IAPM Important Case Studies – Navigator Tutorials

Case Study-I

Q. As a portfolio management consultant you are approached by a investor with investible funds of Rs. 25 Lacs. He wants to know from you that what are the investment avenues available to him which will give a stable return with minimum risks.

Ans: –  A rational investor considers two factors before making investment decision-  Returns and      Risk. He expects to get high Returns while the associated risk should be low. There are various alternatives available for investment in market. Following are the few alternatives which provide stabilized Returns with minimum Risk.

 1. Bonds and Debentures:-

Bonds are fixed income securities. Investors get interest on regular basis from companies. Interest may be paid quarterly, half yearly or yearly. The risk involved is also limited particularly when money is deposited with a reputed company. The interest offered is higher than the interest rate offered by banks. This method is simple and cheaper than obtaining loans from commercial banks.

Gilt Edged securities i.e. Government securities and securities issued by financial institutions such as IDBI, ICICI, etc. are fully secured as they have government banking. The maturity period varies from 10-20 years. These securities are highly liquid asset as it can be sold easily. Even tax benefits are available for such securities.

2. Fixed Deposits :-

The investor can invest in fixed deposits of banks particularly in nationalized banks as the risk involved is Zero while the returns are reasonable. The returns generated from fixed deposits are around 9- 10 % p.a. It provides Liquidity because the fixed deposits can be withdrawn before maturity in case of emergency or loan can be raised against F.D. There is a provision of tax saving under Sec 80C of Income Tax Act, 1961. The bank deducts tax on interest if the interest amount is 10000 or more in a year.

3.Public Provident Fund :-

PPF is a one attractive tax sheltered investment scheme for middle class and salaried people and businessmen. The investor can deposit certain amount periodically in the post office or SBI. The returns generated are 9.5 % p.a. Withdrawals facility is available but it is limited to once in a year. It is normally for a period of 15 years but can be extended for more years. It is not transferable, but nomination facility is available. Thus it is safe and reasonable investment avenue having limited liquidity.

4. Life Insurance Policy :-

Life insurance policy gives protection to family members through financial support in case of death of policy holders. At the same time, it is also acts as method of compulsory savings over a long period out of regular income. It provides financially independent life after retirement .LIC issues different life policies such as Whole Life insurance policy, endowment policy, money back policy, etc. It gives tax benefit even if the policy is on the name of investor’s wife, son, or daughter. LIC now gives bonus to policy holders on yearly basis. Thus apart from giving financial independence, policy allows investor to earn stabilize returns with no risk involved in investment.

5. Preference shares

                           Preference shares are different from equity shares .Investment in equity shares is risky. Investor gets dividend only if company earns profits .This is not in case of preference shares. A preference shareholder is entitled to dividend every year. If company cannot pay in particular year, then it is added to next year’s divided. If company cannot pay next year also it keeps on adding till company can pay it. Preference shareholder gets priority over ordinary shares. Equity shareholder gets dividend only after preference shareholder. If the company winds up and sells all its assets, the money that comes is given to shareholder. Even here preference shareholder first gets the money. Thus investor earns secured returns periodically & risk is also less.

6 Mutual Fund

                                     Mutual Fund Company mobilizes the saving of variance small investors& invests them in stock market securities. The returns generated are distributed amongst the investor. These companies have expertise knowledge of investment. The funds are invested in safe secured & profitable manner in companies belonging to different industries. Even tax benefit is available for the amount invested. Here the risk of loss is diversified among different investors. So individually an investor has to face minimum risk while the returns are high. Investor can expect 15% returns on mutual funds.

The best way to manage portfolio is to diversify the entire amount of investment among different securities/stock. Even if a particular security fetches you loss, there should be other securities that yield returns. Thus the overall portfolio risk of investor can be minimized. It is advisable to diversify Rs 25 lacs

In manner:

Case Study-II

Q. You are a PMS (Portfolio Management Services) Consultant. A Middle aged investor approaches you to seek your advice on deploying his surplus funds of 20 lacs in various shares, schemes, bonds and Govt. Securities. Present to him any five Investment schemes mentioning various merits and demerits of each scheme you may assume that he is willing to take risk to the extent of 30% of his Funds.

Ans- The Portfolio of an Investor can be as follows:

Portfolio of a middle aged Investor

1)      Share: Investment in Share risky but it provides higher returns if investment is made carefully. As the investor is willing to take risk to the extent of 30%, an amount of Rs.6,00,000 can be invested in shares. It is  a liquid investment. The shares can be sold through the broker and money can be realized within 3 days. However he should invest in blue chips like Profit making and dividend paying companies. He can invest in four to five companies from different industries like IT, Pharma, Entertainment and Banking.

2)      Bonds , (3) Fixed Deposits, (4) Public Provident Fund, (5) Mutual Fund

           (Refer Case Study I for Explanation of 2,3,4,5)