Investment Management

We shall cover:
¶ Equity portfolio management

¶ Debt portfolio management

Investment Management Functions
•Set Investment policy
•Perform security Analysis
•Construct a portfolio
•Revise the portfolio
•Evaluate the performance of the portfolio

Security Analysis
Technical Analysis
•Fundamental Analysis
Portfolio Construction
•selectivity (micro forecasting)
•timing (macro forecasting)
•diversification
Portfolio Revision
(Repetition of the previous three steps)
•Motivations
•size of the transaction costs & the perceived
improvement
Portfolio Performance Evaluation
•risk & returns
•benchmarks
 Approaches to Portfolio Management

•Passive management (indexation)-

holding securities for relatively long periods with small
and infrequent changes

•Active management-
involves a systematic effort to exceed the performance of
a selected target
 Types of Equity Instruments
• Common Stock- legal representation of
the ownership position
• Preference Shares- hybrid form of
security with the features of both common
stock and bonds
• Cumulative convertible preference shares
• Warrants
• Convertible debentures
 Market capitalization based classification

• Small cap companies

– Profit potential of small cap companies
• Large cap companies
– Liquidity and tradable
• Differences in Indices and benchmarks

Earning based classification

• Price/Earnings ratios
– Higher the P/E greater the growth potential
• Dividend yield
• Cyclical stocks; Growth stock; Value stock
 Growth vs Value

• Growth Stocks
– High P/E ratio; low dividend yields
• Value Stocks
– Good track record
• Growth versus Value controversy
• Investor preferences

Use of Equity Derivatives for Portfolio Risk Management

Portfolio Management Organization Structure

• Fund Manager-assets allocation

• Security Analysts-supports the fund managers
• security Dealers-executes actual buying or selling
 Part II : Debt Portfolios

Types of Debt Securities

•Secured Vs. Unsecured

•by the issuer Category
•by the maturity profile
•Interest bearing Vs. discounted securities
•Fixed and floating rate

Instruments in Indian debt Market

•Certificate of Deposit (CD)-unsecured Negotiable
Promissory Note
•Commercial Papers(CP)- unsecured instruments
issued by corporate bodies
•Corporate debentures-credit rated
•Floating Rate Bonds
•Government Securities
 Debt instruments contd...

•Treasury Bills-91, 364 days;

•Bank & FI Bonds

PSU bonds
Basic features of bonds
•Par value
•Coupon
•Maturity
•Call options
 Measuring bond yield

• Current yield=
annual coupon interest/current market price;
when bond is selling at discount CR<CY.
When at premium CR>CY.

• Yield to maturity
– Yield and price are inversely related

• Yield curve (TSIR)- tracks the yields across

various maturities; upward sloping
 Risk in Investing in bonds
• Interest rate risk refers to the possibility that income
and/or capital loss will result because of an increase in
the level of interest rates
• Re-investment risk
• Call risk
• Default risk
• Liquidity risk

Yield spread and credit risk

•Spread is the premium over G-sec rate paid by
borrowers according to their credit risk quality
•Credit risk is priced using the ratings of credit
rating agencies.
•Higher the rating, lower the spread.
•Debt portfolios have credit quality objectives.
 Duration
• Duration measures the sensitivity of the bond portfolio to changes in
interest rates.
• Duration is the weighted average term to maturity of a bond.
• Duration of a coupon paying bond is always lower than its term to
maturity.
• Duration of a zero coupon bond is equal to its Maturity

Debt Investment Strategies

• Passive & Active
• Buy and hold
– interest rate risk
– credit risk
• Duration management
– active management based on interest rate
expectations
 Organization of debt fund management

• Interest rate forecasting unit

• Fund managers
• Security dealers
• Risk managers