Horse race 
Speculative 
2. Busying stocks 
Speculative 
3. Real estate 
Speculative 
4. Diversify on the existing product line 
5. Fire at home due to short circuit 
6. Natural disasters 
7. Betting and Gambling 
8. Inflation 
9. Hurricane Katrina 
10.War 
11.Bhopal Gas tragedy 
12.Employee violence at Maruti Plant 
13.Swine Flu 
Speculative 
Pure: Property 
Fundamental 
Speculative 
Fundamental 
Fundamental 
Fundamental 
Particular 
Particular 
Fundamental
Types of Life 
Insurance 
Term Life Insurance 
• Increasing/Decreasing term policies 
• Convertible Term Assurance Policy 
• Level Term Life Insurance 
• Renewable term life Insurance 
Endowment Insurance 
◦ Joint life endowment plan 
◦ Money back endowment plan 
◦ Marriage endowment plan 
Permanent (Whole) Life Insurance 
◦ Ordinary whole life plan 
◦ Limited payment whole life plan 
Unit Linked Plans
Term Life 
Insurance 
• Sum assured is payable only in the event of 
death during the term. 
• In case of survival, the contract comes to an 
end at the end of term. 
• Term Life Insurance can be for period as long 
as 40 years and as short as 1 year. 
• No refund of premium 
• Non-participating policies 
• Low premium as only death risk is 
covered.
Types of 
Term 
Insurance 
Increasing Term Insurance 
 Life insurance cover under 
this plan goes on increasing 
periodically over the term in 
a predetermined rate. (Riders) 
Decreasing Term Insurance 
 The sum assured decreases with the 
term of the policy. Normally decreasing 
term assurance plan is taken out for 
mortgaged protection, under which 
outstanding loan amount decreases 
as time passes as also the sum assured.
Types of Term 
Insurance 
Convertible term assurance policy 
Under this plan a policyholder 
is entitled to exchange the term 
policy for an endowment 
insurance or a whole life policy. 
Conversion can be done at any 
time during the term except last 
2 years. 
Level Term Life Insurance 
The sum assured throughout the term of the 
policy does not change.
Types of 
Term 
Insurance 
Renewable Term Life Insurance 
With renewable term insurance, the insurance 
company automatically allows you to renew 
your coverage after the term of the policy is 
over (generally 5 to 20 years)
Endowment 
Insurance 
• Endowment insurance plans is an investment 
oriented plan which not only pays in the event of 
death but also in the event of survival at the end of 
the term. 
• Is a contract underwritten by a life insurance 
company to pay a Fixed term plus Accumulated 
profits that are declared annually. 
• Premium includes 2 elements 
-mortality element & investment element 
• Minimum age at entry : 12years 
• Maximum age at entry: 65 years 
• Maximum age at maturity : 75years
Types of 
Endowment 
Insurance 
Joint Life Endowment Plan: 
Under this plan, two lives can be insured under 
one contract. 
The sum assured is payable at the end of the 
endowment term or death of either of the two. 
Money Back Endowment Plan: 
In this plan, there is an additional advantage of 
receiving a certain amount of money at periodic 
intervals during the policy term.
Types of 
Endowment 
Insurance 
Marriage Endowment Plan: 
This plan has the specific condition that the sum assured 
is payable only after the expiry of the term even if death 
of the life assured takes place earlier. 
Educational Endowment Plan: 
These plans are specially designed to meet educational 
expense of children at a future date. If the insured parent 
dies before the date of maturity the installment is paid in 
lump sum with immediate effect which helps to meet the 
educational expenses.
Permanent( 
Whole) Life 
Insurance 
• Whole life plans are another type of endowment 
plan, which cover death for an indefinite period. 
• When the policy holder dies, the face value of the 
policy, known as a death benefit, is paid to the 
person or persons named in the life insurance policy 
(the beneficiary or beneficiaries). 
• It can be with or without profits. 
• If you cancel the policy after a certain amount of time 
has passed, the insurance company will surrender 
the cash value to you.
Types of 
Whole Life 
Insurance 
• Ordinary Whole Life Plan: 
• This is a continuous premium payment plan. The 
insured pays premium throughout his life. It provides 
dual facility of protection plus savings. 
• Limited Payment Whole Life Plan: 
• It provides the same benefit as above but premiums 
are paid for a limited period. Premiums are 
sufficiently higher to cover the risk
Types of 
Whole Life 
Insurance 
3. Anticipated Whole Life Plans: 
 Under this plan, the insured receives a 
fixed sum in a periodic interval on his 
survival and full sum assured is paid on 
death of the policy holder without any 
deduction. 
 It takes care of family needs after 
death of the insured and interim needs 
of the insured and his family.
Children’s 
Life 
Insurance 
• Since last few years insurance companies have 
started offering risk cover plans like limited 
payment whole life, and endowment assurance 
plan from the age of 12years and money back 
plan from age of 13 years(completed). 
• New plans have been specifically designed for 
children where the risk of the child starts much 
earlier say 7 years.
Unit Linked 
Plans 
• It has emerged as one of the fastest growing 
insurance products. 
• It is a combination of an investment fund( such 
as mutual fund) and an insurance policy. 
• The premium amount is invested in the stock 
market and returns better income on the 
maturity period.
Add ons 
• Add-on’s or Riders 
• Accident and Disability benefit 
• Critical illness benefit 
• Major surgical assistance 
• Level Term Insurance 
•Protection Plans 
• The Pru Life Guard or Term Level Assurance 
• Death Risk Coverage 
• No maturity benefits in case of single premium level 
term policy 
• Add-on’s or Riders as in ICICI Pru Cash Bank
HOW MUCH 
INSURANCE 
DOES A 
MAN NEED? 
1. Immediate funds requirements upon 
after death- medical expenses for 
terminal illness, expenses for 
performance of last rites and 
religious ceremonies etc 
2. Children's Education and Marriage 
expenses 
3. Recurring dependent spouse and 
children 
4. Funds for paying off debts.
Requirements 
of Insurable 
Risks 
1. Sufficient number of homogeneous exposure 
2. The loss must occur by chance 
3. Risk must be predictable 
4. Loss must not be catastrophic 
5. Loss must be definite and measurable
Legal 
Principles of 
Insurance 
• Should also meet all the requirements of a valid 
contract: 
• Offer and Acceptance 
• Consideration 
• Legal Capacity 
• Legal Purpose 
Insurance - contractual 
agreement between the 
insurer and the insured. 
• Insurance contracts are special type of contracts which 
have certain additional distinguishing features associated 
with it. 
• Insurable Interest 
• Indemnity 
• Principle of Contribution 
• Subrogation (Applicable only to indemnity contracts… not to life 
insurance) 
• Utmost good faith Utmost good faith 
• Principle of Causa Proxima
CONCEPT OF RISK 
In Investments
Concept of Risk 
• Concept of Risk The actual returns that an investor receives from a stock 
may vary from his expected return and the this probability of variance itself is 
the risk. 
• Risk is expressed in terms of variability of return. An investor before investing 
in securities must properly analyze the risks associated with these securities. 
• Sometimes the term risk and uncertainty are used interchangeably but 
uncertainty the possible events and probabilities of their occurrence are not 
known, whereas in case of risk they are known. 
• So, risk and uncertainty are different from each other.
Business Entities are Exposed to Many Risks 
• Interest Rate Risk Exchange 
• Risk Liquidity Risk Default Risk 
• Internal Business Risk 
• External Business Risk 
• Financial Risk 
• Market Risk 
• Marketability Risk 
• Credit Risk 
• Operational Risk 
• Environmental Risk 
• Production Risk 
• Events of God 
• And many more
Types of Risks Types of Risk 
Systematic 
Risk 
Unsystematic 
Risk 
Systematic Risk: 
 Systematic Risk It is the risk that is caused by external factors such as 
economic, political and sociological conditions. 
 It affects the functioning of the entire market. 
 Since these risks arise due to external factors they are beyond the control of 
the company affected, and hence are uncontrollable or referred to as 
undiversifiable risk. 
They are of three types: 
1. Market risk 
2. Interest rate risk 
3. Purchasing power risk
Market risk 
• Market risk as that portion of the total variability of returns that is caused by the alternating forces 
of bull and bear markets. 
• When the stock market moves upwards, it is known as bull market. On the other hand, when the 
stock market moves downwards, then it is known as bear market. 
• The two forces that affect the market are: 
1. Tangible events : Earthquake, war, political uncertainty and decrease in the value of money are some 
of the examples of tangible events. 
2. Intangible events: It is related to market psychology. Political unrest or fall of government affects the 
market sentiments. Inflow of foreign funds may make the market psychology positive.
Interest Rate Risk 
• Interest Rate Risk It is the risk caused by the variations in the market interest rates. 
• Prices of debentures, bonds, etc. are mainly affected by the interest rate risk. (as demand for 
bonds and debentures varies directly with the ups and downs of the stock market) Extensive use 
of borrowed funds in the stock market 
• The causes of interest rate risk are as follows: 
Changes in the government’s monetary policy 
Changes in the interest rate of treasury bills 
Changes in the interest rate of government bonds.
Purchasing Power Risk: 
• Purchasing Power Risk Variations in returns are caused by the loss of purchasing power of 
currency. 
• So, the purchasing power risk is the probable loss in the purchasing power of the returns to be 
received in the future. 
• There are mainly two types of inflation: 
1. Demand-pull inflation : The demand for goods and services remains higher than the supply. 
2. Cost-push inflation : There is a rise in price due to the increase in the cost of production.

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Introduction to investments

  • 1. SECURITIES ANALYSIS III Semester M.Com and PORTFOLIO MANAGEMENT
  • 2. SECUTIY ANALYSIS AND PORTFOLIO MANAGEMENT To provide students with a conceptual framework of evaluating various investment avenues. To provide students with a conceptual and analytical framework of different financial. instruments, markets, regulations, their risk and returns and strategies in managing funds. To familiarize students with portfolio management techniques that challenges a financial manager. To give an overview of the global markets and their impact on the domestic markets Why learn this Subject? Objectives
  • 3. SECUTIY ANALYSIS AND PORTFOLIO MANAGEMEN T Course Preview Unit 1 Introduction to Investments 10 Hours Investment management, nature and scope, investment avenues, types of financial assets and real assets, Security return and risk – Systematic and unsystematic risk; sources of risk, Measurement of risk and return; courses of investment information; Profile of Indian investors. Unit 2 Fixed Income Securities 10 Hours Fixed income securities – bonds, preference shares-sources of risk, valuation, duration of bond-theory of interest rates-yield curve; Bond innovations and their valuation; Analysis of variable income securities. Unit 3 Methods of Security Analysis 15 Hours Fundamental analysis – analysis of economy, industry analysis, company analysis – financial and non-financial; Equity valuation models - options, futures, forwards, warrants and their valuations; Technical analysis – Dow theory; Efficient market hypothesis and its implications. Unit 4 Introduction to Portfolio Management 05 Hours Meaning of portfolio management; portfolio analysis; Importance; Portfolio objectives; Portfolio management process; selection of securities. Unit 5 Modern Portfolio Theories Portfolio theory; Markowitz model; Sharpe’s single index model; Efficient frontier with lending and borrowing, optimal portfolio, capital asset pricing model; Arbitrage pricing theory, two factor and multifactor models. Unit 6 Portfolio Management Strategies & Portfolio Evaluation 08 Hours Bond Portfolio management strategies; Equity portfolio management strategies, strategies using derivatives, hedging; Portfolio revision – rebalancing plans, Portfolio evaluation- Sharpe’s index, Treynor’s measure and Jenson’s measure.
  • 4. SECUTIY ANALYSIS AND PORTFOLIO MANAGEMEN T Reference Books ♠ Alexender & Bailey. (2001). Fundamentals of Investments. New Delhi: PHI . ♠ Bhalla V K. (2008). Investment Management. New Delhi: S Chand & Co. ♠ Fischer and Jordan (2006). Security Analysis and Portfolio Management. New Delhi: Prentice- Hall. ♠ Prasanna Chandra.(2011). Investment Analysis and Portfolio Management .New Delhi: Mcgraw-Hill. ♠ Preeti Singh. (2000). Investment Management. New Delhi: HPH . ♠ Punithavathy Pandian .(2010). Security Analysis and Portfolio Management. New Delhi: Vikas Publishing House. ♠ SudhindraBhat.(2011). Security Analysis and Portfolio Management. New Delhi: Excel Books. Finance portals  Moneycontrol.Com  Btvin.Com  Profit.Ndtv.Com  Indiainfoline.Com  Apnapaisa.Com
  • 5. Unit : 1 INTRODUCTION TO INVESTMENTS
  • 6. What is Investment? In simple terms, Investment refers to process of investing money in financial or real assets for profit or material result.  Investment made in buying financial instruments such as new shares, bonds, securities, etc. is considered as a Financial Investment. Investment made in plant and equipment, land and building and other infrastructure facilities is considered as Real Investment.  Investment decisions refers to application of funds in long-term assets in anticipation of future benefits and maximization of long-term profitability. Investment refers to a money commitment of some sort.
  • 7. Difference between Savings and Investment Difference Savings Investment Meaning Saving money means keeping aside a part of your income regularly in order to deal with unexpected expenses. Investment means putting your saved money in various products in order to earn returns and grow your wealth. Time Savings are usually used to meet your short term needs. People save in order to deal with emergency situations and meet unexpected expenses. However, investment generally entails a longer horizon of six months or more. It is designed to provide returns and grow your money over a period of time. Risk and reward savings stored in a safety vault are very safe, they will not generate any returns over the years. Even if money is kept in a savings account, it will provide a negligible rate of return. money invested in various products like stocks, mutual funds, gold, etc. is subject to more risks, but has the potential to grow over time. If invested wisely, your money can grow manifold over years. Liquidity savings are the most liquid assets, as they can be accessed at any time. It takes a few days for the money to reach your bank account after you decide to sell your investments.
  • 8. CLASSIFICATIO N OF INVESTMENT • A: On the Basis of Physical Investments • House • Land • Building • Gold and Silver • Precious stones Investment refers to a money commitment of some sort. • B: On the Basis of Financial Investment • Marketable and Transferable investments • Non-Marketable Investments B.1: Marketable and Transferable investments • Shares • Debentures • Bonds • Government Securities • Derivatives B.2: Marketable and Transferable investments • Bank Deposits • Provident and Pension Funds • Insurance Certificates • Post office Deposits • National Saving Certificates • Company Deposits
  • 9. Share • Features and rights of equity share holders Residual claim Voting rights Ownership rights Pre-emptive right (Right issue) Par value The capital of a company is divided into shares. Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company. Merits 1. Easily transferable 2. Liability 3. Profit potential 4. Purchasing power risk De-merits 1. Uncertain and Irregular Income 2. Capital loss During Depression Period 3. Loss on Liquidation
  • 10. Preference Shares Preference shares are those, which enjoy preferential rights. • Features and rights of equity share holders Dividends Voting rights Ownership rights  Pre-emptive right (Right issue)  Par value  Retirement of debt through sinking fund  Convertibility  Hybrid De-merits 1. No Voting Right 2. Fixed Income 3. No claim over surplus 4. No Guarantee of Assets Merits 1. Regular Fixed Income 2. Lesser Capital Losses 3. Preferential Rights 4. Voting Right for Safety of Interest. 5. Fair Security Preference shares. Sec. 85(1) of the Companies Act defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Classification of preference shares 1. Cumulative or non cumulative 2. Participating or Non-participating 3. Redeemable or Non-Redeemable 4. Convertible or Non-convertible
  • 11. Classification of Equity Shares According to Stock Market Stock market has classified equity shares as follows: Type Key feature Blue chip shares Share of large, well established and financially strong companies shares with an impressive record of earnings and dividends. Growth shares Enjoy an above average rate of growth as well as profitability. Income shares fairly stable operations, relatively limited growth opportunities, and high dividend payout ratios. Cyclical shares A Cyclical stock is a stock highly correlated to the economic activity. Defensive shares Relatively unaffected by the ups and downs in general business conditions. Speculative shares tend to fluctuate widely because there is a lot of speculative trading in them.
  • 12. Concept of Debentures in India • According to Indian Company’s Act, 1956, defined the term ‘Debentures.’ • Debentures includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not, in common parlance, debenture is an instrument issued by a company under its common seal, acknowledging its debt to the holder, and containing an undertaking to repay the debt on or after a specified period and to pay interest on the debt at a fixed rate at regular intervals, usually, half yearly, until the debt is repaid. • The person to whom the debentures are issued are called debenture holders. The debenture holders are not the owners of the company. They are just the loan creditors of the company.
  • 13. Debenture A type of debt instrument that is not secured by physical assets or collateral. Merits 1. Higher rates of financial return 2. Choice of converting 3. Fixed interest 4. Transferable De-merits 1. Credit Risk 2. Bankruptcy 3. Unsecured Classification of Debentures 1. Convertible debentures 2. Non-convertible debentures
  • 14. Corporate FDs • The deposit placed by investors with companies for a fixed term carrying a prescribed rate of interest is called Company Fixed Deposit. • Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilized are governed by the Companies Act under Section 58A. • These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option. Companies that find it difficult to get loans from banks raise money from the public. 1. Company fixed deposits offer better interest rates than banks 2. Additional risk 3. Company fixed deposits are rated by Rating Agencies 4. TDS on Company Fixed Deposits 5. You could keep a shorter horizon 1. Cumulative 2. Non-Cumulative
  • 15. Bonds A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Features of Bonds 1. Indenture 2. Covenants: Affirmative & Negative 3. Maturity 4. Par Value 5. Coupon Rate Types of Bonds 1. Serial Bonds 2. Sinking Fund bonds 3. Registered bonds 4. Mortgage bond 5. Collateral trust bonds 6. Convertible bonds 7. Zero-coupon bonds 8. Callable Bonds
  • 16. Symbols Rating Definition Remarks CRISIL AAA Highest Safety Timely servicing of financial obligations-lowest credit risk. CRISIL AA High Safety Timely servicing of financial obligations very- low credit risk. CRISIL A Adequate safety Adequate degree of safety- low credit risk. CRISIL BBB Moderate Safety carry moderate credit risk. CRISIL BB Moderate Risk risk of default -financial obligations CRISIL B High Risk CRISIL C Very High Risk CRISIL D Default
  • 17.
  • 18. Fixed Deposits • The main features of fixed deposit account are as follows: • Tenure ranges between six months to 10 years • Guaranteed Returns • Interest income monthly, quarterly or annually. • Reinvest interest income and gain the influence of compounding • Partial or full withdrawal facility is available with penalty interest rates • Loan against deposits • Senior citizens get higher coupon rates in the range of 0.25 - 100 %. The term 'fixed deposit' means that the deposit is fixed and is repayable only after a specific period is over. Pros Cons Safety Lower rate of returns Regular Income Taxes Saves tax inflation Convenience Risk Deposit Insurance & Credit Guarantee Scheme of India
  • 19. Recurring deposits • Recurring deposits are special kind of Term Deposits and are suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month. Difference Fixed Recurring Rate of Return Approximately 8%-8.5% for a period of 1 year Approximately 8%-8.5% for a period of 1 year Additional Benefits Loan facility available Loan facility available Tenure Tenure ranges from 7 days to 10 years Tenure ranges from 1 years to 10 years Minimum investment Rs. 10,000 (may differ from Bank to Bank) Rs. 100 Maximum investment No limit No Limit Premature withdrawal Interest penalty levied, varies from Bank to Bank Interest penalty levied, varies from Bank to Bank Tax benefit Incase of a Tax saver FD, a tax exemption u/s 80c is applicable No tax benefit Interest Income Taxable and subject to Taxable but no TDS
  • 20.
  • 22. It provides a parking place to employ short term surplus funds. It is a market purely for short term funds or financial assets called near money. It deals with debt instrument which have a maturity of less than one year at the time of issue are called money market instruments. Money market instruments are highly liquid and have negligible risk. The money market is dominated by the government, financial institutions, banks and corporates. Features of a Money Market
  • 23. TREASURY BILLS • Treasury Bills are money market instruments to finance the short term requirements of the Government of India. • These are discounted securities and thus are issued at a discount to face value. • The return to the investor is the difference between the maturity value and issue price. • Treasury Bills are issued for the following tenors 91-days, 182- days and 364-days Treasury bills. Benefits of Investment In Treasury Bills 1. No tax deducted at source 2. Zero default risk being sovereign paper 3. Highly liquid money market instrument 4. Better returns especially in the short term 5. Transparency 6. Simplified settlement 7. High degree of tradability
  • 24. Treasury Bills  Form  The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialized form.  Minimum Amount of Bids  Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof.  Eligibility  All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organizations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills.  Repayment  The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai.  Availability  All the treasury Bills are highly liquid instruments available both in the primary and secondary market.  Day Count  For treasury bills the day count is taken as 365 days for a year. How to BUY treasury Bills?
  • 25. Yield Calculation • A cooperative bank wishes to buy 91 Days Treasury on Oct. 12, 20014, Bill Maturing on Dec. 6, 2014. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The yield of a Treasury Bill is calculated as per the following formula: YTM (100-P)x365x100 PxD Wherein Y = discounted yield P= Price D= Days to maturity YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70%
  • 26. Salient Features of The Auction Technique • The auction of treasury bills is done only at Reserve Bank of India, Mumbai. • Bids are submitted in terms of price per Rs 100. • For example, a bid for 91-day Treasury bill auction could be for Rs 97.50. Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day. • Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.
  • 27. Types of Auctions There are two types of auction for treasury bills: 1. Multiple Price Based or French Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him. 2. Uniform Price Based or Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him.
  • 28. Working Capital INADEQUACY OF WC Under-utilization of capacity Creditworthiness is hit Cannot utilize business opportunity Modernization and Maintenance Discounts and Perks
  • 29. Money Market Instruments 1. Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. 2. Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day 3. Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. 4. Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months
  • 30. Certificates of Deposit • Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. • Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time. Difference FD CD Negotiability No Yes Return Low High Rating No Yes Key Features 1. Eligibility-Who can issue? 2. Aggregate Amount- How much? 3. Denominations-Pricing? multiples of Rs. 1 lakh thereafter. 4. Investors-Who can buy? 5. Maturity 7d-1y 6. Coupon Rate 7. Reserve Requirements 8. Settlement-DVP
  • 31. Commercial Paper (CP) • A Commercial Paper (CP) is an unsecured, short-term debt instrument issued by a corporation, typically for meeting short-term liabilities. • It was introduced in India in 1990. • It was aimed at providing highly rated corporates with a borrowing option. • So while they could borrow from a bank, now with the help of a CP, they could also borrow from the open market. • This process is also called Financial Disintermediation or in other words getting rid of the mediator.
  • 32. RBI Guidelines Who can issue CP? Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. Rating requirement All eligible participants shall obtain the credit rating for issuance of Commercial Paper. In what denominations a CP that can be issued? CP can be issued in denominations of Rs.5 lakh or multiples thereof. minimum and maximum period of maturity a minimum of 7 days and a maximum of up to one year from the date of issue Who can invest in CP? a Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time. What is the mode of redemption? Initially the investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP. DVP.
  • 33. REPO • An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. • The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. • The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. • Legal title to the collateral security which is used in repo transaction, passes to the buyer during the repo period. As a result in case the seller defaults the buyer does not require to establish right on the collateral security.
  • 34. Gilt Edged Securities • Gilts, short for Gilt Edged Securities, are securities issued by the Government with a fixed interest rate for a predetermined length of time. • Gilt-edged securities are a high-grade investment with very low risk. Typically, these are issued by blue chip companies that dependably meet dividend or interest payments because they are well-established and financially stable .
  • 35. RISK MANAGEMENT AND INSURANCE
  • 36. Concept of RISK “Risk is defined as the chance of having a loss due to occurrence of an event” “The risk is always associated with the loss aspects since the word itself has the association of DANGER OF LOSS” The definition can be “ PROBABAILITY OF THE OCCURRENCE OF AN EVENT RESULTING IN LOSS/ GAIN
  • 37. Types of Risk Speculative RISK Results in loss, or break even or Making a profit Pure RISK Produces only loss or in some cases break even. Fundamental RISK Particular RISK Outside the control & Fall on masses Exposure to loss from a situation associated with specific individual events Dynamic and Static Risk 1. Personal Risk  Premature Death  Dependent Old Age  Sickness and Disability  Unemployment 2. Property Risk  Loss or Damage  Loss on use of property  Additional expenses on loss 3. Liability Risk  Human Mistake/Civil Wrong 4. Default Risk
  • 38. Activity 1. Horse race Speculative 2. Busying stocks Speculative 3. Real estate Speculative 4. Diversify on the existing product line 5. Fire at home due to short circuit 6. Natural disasters 7. Betting and Gambling 8. Inflation 9. Hurricane Katrina 10.War 11.Bhopal Gas tragedy 12.Employee violence at Maruti Plant 13.Swine Flu Speculative Pure: Property Fundamental Speculative Fundamental Fundamental Fundamental Particular Particular Fundamental
  • 39. Types of Life Insurance Term Life Insurance • Increasing/Decreasing term policies • Convertible Term Assurance Policy • Level Term Life Insurance • Renewable term life Insurance Endowment Insurance ◦ Joint life endowment plan ◦ Money back endowment plan ◦ Marriage endowment plan Permanent (Whole) Life Insurance ◦ Ordinary whole life plan ◦ Limited payment whole life plan Unit Linked Plans
  • 40. Term Life Insurance • Sum assured is payable only in the event of death during the term. • In case of survival, the contract comes to an end at the end of term. • Term Life Insurance can be for period as long as 40 years and as short as 1 year. • No refund of premium • Non-participating policies • Low premium as only death risk is covered.
  • 41. Types of Term Insurance Increasing Term Insurance  Life insurance cover under this plan goes on increasing periodically over the term in a predetermined rate. (Riders) Decreasing Term Insurance  The sum assured decreases with the term of the policy. Normally decreasing term assurance plan is taken out for mortgaged protection, under which outstanding loan amount decreases as time passes as also the sum assured.
  • 42. Types of Term Insurance Convertible term assurance policy Under this plan a policyholder is entitled to exchange the term policy for an endowment insurance or a whole life policy. Conversion can be done at any time during the term except last 2 years. Level Term Life Insurance The sum assured throughout the term of the policy does not change.
  • 43. Types of Term Insurance Renewable Term Life Insurance With renewable term insurance, the insurance company automatically allows you to renew your coverage after the term of the policy is over (generally 5 to 20 years)
  • 44. Endowment Insurance • Endowment insurance plans is an investment oriented plan which not only pays in the event of death but also in the event of survival at the end of the term. • Is a contract underwritten by a life insurance company to pay a Fixed term plus Accumulated profits that are declared annually. • Premium includes 2 elements -mortality element & investment element • Minimum age at entry : 12years • Maximum age at entry: 65 years • Maximum age at maturity : 75years
  • 45. Types of Endowment Insurance Joint Life Endowment Plan: Under this plan, two lives can be insured under one contract. The sum assured is payable at the end of the endowment term or death of either of the two. Money Back Endowment Plan: In this plan, there is an additional advantage of receiving a certain amount of money at periodic intervals during the policy term.
  • 46. Types of Endowment Insurance Marriage Endowment Plan: This plan has the specific condition that the sum assured is payable only after the expiry of the term even if death of the life assured takes place earlier. Educational Endowment Plan: These plans are specially designed to meet educational expense of children at a future date. If the insured parent dies before the date of maturity the installment is paid in lump sum with immediate effect which helps to meet the educational expenses.
  • 47. Permanent( Whole) Life Insurance • Whole life plans are another type of endowment plan, which cover death for an indefinite period. • When the policy holder dies, the face value of the policy, known as a death benefit, is paid to the person or persons named in the life insurance policy (the beneficiary or beneficiaries). • It can be with or without profits. • If you cancel the policy after a certain amount of time has passed, the insurance company will surrender the cash value to you.
  • 48. Types of Whole Life Insurance • Ordinary Whole Life Plan: • This is a continuous premium payment plan. The insured pays premium throughout his life. It provides dual facility of protection plus savings. • Limited Payment Whole Life Plan: • It provides the same benefit as above but premiums are paid for a limited period. Premiums are sufficiently higher to cover the risk
  • 49. Types of Whole Life Insurance 3. Anticipated Whole Life Plans:  Under this plan, the insured receives a fixed sum in a periodic interval on his survival and full sum assured is paid on death of the policy holder without any deduction.  It takes care of family needs after death of the insured and interim needs of the insured and his family.
  • 50. Children’s Life Insurance • Since last few years insurance companies have started offering risk cover plans like limited payment whole life, and endowment assurance plan from the age of 12years and money back plan from age of 13 years(completed). • New plans have been specifically designed for children where the risk of the child starts much earlier say 7 years.
  • 51. Unit Linked Plans • It has emerged as one of the fastest growing insurance products. • It is a combination of an investment fund( such as mutual fund) and an insurance policy. • The premium amount is invested in the stock market and returns better income on the maturity period.
  • 52. Add ons • Add-on’s or Riders • Accident and Disability benefit • Critical illness benefit • Major surgical assistance • Level Term Insurance •Protection Plans • The Pru Life Guard or Term Level Assurance • Death Risk Coverage • No maturity benefits in case of single premium level term policy • Add-on’s or Riders as in ICICI Pru Cash Bank
  • 53. HOW MUCH INSURANCE DOES A MAN NEED? 1. Immediate funds requirements upon after death- medical expenses for terminal illness, expenses for performance of last rites and religious ceremonies etc 2. Children's Education and Marriage expenses 3. Recurring dependent spouse and children 4. Funds for paying off debts.
  • 54. Requirements of Insurable Risks 1. Sufficient number of homogeneous exposure 2. The loss must occur by chance 3. Risk must be predictable 4. Loss must not be catastrophic 5. Loss must be definite and measurable
  • 55. Legal Principles of Insurance • Should also meet all the requirements of a valid contract: • Offer and Acceptance • Consideration • Legal Capacity • Legal Purpose Insurance - contractual agreement between the insurer and the insured. • Insurance contracts are special type of contracts which have certain additional distinguishing features associated with it. • Insurable Interest • Indemnity • Principle of Contribution • Subrogation (Applicable only to indemnity contracts… not to life insurance) • Utmost good faith Utmost good faith • Principle of Causa Proxima
  • 56. CONCEPT OF RISK In Investments
  • 57. Concept of Risk • Concept of Risk The actual returns that an investor receives from a stock may vary from his expected return and the this probability of variance itself is the risk. • Risk is expressed in terms of variability of return. An investor before investing in securities must properly analyze the risks associated with these securities. • Sometimes the term risk and uncertainty are used interchangeably but uncertainty the possible events and probabilities of their occurrence are not known, whereas in case of risk they are known. • So, risk and uncertainty are different from each other.
  • 58. Business Entities are Exposed to Many Risks • Interest Rate Risk Exchange • Risk Liquidity Risk Default Risk • Internal Business Risk • External Business Risk • Financial Risk • Market Risk • Marketability Risk • Credit Risk • Operational Risk • Environmental Risk • Production Risk • Events of God • And many more
  • 59. Types of Risks Types of Risk Systematic Risk Unsystematic Risk Systematic Risk:  Systematic Risk It is the risk that is caused by external factors such as economic, political and sociological conditions.  It affects the functioning of the entire market.  Since these risks arise due to external factors they are beyond the control of the company affected, and hence are uncontrollable or referred to as undiversifiable risk. They are of three types: 1. Market risk 2. Interest rate risk 3. Purchasing power risk
  • 60. Market risk • Market risk as that portion of the total variability of returns that is caused by the alternating forces of bull and bear markets. • When the stock market moves upwards, it is known as bull market. On the other hand, when the stock market moves downwards, then it is known as bear market. • The two forces that affect the market are: 1. Tangible events : Earthquake, war, political uncertainty and decrease in the value of money are some of the examples of tangible events. 2. Intangible events: It is related to market psychology. Political unrest or fall of government affects the market sentiments. Inflow of foreign funds may make the market psychology positive.
  • 61. Interest Rate Risk • Interest Rate Risk It is the risk caused by the variations in the market interest rates. • Prices of debentures, bonds, etc. are mainly affected by the interest rate risk. (as demand for bonds and debentures varies directly with the ups and downs of the stock market) Extensive use of borrowed funds in the stock market • The causes of interest rate risk are as follows: Changes in the government’s monetary policy Changes in the interest rate of treasury bills Changes in the interest rate of government bonds.
  • 62. Purchasing Power Risk: • Purchasing Power Risk Variations in returns are caused by the loss of purchasing power of currency. • So, the purchasing power risk is the probable loss in the purchasing power of the returns to be received in the future. • There are mainly two types of inflation: 1. Demand-pull inflation : The demand for goods and services remains higher than the supply. 2. Cost-push inflation : There is a rise in price due to the increase in the cost of production.