TYBMS SEM 5 : Finance: Investment Analysis & Portfolio Management (Q.P. November 2023 with Solution)

Paper/Subject Code: 46003/Finance: Investment Analysis & Portfolio Management

TYBMS SEM 5 : Finance:
Investment Analysis & Portfolio Management
(Q.P. April 2023 with Solution)

NB: (1) All questions are compulsory having internal option.

(2) Figures to the right indicate marks allocated to each question.

(3) Simple calculator is allowed.

1. (A) Match the columns and rewrite the sentence. (Any 8)        (08 Marks)

Group – I	Group - II
i. Equity Share	a. Controllable
ii. Mutual Fund valuation	b. Modern Portfolio Theory
iii. Debenture	c. Reducing the risk of loss
iv. Post Office Saving Scheme	d. Time factor
v. Systematic Risk	e. Own Fund
vi. Expected Return	f. NAV (Net Asset Value)
vii. Unsystematic Risk	g. Debt Funds
viii. Risk-return trade-off	h. Tax Saving Investment
ix. Diversification-	i. Uncontrollable
Χ. Portfolio revision	j. Probability

Ans:

Group – I	Group - II
i. Equity Share	e. Own Fund
ii. Mutual Fund valuation	f. NAV (Net Asset Value)
iii. Debenture	g. Debt Funds
iv. Post Office Saving Scheme	h. Tax Saving Investment
v. Systematic Risk	i. Uncontrollable
vi. Expected Return	j. Probability
vii. Unsystematic Risk	a. Controllable
viii. Risk-return trade-off	d. Time factor
ix. Diversification-	c. Reducing the risk of loss
Χ. Portfolio revision	b. Modern Portfolio Theory

1.(B) Give True or False: (Any 7).                (07 Marks)

i. The maximum deduction which can be claimed under section 80C is Rs. 1,50,000.

ii. India is the highest consumer of gold in the world.

iii. The maximum maturity of Treasury bill is 3 years.

iv. Stock Market Index is the method of showing the overall performance of all the companies listed in Stock market with a single number.

v. NIFTY is the stock market Index of India's Bombay Stock Exchange.

vi. SML is a linear relationship between expected return and systematic risk.

vii. The Dow Theory consist of 3 types of market movement.

viii. An Oscillator is a technical analysis tool.

ix. The RSI was developed by J. Welles Wilder.

x. Charting helps to analyses and interpret the price trends of an underlying.

Ans:

Statement	True/False	Explanation
i. The maximum deduction which can be claimed under section 80C is Rs. 1,50,000.	True	Section 80C allows a deduction up to Rs. 1,50,000.
ii. India is the highest consumer of gold in the world.	False	India is one of the largest, but not always the highest.
iii. The maximum maturity of Treasury bill is 3 years.	False	Treasury bills have a maximum maturity of 364 days.
iv. Stock Market Index is the method of showing the overall performance of all the companies listed in Stock market with a single number.	False	Index represents selected companies, not all.
v. NIFTY is the stock market Index of India's Bombay Stock Exchange.	False	NIFTY belongs to NSE; BSE's index is SENSEX.
vi. SML is a linear relationship between expected return and systematic risk.	True	SML represents the CAPM relationship between risk and return.
vii. The Dow Theory consists of 3 types of market movement.	True	Primary, secondary, and minor movements.
viii. An Oscillator is a technical analysis tool.	True	Oscillators help identify overbought or oversold conditions.
ix. The RSI was developed by J. Welles Wilder.	True	RSI was introduced by J. Welles Wilder in 1978.
x. Charting helps to analyze and interpret the price trends of an underlying.	True	Charting is essential for analyzing price trends.

2. (A) What are the factors influencing for the selection of Investment Alternatives. Explain in brief.

When selecting investment alternatives, investors consider various factors that influence their decisions. These factors help assess the suitability, risk, and potential returns of different investment options. Here’s a brief overview of the key factors influencing the selection of investment alternatives:

1. Investment Objectives:

Capital Preservation: Investors focused on protecting their capital may prefer low-risk investments like government bonds or savings accounts.

Income Generation: Those seeking regular income might favor dividend-paying stocks or fixed-income securities.

Capital Appreciation: Investors aiming for significant growth often look at equities or real estate.

2. Risk Tolerance:

Individual Risk Appetite: Different investors have varying levels of comfort with risk. Higher risk can yield higher returns but also increases potential losses. Investors must assess their personal risk tolerance to choose appropriate investments.

Market Conditions: Economic factors, such as interest rates, inflation, and market volatility, can impact risk perception and influence investment choices.

3. Time Horizon:

Short-Term vs. Long-Term: The investment time frame significantly impacts the selection of alternatives. Short-term investors may prefer liquid assets or trading strategies, while long-term investors might opt for growth-oriented assets that can weather market fluctuations.

4. Liquidity Needs:

Access to Cash: Investors must consider their need for liquidity, or how quickly they can convert an investment into cash. Assets like stocks and bonds tend to be more liquid than real estate or collectibles.

5. Market Conditions:

Economic Environment: The overall economic climate, including interest rates, inflation rates, and economic growth, influences the attractiveness of various investment options.

Market Trends: Current market trends and investor sentiment can affect the perceived potential of different investments.

6. Diversification:

Portfolio Strategy: Investors aim to diversify their portfolios to minimize risk. The selection of investment alternatives will depend on how well they complement existing holdings and contribute to overall portfolio balance.

7. Tax Considerations:

Tax Implications: Different investments have varying tax consequences, such as capital gains tax or dividend tax. Investors often seek to optimize their tax situation by selecting tax-efficient investments.

8. Cost and Fees:

Expense Ratios and Commissions: The costs associated with purchasing and holding investments can impact returns. Investors should evaluate the fees related to mutual funds, trading commissions, or management fees when selecting alternatives.

9. Investment Knowledge and Experience:

Understanding of Options: An investor’s knowledge and experience in certain types of investments can influence their choices. More experienced investors may be comfortable with complex instruments, while novices may prefer straightforward options.

10. Regulatory and Legal Factors:

Compliance and Regulations: Legal and regulatory considerations can affect investment choices, particularly in sectors with strict compliance requirements, such as real estate or hedge funds.

(B) Explain the types of Investors.

Investors can be categorized based on various criteria, including their investment goals, risk tolerance, investment strategies, and time horizons. Understanding the different types of investors can help tailor investment strategies and communication. Here are the main types of investors:

1. Individual Investors:

These are private individuals who invest their own money in various financial instruments, such as stocks, bonds, mutual funds, or real estate. They can be further categorized based on their investment approach:

Retail Investors:

Typically smaller investors who buy and sell securities for personal accounts.

They often rely on brokerage firms or online platforms for their transactions.

High-Net-Worth Individuals (HNWIs):

Individuals with substantial assets (usually over $1 million) who often have access to exclusive investment opportunities.

They may employ financial advisors or wealth management firms for personalized investment strategies.

2. Institutional Investors:

These are organizations that invest large sums of money on behalf of clients or members. They typically have greater resources and access to market information, and they often have a significant influence on market movements. Types include:

Pension Funds:

Investment funds that manage retirement savings for employees.

They seek long-term growth and income to ensure future payouts.

Mutual Funds:

Investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.

Managed by professional fund managers.

Hedge Funds:

Investment funds that employ advanced strategies, including leverage, derivatives, and short selling, to achieve high returns.

Typically accessible to accredited investors and have higher fees.

Insurance Companies:

Institutions that invest premium income to meet future liabilities and payouts.

They focus on stable and long-term investments.

Endowments and Foundations:

Organizations that manage funds for charitable purposes or to support specific causes.

They often seek long-term growth to fund their initiatives.

3. Value Investors:

Investors who seek undervalued securities, believing that the market has mispriced them. They focus on a company’s fundamentals, such as earnings, dividends, and asset value.

They typically have a long-term perspective and may hold investments for years until they believe the stock's true value is recognized.

4. Growth Investors:

Investors who focus on companies expected to grow at an above-average rate compared to their industry or the overall market.

They typically invest in smaller, emerging companies and are willing to pay a premium for anticipated growth, often ignoring current earnings or valuation metrics.

5. Income Investors:

Investors who prioritize generating a steady income stream from their investments, typically through dividends or interest payments.

They often invest in dividend-paying stocks, bonds, and real estate investment trusts (REITs).

6. Speculative Investors:

Investors who take high risks in pursuit of substantial short-term gains. They may invest in volatile assets such as options, cryptocurrencies, or penny stocks.

They often rely on market trends, news, and technical analysis rather than fundamental analysis.

7. Passive Investors:

Investors who adopt a buy-and-hold strategy, aiming to replicate market performance rather than trying to outperform it.

They often invest in index funds or exchange-traded funds (ETFs) that track specific market indices.

8. Active Investors:

Investors who frequently buy and sell securities in an attempt to outperform the market. They rely on market analysis, research, and technical indicators to make investment decisions.

Active investing requires more time and involvement compared to passive investing.

9. Sustainable/Responsible Investors:

Investors who prioritize environmental, social, and governance (ESG) factors in their investment decisions.

They seek to invest in companies that align with their values, often avoiding industries like fossil fuels or tobacco.

10. Retirement Investors:

Individuals specifically focused on building a nest egg for retirement, typically using retirement accounts like 401(k)s or IRAs.

Their strategies may evolve over time, shifting from growth-oriented investments in their working years to more conservative, income-generating investments as they approach retirement.

OR

2. (C) The security return on stock of Multi Ltd. and Metal Ltd. under different status of economy are given below:

Particulars	Boom	Low Growth	Stagnation	Recession
Probability	0.35	0.25	0.20	0.20
Return on stock of Multi Ltd. (%)	50	45	30	25
Return on stock of Metal Ltd. (%)	45	50	40	30

Calculate the expected return and standard deviation of return on both the stocks and advise to invest in one of them.                                                                (08 Marks)

2. (D) The security return of Koo Ltd. and market returns are given below:

Years	1	2	3	4	5	6	7
Security Return (%) of Koo Ltd	10	13	15	14	15	18	20
Market Return (%)	14	16	18	20	22	24	26

Calculate Beta on security of Koo Ltd.

3.(A) Distinguish between Fundamental Analysis and Technical Analysis.

	Fundamental Analysis	Technical Analysis
Definition	Focuses on evaluating a company’s intrinsic value based on its financial performance, business model, industry conditions, and macroeconomic factors.   It involves analyzing a company’s financial statements (such as balance sheets, income statements, and cash flow statements) to determine whether a stock is overvalued or undervalued.	Focuses on studying price movements and trading volumes of stocks or securities to predict future price trends.   It is based on the idea that past market data (price charts, patterns, and indicators) can help forecast future price movements.
Focus	Concentrates on the company’s business performance, such as revenue, profit margins, earnings growth, and management quality.   Considers economic indicators, industry trends, and competitive positioning.   Aims to identify whether the company has a strong foundation and good growth potential in the long run.	Concentrates on historical price charts and trading volumes.   Uses technical indicators like moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), and chart patterns (e.g., head and shoulders, double top/bottom).   Aims to identify trends, price levels, and market sentiment to make short-term trading decisions.
Objective	Aims to determine the intrinsic value of a stock or asset and assess whether it is undervalued or overvalued.   Suitable for long-term investors who want to invest in fundamentally strong companies and hold them over time.	Aims to identify buying and selling opportunities based on price trends and patterns.   Suitable for short-term traders (like day traders or swing traders) who want to capitalize on market movements over a short period.
Time Horizon	Has a long-term perspective, as it involves understanding a company’s prospects and potential growth over time.   Investors may hold a stock for years if they believe the underlying business is strong and undervalued.	Has a short-term to medium-term perspective, focusing on quick price movements and trends.   Positions may be held for a few days, weeks, or even minutes, depending on the trading strategy.
Data Sources	Relies on financial reports, such as balance sheets, income statements, cash flow statements, and annual reports.   Uses qualitative factors like management quality, industry conditions, and macroeconomic indicators (e.g., GDP, inflation rates).	Relies on price charts, trading volume data, and various technical indicators.   Data is obtained from historical price movements and market trends rather than company-specific information.
Tools & Techniques	Uses tools like Price-to-Earnings (P/E) ratio, Price-to-Book (P/B) ratio, Dividend Discount Model (DDM), and Discounted Cash Flow (DCF) analysis.   Evaluates economic indicators and industry analysis to determine how external factors might impact a company’s performance.	Uses tools like candlestick charts, moving averages, support and resistance levels, Bollinger Bands, and Fibonacci retracements.   Identifies patterns such as head and shoulders, triangles, and double tops/bottoms for forecasting price movements.
Approach to Market	Believes that a stock’s intrinsic value will eventually be reflected in its market price.   Assumes that the market can be inefficient in the short term but becomes efficient in the long run, where prices align with intrinsic value.	Believes that market prices reflect all available information (including fundamentals).   Assumes that history repeats itself, with price movements showing repetitive patterns due to market psychology.
Strengths & Limitations	Strengths: Provides a comprehensive understanding of a company’s financial health and long-term potential; suitable for building a long-term investment portfolio.   Limitations: Time-consuming and may not be effective for short-term price movements; relies on accurate financial information which may be difficult to obtain for smaller companies.	Strengths: Helps identify precise entry and exit points, making it suitable for short-term trading; allows for quick decision-making.   Limitations: Ignores the fundamental aspects of a company, which can lead to misleading signals in volatile or low-volume stocks; trends may not always be reliable.

3.(B) Give a brief note on Systematic Risk and Unsystematic Risk.

Systematic Risk and Unsystematic Risk are two major types of risks in investment and portfolio management.

1. Systematic Risk:

Definition: Systematic risk, also known as market risk or undiversifiable risk, refers to the risk that affects the entire market or a large segment of the market. It is inherent to the entire market and cannot be eliminated through diversification.

Causes: This type of risk is caused by macroeconomic factors such as interest rate changes, inflation, political instability, recessions, or global events like wars or pandemics.

Examples:

Interest Rate Risk: When central banks raise interest rates, it affects bond prices, borrowing costs, and stock market performance.

Inflation Risk: Rising inflation can erode purchasing power and affect asset values across the market.

Management: Systematic risk cannot be diversified away but can be mitigated through strategies like hedging, investing in low-risk assets, or using options and derivatives.

2. Unsystematic Risk:

Definition: Unsystematic risk, also called specific risk or diversifiable risk, is the risk that is specific to a particular company, industry, or sector. It does not affect the whole market but is related to individual investments.

Causes: This type of risk arises from factors such as company mismanagement, product recalls, strikes, lawsuits, or industry-specific issues.

Examples:

Business Risk: A company facing operational difficulties or mismanagement could see its stock price decline.

Financial Risk: Companies with excessive debt could default on their obligations, leading to a drop in stock or bond prices.

Management: Unsystematic risk can be reduced or eliminated through diversification, as holding a portfolio of different assets spreads out the risk of poor performance in one specific investment.

OR

3. The Balance Sheet of Livspace Pvt. Ltd. as on 31 March 2023 was as under:

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
6,000 Equity Shares of Rs. 100 each fully paid	6,00,000	Fixed Assets	8,70,000
10% Preference shares	3,00,000	Investments	2,00,000
General Reserve	1,80,000	Inventories	1,80,000
9% Debentures	2,50,000	Debtors	1,75,000
Bank Overdraft	90,000	Cash & Bank	45,000
Sundry Creditors	85,000	Advance Salary	40,000
Outstanding Expenses	55,000	Preliminary Expenses	50,000
Total →	15,60,000	Total →	15,60,000

Market Price per Share    Rs. 230

Dividend per share        Rs. 20

Calculate:

i. Liquid Ratio

ii. Earnings Per Share

iii. Price-Earnings Ratio

iv. Dividend Pay-out Ratio

V. Dividend Yield Ratio

OR

4. (A) Define Portfolio Management. Explain the steps in the process of Portfolio Management.

Portfolio Management is the process of selecting, managing, and monitoring a collection of investments (a portfolio) to meet specific financial goals, balancing risk and return based on an investor's objectives, risk tolerance, and time horizon. The main goal is to achieve an optimal mix of assets to maximize returns while minimizing risk through effective diversification, asset allocation, and ongoing adjustments.

Steps in the Process of Portfolio Management:

Assessment of Investor’s Objectives and Constraints:

The first step is to assess the investor’s financial goals, risk tolerance, time horizon, and liquidity needs. Goals can range from capital preservation, income generation, or growth, depending on factors like retirement planning, education savings, or short-term income needs.

Constraints include factors such as tax considerations, legal or regulatory constraints, ethical concerns, and any unique personal preferences or needs.

Asset Allocation:

Based on the investor's objectives and risk profile, the next step is to determine the optimal mix of asset classes, such as equities (stocks), fixed-income securities (bonds), real estate, commodities, or cash.

Strategic Asset Allocation involves setting long-term target percentages for each asset class, while Tactical Asset Allocation involves making short-term adjustments to take advantage of market opportunities.

Proper asset allocation helps balance risk and return by diversifying across asset classes with varying risk levels and return potential.

Security Selection:

After deciding on asset allocation, the next step is to choose specific securities within each asset class. This includes selecting individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other instruments.

Security selection may be based on fundamental analysis (evaluating a company’s financial health, earnings potential, etc.) or technical analysis (using price trends and patterns).

The goal is to pick securities that fit within the asset allocation strategy and align with the investor’s risk-return preferences.

Portfolio Diversification:

Diversification involves spreading investments across different sectors, industries, geographical regions, and asset classes to reduce risk. A well-diversified portfolio ensures that poor performance in one asset or sector doesn’t significantly impact the overall portfolio’s returns.

Diversification reduces the portfolio’s exposure to any single asset or risk factor and helps in achieving a smoother and more stable return profile over time.

Risk Management:

Continuous risk assessment and management are critical to portfolio management. Investors should assess various types of risk such as market risk, interest rate risk, inflation risk, and currency risk.

Risk management strategies include using stop-loss orders, portfolio insurance, and diversification, as well as adhering to the asset allocation plan even in volatile market conditions.

It is essential to ensure that the risk taken aligns with the investor’s risk tolerance.

Performance Monitoring and Rebalancing:

Regular monitoring of the portfolio’s performance is necessary to ensure that it stays aligned with the investor's goals and risk profile. Performance is typically measured by comparing the portfolio's returns with benchmarks or indices.

Rebalancing involves adjusting the portfolio to bring it back in line with the original asset allocation plan. For example, if stock prices rise significantly, they may occupy a larger percentage of the portfolio than intended, leading to higher risk. Rebalancing might involve selling some stocks and buying more bonds or other assets to restore the original balance.

This step helps in managing risk and maintaining the portfolio's strategy over time.

Tax Efficiency and Cost Management:

Managing taxes and investment costs is crucial for optimizing portfolio returns. Tax-efficient strategies, such as holding investments for the long term (to benefit from lower capital gains taxes) or utilizing tax-advantaged accounts (like retirement funds), can enhance after-tax returns.

Minimizing costs, such as brokerage fees, management fees, and other transaction costs, is another essential consideration in maintaining a cost-effective portfolio.

Review and Adjustments:

Periodically, the portfolio should be reviewed to reflect any changes in the investor’s financial goals, risk tolerance, or market conditions. Life events like retirement, marriage, or purchasing a home may require adjustments in the portfolio.

The portfolio manager must remain flexible and adjust the investment strategy to reflect the changing economic environment or personal circumstances while staying aligned with the investor’s overall objectives.

(B) Explain Elliott Wave Theory in Brief.

Elliott Wave Theory is a form of technical analysis used to predict market trends by identifying recurring patterns in market prices. Developed by Ralph Nelson Elliott in the 1930s, the theory suggests that financial markets move in repetitive cycles, which are driven by collective investor psychology, or "waves." These cycles can be observed on charts and used to forecast future price movements.

Principles of Elliott Wave Theory:

Wave Structure:

Elliott proposed that market prices move in a series of five waves during a bull market (upward trend) and three waves during a bear market (downward trend).

Impulse Waves (5 Waves): The primary trend consists of five waves: three upward waves (1, 3, and 5) and two corrective downward waves (2 and 4) within a bull market. Each impulse wave represents a progressive move in the direction of the overall trend.

Corrective Waves (3 Waves): After the five-wave impulse, there is a corrective phase consisting of three waves (A, B, and C), which move against the primary trend.

Fractals:

The wave patterns are fractal in nature, meaning they occur on all time scales, from short-term movements (e.g., hourly charts) to long-term market trends (e.g., monthly or yearly charts). Each wave can be subdivided into smaller waves, following the same 5-wave or 3-wave structure.

Wave Degrees:

Elliott identified different degrees of waves, from Grand Supercycle (lasting several decades) to Minute waves (lasting only a few minutes or hours). Each degree is part of a larger cycle and contributes to the overall market movement.

Fibonacci Relationships:

Elliott found that the length and duration of waves often have relationships that correspond to the Fibonacci sequence (e.g., 1.618, 0.618). Traders often use Fibonacci retracement and extension levels to predict the end of corrective waves or the continuation of impulse waves.

Example of a Bullish Elliott Wave Cycle:

Wave 1: Initial upward movement as some investors enter the market.

Wave 2: A slight pullback or correction, but prices do not fall below the start of Wave 1.

Wave 3: The strongest upward wave, driven by widespread optimism and participation by more investors.

Wave 4: Another corrective pullback, typically less severe than Wave 2.

Wave 5: Final upward move, often accompanied by over-enthusiasm, before the trend reverses.

After the five-wave impulse, a three-wave corrective phase (A, B, C) typically follows, moving against the trend.

Advantages of Elliott Wave Theory:

Predictive Power: When used correctly, Elliott Wave analysis can help traders anticipate market turns and trends with greater accuracy.

Works in Any Market: The theory can be applied to various asset classes, including stocks, commodities, and currencies, and across different time frames.

Flexible: The fractal nature of waves allows traders to analyze market movements at different scales.

Disadvantages of Elliott Wave Theory:

Subjective Interpretation: The identification of waves can be subjective, leading different analysts to label waves differently. This makes consistent application difficult.

Complexity: Elliott Wave Theory can be complex and challenging for beginners to master. Accurately counting waves requires significant experience and practice.

OR

4.(C) The information for three portfolios is given below:

Portfolio	Average Return on Portfolio (%)	Beta	standard Deviation
Pen India Ltd.	18	0.9	0.48
Balaji Telefilms Ltd.	19	1.4	0.38
Warner Bros.	22	1.1	0.28
Market Index	24	1.0	0.32

Compare these portfolios on performance using Sharpe and Treynor Measures. Risk free rate of return is 8%.

4.(D) The following information the securities are as follows:                (7 Marks)

Securities	Expected Return on Portfolio (%)	Beta
Godrej Interio	22	1.5
Durian	21	1.2
Nilkamal Ltd.	23	0.8
Market Return	24	1.0

If the risk-free rate is 7%. Calculate returns for each security under CAPM. Identify the securities are undervalued or overvalued or at par and advise to Invest.                (07 Marks)

5. Dr. Vinod Raina, aged 62 years a Practicing Senior Doctor. He is having Rs. 1,50,00,000 investible fund.

(a) Advise him for Investment avenues available to him which will give maximum return?

Ans: 

For a senior investor like Dr. Vinod Raina, aged 62 years, the investment plan should balance safety, regular income, and moderate growth, given the proximity to retirement and the need to preserve capital while generating stable returns. Here are various investment avenues that he can consider, along with a strategy that focuses on maximizing returns while keeping the risk in check:

1. Fixed Income Instruments:

• Senior Citizens Savings Scheme (SCSS):

  • Description: SCSS is a government-backed scheme designed for senior citizens, offering regular interest income.
  • Returns: Around 8-8.5% per annum (subject to government revisions).
  • Tenure: 5 years (extendable by 3 years).
  • Tax Benefits: Investments up to ₹1.5 lakh qualify for deduction under Section 80C.
  • Recommendation: Invest around ₹20-30 lakhs for stable and secure income.

• Fixed Deposits (FDs) for Senior Citizens:

  • Description: Banks and NBFCs offer fixed deposits with higher interest rates for senior citizens.
  • Returns: Around 6-7.5% per annum, depending on the bank and tenure.
  • Recommendation: Allocate ₹10-15 lakhs in different tenures to maintain liquidity while earning stable returns.

• RBI Floating Rate Savings Bonds:

  • Description: Bonds issued by the Reserve Bank of India that offer a floating interest rate.
  • Returns: Linked to the prevailing interest rates, with a 7-year lock-in.
  • Recommendation: Suitable for ₹10-15 lakhs investment for secure long-term returns.

2. Market-Linked Instruments:

• Mutual Funds (Debt and Hybrid Funds):

  • Debt Mutual Funds: Invests primarily in government and corporate bonds, suitable for moderate returns with lower risk.
    • Returns: Around 6-8% per annum.
    • Recommendation: Invest ₹15-20 lakhs in debt funds like short-term bond funds or dynamic bond funds.
  • Hybrid Funds: A combination of equity and debt, suitable for balanced risk and returns.
    • Returns: Around 8-10% per annum over the medium term.
    • Recommendation: Consider ₹15 lakhs in balanced advantage funds for moderate equity exposure with some stability from debt.

• Equity Mutual Funds (Diversified Funds):

  • Description: Provides exposure to equities for capital appreciation over the long term.
  • Returns: Historically, 10-12% per annum or higher over 5-7 years.
  • Recommendation: Allocate ₹15-20 lakhs in large-cap or index funds (e.g., Nifty 50 or Sensex funds) for growth potential while keeping risk manageable.
  • Note: Given Dr. Raina’s age, it is advisable to keep equity exposure limited to around 20-30% of the portfolio.

3. Real Estate Investment:

• Description: Investing in rental properties or commercial spaces can generate rental income and long-term capital appreciation.
• Returns: Rental yields are typically around 3-5% per annum, but capital appreciation over the long term can enhance overall returns.
• Recommendation: Consider investing in a commercial property or a Real Estate Investment Trust (REIT), which offers a more liquid way to invest in real estate.
• Allocation: ₹30-40 lakhs in REITs or a small commercial property could be considered for potential rental income.

4. Gold and Gold Bonds:

• Sovereign Gold Bonds (SGBs):

  • Description: Issued by the RBI, these bonds offer interest along with appreciation based on gold prices.
  • Returns: Approximately 2.5% interest per annum along with the market price of gold at maturity.
  • Recommendation: Invest ₹5-10 lakhs in SGBs for diversification and to hedge against inflation.

• Gold ETFs/Mutual Funds:

  • Description: These are market-traded instruments that track the price of gold.
  • Recommendation: A small allocation of ₹2-5 lakhs for liquidity and easy access to gold investments.

5. National Pension System (NPS):

• Description: A government-sponsored retirement savings scheme that offers exposure to equities, corporate bonds, and government securities.
• Returns: Historically, around 9-11% per annum based on the asset allocation.
• Recommendation: Although he is 62, NPS can be a good option for tax efficiency, and he could invest up to ₹2-3 lakhs under Tier I for additional tax benefits under Section 80CCD(1B).

6. High-Yield Savings Accounts and Liquid Funds:

• Description: These provide liquidity while earning a better return than regular savings accounts.
• Returns: Around 4-6% per annum.
• Recommendation: Keep ₹5-10 lakhs in high-yield savings accounts or liquid mutual funds to manage emergency expenses.

Suggested Allocation :

Investment Avenue Amount (in  ₹) Percentage of Portfolio Objective Senior Citizens Savings Scheme (SCSS) 20-30 lakhs 13-20% Secure, regular income Fixed Deposits (Senior Citizens) 10-15 lakhs 7-10% Stability and safety RBI Floating Rate Savings Bonds 10-15 lakhs 7-10% Long-term, safe returns Debt Mutual Funds 15-20 lakhs 10-13% Moderate returns with low risk Hybrid Mutual Funds 15 lakhs 10% Balanced growth and stability Equity Mutual Funds (Large-cap/index) 15-20 lakhs 10-13% Long-term capital growth Real Estate/REITs 30-40 lakhs 20-27% Rental income and capital appreciation Gold (SGBs/ETFs) 5-10 lakhs 3-7% Inflation hedge, diversification National Pension System (NPS) 2-3 lakhs 1-2% Additional tax benefits Liquid Funds/High-Yield Savings 5-10 lakhs 3-7% Emergency fund, liquidity

(b) Explain the advantages and disadvantages by investing in the specific avenues.

5.Give Short Notes on: (Any Three)

i. Small Cap and Large cap

Small-cap and large-cap refer to categories of companies based on their market capitalization, which is the total market value of a company's outstanding shares. These classifications help investors assess the size, risk, and growth potential of a company.

1. Small-Cap

Definition: Small-cap companies have a market capitalization typically between $300 million and $2 billion. These companies are smaller in size and often in the earlier stages of growth.

Characteristics:

High growth potential, but usually more volatile and risky.

Often overlooked by large institutional investors, offering opportunities for individual investors.

May experience rapid growth during economic upturns but are more vulnerable during downturns.

Examples: Emerging tech startups, niche manufacturing firms.

2. Large-Cap

Definition: Large-cap companies have a market capitalization of $10 billion or more. These are well-established, mature companies that are leaders in their industries.

Characteristics:

Stability and steady performance, often offering dividends.

Lower risk compared to small-cap stocks but with slower growth potential.

Attract large institutional investors and are a major part of major stock indices.

Examples: Global corporations like Apple, Microsoft, or Johnson & Johnson.

ii. NSDL and CDSL

NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) are the two main depositories in India, providing electronic services for the settlement of trades in securities. They play a key role in the Indian financial market by ensuring the safekeeping and transfer of securities in a dematerialized (electronic) form.

NSDL (National Securities Depository Limited):

Established: 1996

Promoters: NSDL was promoted by institutions such as the National Stock Exchange (NSE), Industrial Development Bank of India (IDBI), and Unit Trust of India (UTI).

Role: NSDL facilitates the holding and transfer of securities such as shares, bonds, and mutual funds in electronic form, thus eliminating the risks associated with physical certificates (e.g., theft, forgery, or loss).

Functions:

Dematerialization (conversion of physical certificates into electronic form).

Rematerialization (conversion of electronic securities back into physical form).

Settlement of trades in securities.

Providing electronic account statements for securities.

Coverage: NSDL is the larger of the two depositories and is associated with a broader range of depository participants (DPs), which are agents that investors use to access depository services.

CDSL (Central Depository Services Limited):

Established: 1999

Promoters: CDSL was promoted by the Bombay Stock Exchange (BSE) and other financial institutions.

Role: Like NSDL, CDSL also provides depository services for holding securities in electronic form and facilitates their transfer in the stock market.

Functions:

Dematerialization and rematerialization.

Settlement of securities trades.

Providing online account services and transaction statements.

Coverage: Though CDSL is smaller compared to NSDL, it has gained significant market share, especially among retail investors. It also has a wide network of depository participants.

Differences:

Promoters: NSDL is linked with NSE, while CDSL is linked with BSE.

Size: NSDL is the larger and older depository, while CDSL caters more to individual investors and has been gaining ground in recent years.

Market Focus: While both cater to similar functions, NSDL has traditionally been associated with institutional investors, whereas CDSL has a stronger retail investor base.

iii. Portfolio Management Decision

Portfolio management decision involves selecting and managing a collection of investments (or portfolio) to achieve specific financial goals while balancing risk and return. It is a continuous process that includes decision-making around asset allocation, security selection, diversification, and performance monitoring. Effective portfolio management ensures that investments align with the investor’s risk tolerance, financial goals, and time horizon.

Decisions in Portfolio Management:

Investment Objectives:

The first step in portfolio management is defining clear investment objectives, such as capital growth, income generation, or wealth preservation. These objectives guide the overall strategy and asset selection.

Asset Allocation:

This involves deciding how to distribute investments across different asset classes (e.g., equities, bonds, real estate, cash) to balance risk and return. Asset allocation is crucial in determining the long-term performance of a portfolio.

Security Selection:

Once asset allocation is decided, the next step is choosing specific securities within each asset class (e.g., picking individual stocks or bonds). This decision depends on factors like the company's financial health, market conditions, and the potential for growth or income.

Diversification:

Diversifying the portfolio by investing in a variety of assets or sectors reduces the risk of significant losses. A well-diversified portfolio spreads risk across different investments to mitigate the impact of a poor-performing asset.

Risk Management:

Investors must assess their risk tolerance and make decisions that align with their comfort level. This includes deciding on the mix of high-risk and low-risk investments and employing strategies like hedging or stop-loss orders.

Performance Monitoring and Rebalancing:

Regularly reviewing the portfolio’s performance ensures that it stays aligned with the investor’s objectives. Rebalancing may be needed if market fluctuations cause the portfolio to drift away from the intended asset allocation. This involves selling or buying assets to maintain the desired allocation.

Tax Efficiency:

Portfolio decisions should also consider the tax implications of different investments. Tax-efficient strategies, such as holding investments for the long term to benefit from lower capital gains taxes, can improve overall returns.

Types of Portfolio Management:

Active Portfolio Management: The manager actively makes investment decisions and attempts to outperform the market by picking individual stocks, timing trades, or making frequent adjustments to the portfolio.

Passive Portfolio Management: In this approach, the portfolio mirrors a specific index (like the S&P 500) and is not frequently adjusted. The goal is to match the market's performance rather than outperform it.

Discretionary Portfolio Management: The portfolio manager has full discretion to make investment decisions without needing client approval for each trade.

Non-Discretionary Portfolio Management: The manager makes recommendations, but the client has the final say in every decision.

iv. Technical Analysis

Technical analysis is a method used to evaluate and predict the future price movements of financial assets, such as stocks, commodities, or currencies, by analyzing historical price data and trading volumes. Unlike fundamental analysis, which focuses on the intrinsic value of an asset based on financial statements, economic factors, and industry conditions, technical analysis focuses on chart patterns, price trends, and various statistical indicators.

Concepts of Technical Analysis:

Price Movements:

The core belief in technical analysis is that all relevant information is already reflected in the price. By studying past price movements, traders aim to predict future price behavior.

Charts and Patterns:

Price Charts: Line charts, bar charts, and candlestick charts are commonly used to plot an asset's historical price movements.

Patterns: Various chart patterns such as head and shoulders, triangles, and double tops or bottoms are used to identify potential price reversals or continuations.

Trends:

Trend Analysis: Technical analysis relies on identifying trends in price movements. Trends can be upward (bullish), downward (bearish), or sideways (consolidation). Recognizing the direction of a trend helps traders make decisions about when to buy or sell.

Trendlines: Lines drawn on price charts to highlight trends, helping traders to visualize support and resistance levels.

Support and Resistance:

Support: A price level where an asset tends to find buying interest, preventing the price from falling further.

Resistance: A price level where selling pressure tends to prevent the price from rising further.

These levels help traders make decisions about entry and exit points.

Technical Indicators:

Moving Averages: A commonly used indicator that smoothens out price data to identify the direction of a trend over a set period (e.g., 50-day or 200-day moving average).

Relative Strength Index (RSI): A momentum indicator that measures the speed and change of price movements to determine whether an asset is overbought or oversold.

MACD (Moving Average Convergence Divergence): An indicator used to spot changes in the strength, direction, and momentum of a trend.

Bollinger Bands: A volatility indicator that shows the range within which the asset’s price typically moves, helping to identify overbought or oversold conditions.

Volume Analysis:

Volume is the number of shares or contracts traded in a security. Technical analysts use volume as a confirmation tool. For example, an increase in price with high volume is seen as a stronger signal than the same price movement with low volume.

Market Sentiment:

Technical analysis also incorporates sentiment indicators, which gauge the overall mood of the market. Bullish sentiment may signal optimism, while bearish sentiment may indicate caution or pessimism.

Key Assumptions in Technical Analysis:

Prices Reflect All Information: It is assumed that all publicly available information, including fundamentals, is already reflected in the asset's price.

Price Moves in Trends: Prices tend to move in identifiable trends, and these trends persist over time.

History Repeats Itself: Price patterns often repeat because of market psychology. Traders react to similar conditions in predictable ways.

Advantages of Technical Analysis:

Quick Decisions: Useful for short-term trading and identifying entry and exit points.

Price Focused: Emphasizes actual market activity, which reflects supply and demand forces.

Pattern Recognition: Can help identify market cycles and investor behavior.

Disadvantages of Technical Analysis:

Subjectivity: Different analysts may interpret the same data in different ways, leading to different conclusions.

Lagging Indicators: Some technical indicators rely on past data, making them potentially slow to react to sudden market changes.

No Guarantee: Even well-formed patterns and indicators may not always lead to accurate predictions.

v. The Random Walk Theory

The Random Walk Theory is a financial theory that suggests stock price movements are completely random and unpredictable. This theory, popularized by economist Burton Malkiel in his book "A Random Walk Down Wall Street," argues that asset prices follow a "random walk," meaning that past movements or trends cannot be used to predict future price movements. According to this theory, stock prices respond to new information, which is unpredictable, causing prices to move in a random and efficient manner.

Concepts of Random Walk Theory:

Unpredictability of Stock Prices:

The theory asserts that stock prices move in a random and unpredictable way, much like the steps in a random walk. As a result, no one can consistently outperform the market by trying to time price movements.

Efficient Market Hypothesis (EMH):

Random Walk Theory is closely tied to the Efficient Market Hypothesis, which states that all known information is already reflected in stock prices. Since new information arrives randomly and unexpectedly, price changes are also random.

No Predictable Patterns:

According to the theory, price patterns, technical analysis, and historical data offer no advantage in predicting future price movements. Investors cannot reliably use past performance to predict the future.

Passive Investment Strategy:

The theory supports the idea that it is difficult to consistently "beat the market." As a result, it advocates for a passive investment strategy (such as investing in index funds) rather than attempting active management or market timing.

Advantages of Random Walk Theory:

Supports Efficient Markets: It reinforces the idea that financial markets are highly efficient and that trying to time the market is futile.

Simplifies Investing: The theory encourages investors to focus on long-term, passive strategies, which can reduce trading costs and stress.

Criticisms of Random Walk Theory:

Ignores Market Anomalies: Critics argue that markets are not always fully efficient, and there are anomalies (such as momentum, bubbles, or market psychology) that can lead to price trends.

Overlooks Behavioral Finance: The theory doesn't account for irrational investor behavior, which can influence market prices in a non-random way.