Some of the major sub categories of the two major style of active equity management (top down and bottom up) are listed below; Growth managers: Growth managers can be classified as either top-down or bottom-up. The growth managers are either divided into large capitalization or small capitalization. The growth managers buy securities that are typically selling at relatively high P/E ratios, due to high earnings growth rate, with the expectation of continued high earnings growth. The portfolios are characterized by high P/E ratios, high returns, and relatively low dividend yields. Market timers: The market timer is typically a set category of top-down investment style and comes in many varieties. The basic assumption is that he can forecast the market i.e. when it will go up or down. In the sense he market timer is not too distant than the technical analyst. The portfolio is not fully invested in equities. Rather Continue reading
Investment Management
Risk-Return Relationship in Investments
The entire scenario of security analysis is built on two concepts of security: Return and risk. The risk and return constitute the framework for taking investment decision. Return from equity comprises dividend and capital appreciation. To earn return on investment, that is, to earn dividend and to get capital appreciation, investment has to be made for some period which in turn implies passage of time. Dealing with the return to be achieved requires estimated of the return on investment over the time period. Risk denotes deviation of actual return from the estimated return. This deviation of actual return from expected return may be on either side — both above and below the expected return. However, investors are more concerned with the downside risk. The risk in holding security deviation of return deviation of dividend and capital appreciation from the expected return may arise due to internal and external forces. That Continue reading
What is a Mutual Fund Load?
Load is the factor that is applied to the Net Asset Value (NAV) of a mutual fund scheme to arrive at the price. If a commission is paid to agents to bring in new business this represents the cost incurred by the mutual fund for additional sale. The fund may therefore decide that, investors who are already in the scheme need not bear this cost. Therefore, it may decide to impose this cost on the new investors by increasing the price at which they can buy units. This is called the sales load. Similarly, if an investor stays in a fund for a short while and decides to repurchase his units, the fund may incur some costs in liquidating the portfolio and paying off this investor. The fund may want to impose the cost of this operation on the exiting investor in the form of a load. This is called Continue reading
Commercial Paper – Definition, Features and Advantages
What is a Commercial Paper? A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company. Features of Commercial Paper Commercial paper is a short-term money market instrument comprising usince promissory note with a fixed maturity. It is a certificate evidencing an unsecured corporate debt of short term maturity. Commercial paper is issued at a discount to face value basis but it can be issued in interest bearing form. The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his liquidity and established earning power, to guarantee that promise. Commercial paper can be issued directly by a company to investors or through banks/merchant banks. Advantages of Commercial Continue reading
Naïve Diversification of Investment Portfolio
Portfolios may be diversified in a naïve manner, without really applying the principles of Markowitz diversification, which is discussed at length in the next paragraph. Naïve diversification, where securities are selected on a random basis only reduces the risk of a portfolio to a limited extent. When the securities included in such a portfolio number around ten to twelve, the portfolio risk decreases to the level of the systematic risk in the market. It may also be noted that beyond fifteen shares, there is no decrease in the total risk of a portfolio. Before discussing about portfolio diversification process, what the researches of investors and investment analysts have found is to be set out briefly. Firstly, they found that putting all eggs in one basket is bad and most risky. Secondly, there should be adequate diversification of investment into various securities as that will spread the risk and reduce it; Continue reading
Buy Back of Securities
Buy Back of Securities means the purchase by the company of its own shares. Buy-back of equity shares is an important mode of capital restructuring. It is a corporate financial strategy which involves capital restructuring and is prevalent globally with the underlying objectives of increasing earnings per share, averting hostile takeovers, improving returns to the stakeholders and realigning the capital structure. Buy Back of Securities is done by the company with the purpose to improve liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back of Securities) Regulations, 1998, a company is permitted to buy back its shares from: existing shareholders on a proportionate basis through the offer document; open market through stock exchanges using book building process; and shareholders holding odd lot shares. The company has to disclose the pre and post-buy back holdings of the promoters. To ensure completion of the buy back process Continue reading