a study on investor

8/7/2019 A STUDY ON INVESTOR

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A STUDY ON INVESTOR¶S PREFERNCE TOWARDS

FINANCIAL INVESTMENT WITH SPECIAL REFERENCE TO

L & T FINANCE LTD, CHENNAI.

BY

M.NALINA LAKSHMI

REGISTER NO: 40509631022

OF

DHANALAKSHMICOLLEGE OF ENGINEERING

A PROJECT REPORT

Submitted to the

FACULTY OF MANAGEMENT STUDIES

In partial fulfillment of the requirements

for the award of the degree

MASTER OF BUSINESS ADMINISTRATION

JUNE - 2011



DHANALAKSHMI COLLEGE OF ENGINEERING, CHENNAI

Manimangalam, ,Chennai - 601301.

DEPARTMENT OF MANAGEMENT STUDIES

BONAFIDE CERTIFICATE

Certified that this project report titled,³A STUDY ON INVESTOR¶S PREFERENCE

TOWARDS FINANCIAL INVESTMENT WITH SPECIAL REFERENCE TO L & T

FINANCE LTD ,CHENNAI´,is the bonafide work of

Ms.M.NALINA LAKSMI (Register Number: 405009631022) who carried out the research

under my supervision. Certified further, that to the best of my knowledge the work reported

herein does not form part of any other project report or dissertation on the basis of which a

degree or award was conferred on an earlier occasion on this or any other candidate.

INTERNAL GUIDE HEAD OF THE DEPARTMENT



DECLARATION

I, M.NALINA LAKSHMIof M.B.A., final year, DEPARTMENT OF

MANAGEMENT STUDIES, DHANALAKSHMI COLLEGE OF

ENGINEERING, Manimangalam, Chennai ± 601 301, hereby declare that this

project work titled,³A STUDY ON INVESTOR¶S PREFERNCE TOWARD

FINANCIAL INVESTMENTS WITH SPECIAL REFERENCE TOWARDS

L & T FINANCE LTD, CHENNAI´, issubmitted for the partial fulfillment in

M.B.A., of DHANALAKSHMI COLLEGE OF ENGINEERING.

This is original work of mine with declaration and effort.

DATE: (M.NALINA LAKSHMI)



NEED OF THE STUDY

It analysis the information to be used for forecasting the trends in economy and industry.

The study will reveal the strengths and weakness in the approaches of the investors while

investing in the various financial instruments.

It helps to identify the investors awareness among the investment opportunities.

The investor has different alternative avenues of investment for his savings to flow in

accordance with his preference.

The main objectives of the investors are income, capital appreciation, liquidity,

marketability, and safety.

Finally to analyze the most preferred mode of investment by the investors.



SCOPE OF THE STUDY The study will help to analyze various categories of investment opportunities available

to the investors.

The study allows us to learn the attitude of the investors towards the financial

investments.

It helps to identify the relationship between the annual income and annual savings.

Factors associate with their investment decisions.



What Investors Should Know About Interest Rates

by Ben McClure -investopedia

If you're ever looking for a topic to kill conversation so that you can be left alone to

think about your investments, start talking about interest rates. Your listener's eyes are

guaranteed to glaze over, and you'll be alone in no time.

But if you own investments, the topic is not as dry as you think. In fact, it is something investors

should make an effort to understand. According to financial theory, interest rates - which change

all the time - are fundamental to company valuation, and therefore play an important role in how

we put a price on stocks. Here we take a look at the relationship between interest rates and stock

price.

Interest Rates: The Cost of Money

Think of an interest rate as the cost of money, which - just like the cost of production, labor, and

other expenses - is a factor of a company's profitability.

The fundamental cost of money to an investor is the Treasury note rate, whose return is

guaranteed by the "full faith and credit" of the U.S. government. According to financial theory, a

stock's value proposition starts there: stocks are risky assets, even riskier than bondsbecause

bondholders are paid their capital before stockholders in the event of bankruptcy. Therefore,

investors require a higher return for taking on extra risk by investing in stocks instead of

Treasury notes, which are guaranteed to pay a certain return.

The extra return that investors can theoretically expect from stocks is referred to as the "risk

premium". Historically, the risk premium runs at around 7%. This means that if the risk-free rate

(the Treasury note rate) is 4%, then investors would demand a return of 11% from a stock.Therefore, the total return on a stock is the sum of two parts: the risk-free rate and the risk

premium. If you want higher returns, you must invest in riskier stocks because they offer a

higher risk premium than, say, stronger blue chip companies. In theory, rational investors will

select an investment with a return that is high enough to compensate for the lost opportunity of

earning interest from the guaranteed Treasury note and for taking on additional risk.



Risk and Return: An Inverse Relationship

If the required return rises, the stock price will fall, and vice versa. This makes sense: if nothing

else changes, the price needs to be lower for the investor to have the required return. There is an

inverse relationship between required return and the stock price investors assign to a stock.

The required return might rise if the risk premium or the risk-free rate increases. For instance, the

risk premium might go up for a company if one of its top managers resigns or if the company

suddenly decides to lower its dividend payments. And the risk-free rate will increase if interest

rates rise.

So, changes in interest rates impact the theoretical value of companies and their shares: basically,

a share's fair value is its projected future cash flows discounted to the present using the investor's

required rate of return. If interest rates fall and everything else is held constant, share value

should rise. That's why the market cheers when the U.S. Federal Reserve announces a rate cut.

Conversely, if the Fed raises rates (holding everything else constant), share values ought to fall.

How Interest Rates Affect Companies

Interest rates impact a company's operations too. Any increase in the interest rates that it pays

will raise its cost of capital. Therefore, a company has to work harder to generate higher returns

in a high interest environment. Otherwise, the bloated interest expense will eat away at its

profits. Lower profits, lower cash inflows and a higher required rate of return for investors all

translate into depressed fair value for the company's stock.

Moreover, if interest rate costs shoot up to such a level that the company has problems paying off

its debt, then its survival may be threatened. In that case, investors will demand an even higher

risk premium. As a result, the fair value will fall even further.

Finally, high interest rates normally go hand in hand with a sluggish economy. They prevent

people from buying things and companies from investing in growth opportunities. As a result,

sales and profits drop, and so do share prices.

Conclusion

In financial theory, valuation begins with a simple question: if you put money into this company,



what are the chances you will get a better return than if you invest in something else? Interest

rates play an important part in determining what that something else might be.

Convertible Bonds: Pros And Cons For Companies And Investors

by Richard Cloutier

There are pros and cons to the use ofconvertible bonds as a means of financing by corporations.

One of several advantages of this delayed method of equity financing is a delayeddilution of

common stock and earnings per share (EPS). Another is that the company is able to offer the

bond at a lower coupon rate - less than it would have to pay on a straight bond. The rule usually

is that the more valuable the conversion feature, the lower the yield that must be offered to sell

the issue; the conversion feature is a sweetener. Read on to find out how corporations take

advantage of convertible bonds and what this means for the investors who buy them.

Advantages of Debt Financing

Regardless of how profitable the company is, convertible bondholders receive only a fixed,

limited income until conversion. This is an advantage for the company because more of

the operating income is available for the common stockholders. The company only has to share

operating income with the newly converted shareholders if it does well. Typically, bondholders

are not entitled to vote for directors; voting control is in the hands of the common stockholders.

Thus, when a company is considering alternative means of financing, if the existing management

group is concerned about losing voting control of the business, then selling convertible bonds

will provide an advantage, although perhaps only temporarily, over financing with common

stock. In addition, bond interest is a deductible expense for the issuing company, so for a

company in the 30% tax bracket, the federal government in effect pays 30% of the interest

charges on debt. Thus, bonds have advantages over common and preferred stock to a corporation

planning to raise new capital.

What Bond Investors Should Look For

Companies with poor credit ratings often issue convertibles in order to lower the yieldnecessary

to sell their debt securities. The investor should be aware that some financially weak companies

will issue convertibles just to reduce their costs of financing, with no intention of the issue ever



being converted. As a general rule, the stronger the company, the lower the preferred yield

relative to its bond yield.

There are also corporations with weak credit ratings that also have great potential for growth.

Such companies will be able to sell convertible debt issues at a near-normal cost, not because of

the quality of the bond but because of the attractiveness of the conversion feature for this

"growth" stock. When money is tight and stock prices are growing, even very credit-worthy

companies will issue convertible securities in an effort to reduce their cost of obtaining scarce

capital. Most issuers hope that if the price of their stocks rise, the bonds will be converted to

common stock at a price that is higher than the current common stock price. By this logic, the

convertible bond allows the issuer to sell common stock indirectly at a price higher than the

current price. From the buyer's perspective, the convertible bond is attractive because it offers the

opportunity to obtain the potentially large return associated with stocks, but with the safety of a

bond.

The Disadvantages of Convertible Bonds

There are some disadvantages for convertible bond issuers, too. One is that financing with

convertible securities runs the risk of diluting not only the EPS of the company's common stock,

but also the control of the company. If a large part of the issue is purchased by one buyer,

typically an investment banker or insurance company, conversion may shift the voting control of

the company away from its original owners and toward the converters. This potential is not a

significant problem for large companies with millions of stockholders, but it is a very real

consideration for smaller companies, or those that have just gone public.

Many of the other disadvantages are similar to the disadvantages of using straight debt in

general. To the corporation, convertible bonds entail significantly more risk of bankruptcythan

preferred or common stocks. Furthermore, the shorter the maturity, the greater the risk. Finally,

note that the use of fixed-income securities magnifies losses to the common stockholders

whenever sales and earnings decline; this is the unfavorable aspect of financial leverage.

The indenture provisions (restrictive covenants) on a convertible bond are generally much more

stringent than they are either in a short-term credit agreement or for common or preferred stock.



Hence, the company may be subject to much more disturbing and crippling restrictions under a

long-term debt arrangement than would be the case if it had borrowed on a short-term basis, or if

it had issued common or preferred stock.

Finally, heavy use of debt will adversely affect a company's ability to finance operations in times

of economic stress. As a company's fortunes deteriorate, it will experience great difficulties in

raising capital. Furthermore, in such times investors are increasingly concerned with the security

of their investments, and they may refuse to advance funds to the company except on the basis of

well-secured loans. A company that finances with convertible debt during good times to the

point where its debt/assets ratio is at the upper limits for its industry simply may not be able to

get financing at all during times of stress. Thus, corporate treasurers like to maintain some

"reserve borrowing capacity". This restrains their use of debt financing during normal times.

Why Companies Issue Convertible Debt

The decision to issue new equity, convertible and fixed-income securities to raise capitalfunds is

governed by a number of factors. One is the availability of internally generated funds relative to

total financing needs. Such availability, in turn, is a function of a company's profitability and

dividend policy.

Another key factor is the current market price of the company's stock, which determines the cost

of equity financing. Further, the cost of alternative external sources of funds (i.e., interest rates)

is of critical importance. The cost of borrowed funds, relative to equity funds, is significantly

lowered by the deductibility of interest payments (but not of dividends) for federal income tax

purposes.

In addition, different investors have different risk-return tradeoff preferences. In order to appeal

to the broadest possible market, corporations must offer securities that interest as many different

investors as possible. Also, different types of securities are most appropriate at different points in

time.

Conclusion



Used wisely, a policy of selling differentiated securities (including convertible bonds) to take

advantage of market conditions can lower a company's overall cost of capital below what it

would be if it issued only one class of debt and common stock. However, there are pros and cons

to the use of convertible bonds for financing; investors should consider what the issue means

from a corporate standpoint before buying in.

Investing With A Purpose

by Andrew Beattie

Why are you investing? It's ok if you have many different answers for this question, but there is a

big problem if you have no answer at all. Investing is like driving - it is best done with your eyes

open!

Having clear reasons or purposes for investing is critical to investing successfully. Like training

in a gym, investing can become difficult, tedious and even dangerous if you are not working

toward a goal and monitoring your progress. In this article we examine some common reasons

for investing and suggest investments that fit those reasons.

Retirement

No one knows whether the pension system will survive the coming decades. It is this uncertainty

and the reality of inflation that forces us to plan for our own retirement. You need only open the

newspaper to find out about a company that is freezing pensions or a new bill that will cut

government payouts. In these uncertain times, investing can be a tool to help you carve out a

solid path to retirement. There are three maxims that apply to investing for your post-work years:

1. The more years there are between today and your retirement, the

more years your money has to grow. You have to keep in mind that

you are fighting inflation when you are planning to retire. In other

words, if you don't invest your money to outpace inflation, it won't

be worth as much in the future. The older you are when you start,

the more risk averse you will have to be. This means that you will



likely use guaranteed investments such as debt securities, which

have lower returns. By contrast, if you start young, you can take

larger risks for (hopefully) larger gains.

2. The earlier you start learning about investing, the easier it will be to

pick it up. Financial professionals are difficult to choose and costly

to keep, so it is best to manage your own affairs whenever possible.

Investing for retirement is similar to long-term investing. You want to find quality investment

vehicles to buy and hold with the majority of your investment capital. Your retirement portfolio

will actually be a mix of stocks, debt securities, index funds and other money marketinstruments.

This mix will change as you do, moving increasingly toward low-risk guaranteed investments as

you age.

Achieving Financial Goals

We don't always have to think long-term. Investing is as much a tool for shaping your

present financial situation as it is for forming your future one.

Investing can be used as a way to enhance your employment income, helping you to buy the

things you want. Because investing changes along with the investor's desired goals, this type of

investing is not like retirement investing. Investing to achieve financial goals involves a blend of

long-term and short-term investments. If you are investing in the hope of buying a house, you

will almost certainly be looking at longer-term instruments. If you are investing to buy a new

computer in the New Year, you may want short-term investments that pay dividends or

some high-yield bonds.

The caveat here is that you need to pinpoint your goals first. If you want to go on a vacation in a

year, you have to sit down and figure out the cost of the vacation in total and then come up with

an investing strategy to meet that goal. If you don't have a set goal, the money that should be

going into that investment will doubtless be used for other purposes that seem more pressing at

the time

a study on investor

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