Evaluation of Present

Scenario and
Estimation of future
prospects of Portfolio
Management

Project Done By,

Name Roll No Name Roll No

Bhavika Rathod 4 Jaitee Wazalwar 21

Shailesh Deshprabhu 6 Mayura Telang 22

Neha Bansod 8 Yogini Parulkar 23

Rahul Bandiwadekar 9 Sneha Mane 37

Ashwati Nair 38

1
Chapter Topics Page

1 Portfolio Management 3

2 Equity markets

• Present Prospects 3

• Trends 4

• Participants 5

• Reforms 6

3 Insurance

• Present Scenario 9

• Participants in the insurance sector 11

• Reforms 11

4 Mutual Funds

• Types of Mutual Funds 13

• Growth of Mutual Funds & Market Share 16

5 Debt Markets

• Classification of Indian Debt Market 17

• Advantages & Disadvantages Debt Market 18

• Types of Debt Instruments 19

• Reforms in Debt Market 20

• Recent Developments in Bond Market 21

Evaluation of the Present Scenario & Estimation Future

6 Prospects 22

7 Role of SEBI in Portfolio Management 27

Bibliography 32

Portfolio Management

2
Definition of Portfolio Management:

“It is a process of encompassing many activities of investment in

assets and securities. The portfolio management includes the
planning, supervision, timing, rationalism and conservatism in the
selection of securities to meet investor’s objectives."

Equity Markets

Present scenario

The Indian Equity Market is more popularly known as the Indian

Stock Market. The Indian equity market has become the third
biggest after China and Hong Kong in the Asian region.

The Bombay Stock Exchange (BSE) is the oldest stock exchange

in Asia and largest number of listed companies in the world, with
4900 listed as of Feb 2010. On Feb 2010, the equity market
capitalization of the companies listed on the BSE was US$1.28
trillion, which is one-tenth of the combined valuation of the Asia
region & making it the 4th largest stock exchange in Asia and the
11th largest in the world. The above statistics show us the growth
of Indian Equity Markets and BSE is considered to be a benchmark
for Indian Equity Markets.

FII investments were to the tune of 2.5 billion Rs in Aug 2010 in

equity market. Such huge indict allocations were unheard of till
now since they knocked on Indian doors after our economy
liberalized in 1991.

Asia’s third-largest economy has offered an attractive

combination of economic stability and almost double-digit growth
for fund managers anxious about US and European fragility. Net
total foreign investments in Indian equities to August 31 were
Rs594bn ($12.7bn), up from Rs403bn during the same period in
2009, according to SEBI.

3
Indian equities trade at more than 17 times forecast earnings for
2010, compared with a five-year average of 16.2 times earnings.
By comparison, emerging market equities in general trade on an
average of 12 times 2010 earnings, while Russia trades at just 6.7
times forecast earnings. That is a hefty premium. Relative to past
trading history, the Indian equity market looks fully priced. Within
an emerging markets context it looks upwards.

Trends

• Trading platform has become automatic, electronic,

anonymous, order-driven, nation-wide and screen-based.

• On any trading day, more than 10,000 terminals come alive,

in 400 towns and cities; information is flashed on real time
basis

• The trading cycle has been shortened to T+2. This

shortening of the cycle has been done in a phased manner
but in a rapid succession – from T+5 to T+3 to T+2, all in a
matter of two years.

• Another material development, which proved to be of

immense relief to the investors, was dematerialisation of the
scrips. Now 99% of the scrips in the market are
dematerialised.

• At the stock exchanges, robust risk management system has

been put in place, Value-at-risk margining and exposure
limits, on-line monitoring of margins and positions, Clearing
Corporation and Settlement Guarantee Fund mechanism for
trade settlement – all these have made Indian capital market
now arguably world class, in terms of transparency,
efficiency and safety.

4
 • Antiquated and abused badla system or ALBM stands
abolished. In its place, for hedging and trading purposes, a
number of derivatives – in the form of futures and options,
both index-based and stocks-specific have been introduced.

• SEBI has got corporate governance code and practice

reviewed, by Narayana Murthy Committee.

• Credit Rating Agencies have come up with their own

methodology to rate the corporate according to their
governing standards, linking it with wealth creation,
management and distribution

• Margin trading and securities lending have been introduced

with adequate checks and balances.

• The Central Listing Authority has become operational to

provide an independent entry-point scrutiny of the corporate
to be listed. Straight through Processing will get broadened
market wide in another 3 month’s time.

• The Central Registry of market intermediaries and

professionals with unique identification number is under
construction.

• RTGS/NTGS is introduced

Participants

Participants in the Indian equity market are required to register

with SEBI to carry out their businesses. These include:

• Stockbrokers, sub brokers, share transfer agents, bankers to

an issue, trustees of a trust deed, registrars to an issue,

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 merchant bankers, underwriters, portfolio managers,
investment advisers, and other such intermediaries who may
be associated with the securities market in any manner.

• Depositories, participants, custodians of securities, FIIs,

credit rating agencies, and other such intermediaries who
may be associated with the securities market in any manner;
and

• Venture capital funds and collective investment schemes,

including mutual funds.

Reforms

The development in Indian equity market since 1992 can be

summarized as follows:

• Capital Issues (Control) Act of 1947 repealed and the office of

Controller of Capital Issues abolished; control over price and
premium of shares removed. Companies now free to raise funds
from securities markets after filing prospectus with the Securities
and Exchange Board of India (SEBI).

• The power to regulate stock exchanges delegated to SEBI by

the Government.

• SEBI introduces regulations for primary and other secondary

market intermediaries, bringing them within the regulatory
framework.

• Reforms by SEBI in the primary market include improved

disclosure standards, introduction of prudential norms, and
simplification of issue procedures. Companies required disclosing

6
all material facts and specific risk factors associated with their
projects while making public issues.

• Listing agreements of stock exchanges amended to require

listed companies to furnish annual statement to the exchanges
showing variations between financial projections and projected
utilization of funds in the offer document and actual figures. This
is to enable shareholders to make comparisons between
performance and promises.

• SEBI introduces a code of advertisement for public issues to

ensure fair and truthful disclosures.

• Disclosure norms further strengthened by introducing cash flow

statements.

• New issue procedures introduced—book building for institutional

investors—aimed at reducing costs of issue.

• SEBI introduces regulations governing substantial acquisition of

shares and takeovers and lays down conditions under which
disclosures and mandatory public offers are to be made to the
shareholders. Regulations further revised and strengthened in
1996.

• SEBI reconstitutes the governing boards of the stock exchanges

and introduces capital adequacy norms for broker accounts.

• Over-the-Counter Exchange of India formed.

• National Stock Exchange (NSE) establishment as a stock

exchange with nationwide electronic trading.

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• Bombay Stock Exchange (BSE) introduces screen-based trading;
15 stock exchanges now have screened-based trading. BSE
granted permission to expand its trading network to other
centres.

• Capital adequacy requirement for brokers enforced.

• System of mark-to-market margins introduced in the stock

exchanges.

• Stock-lending scheme introduced.

• Transparency brought out in short selling.

• National Securities Clearing Corporation, Ltd. set up by NSE.

• BSE in the process of implementing a trade guarantee scheme.

• SEBI strengthens surveillance mechanisms and directs all stock

exchanges to have separate surveillance departments.

• SEBI strengthens enforcement of its regulations. Begins the

process of prosecuting companies for misstatements and ensures
refunds of application money in several issues on account of
misstatements in the prospectus.

• Indian companies permitted to access international capital

markets through Euro issues.

• Foreign direct investment allowed in stock broking, asset

management companies, merchant banking, and other nonbank
finance companies.

8
• Foreign institutional investors (FIIs) allowed access to Indian
capital markets on registration with SEBI.

• FIIs also permitted to invest in unlisted securities and corporate

and Government debt.

• The Depositories Act enacted to facilitate the electronic book

entry transfer of securities through depositories.

Insurance

Present Scenario

The US$ 41-billion Indian life insurance industry is considered the

fifth largest life insurance market, and growing at a rapid pace of
32-34 per cent annually, according to the Life Insurance Council.

Life Insurance Corporation of India (LIC) registered an 83 per cent

increase in new business income in March 2010, while private
players posted a 47 per cent growth in new business premium.

Moreover, according to IRDA, insurers sold 10.55 million new

policies in 2009-10 with LIC selling 8.52 million and private
companies 2.03 million policies. At the end of March 2010, LIC
held 65 per cent market share in terms of new business income
collection with the private sector contributing the remaining 35
per cent share in 2009-10.

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According to IRDA, total premium collected in 2009-10 was US$
24.64 billion, an increase of 25.46 per cent over US$ 19.64 billion
collected in 2008-09.

A growth of 18 per cent is expected in total premium income and

is likely to cross the US$ 64.93 billion mark, according to B
Mathur, Secretary General, Life Insurance Council.

General Insurance:

According to data released by IRDA, the general insurance

industry recorded 13.42 per cent growth in gross premium
collected during 2009-10. The industry collected gross premium
of US$ 7.84 billion in 2009-10 compared with US$ 6.91 billion in
2008-09.

The public sector players posted 13.85 per cent growth in gross
premium in 2009-10. At the same time, private players recorded a
12.82 per cent increase in gross premium till March 2010.

During April-May 2010, non-life insurers mopped up US$ 1.59

billion against US$ 1.34 billion in the previous year, registering an
increase of 19 per cent according to IRDA data.

The four state-run insurers fared better than their private

counterparts, with New India Insurance collecting the maximum
premium of US$ 294.5 million in April and May 2010, compared to
US$ 253.15 million in the previous year, growing by 16.34 per
cent.

According to the IRDA's Summary Reports of Motor Data of Public

and Private Sector Insurers - 2008-09, nearly 30 million vehicle
policies were issued and a total premium worth US$ 1.83 billion
was collected.

Health Insurance: The Indian health insurance market has

emerged as a new and lucrative growth avenue for both the
existing players as well as the new entrants. According to a latest
research report "Booming Health Insurance in India" by research
firm RNCOS released in April 2010, all emerging trends including

10
the key factors driving the market growth. Furthermore, the
report also identifies what could be the possible growth areas for
expansion and gives a detailed overview of the competitive
landscape. The Indian health insurance market has continued to
post record growth in the last two fiscals (2008-09 and 2009-10).
Moreover, as per the RNCOS estimates, the health insurance
premium is expected to grow at a compound annual growth rate
(CAGR) of over 25 per cent for the period spanning from 2009-10
to 2013-14.

Bancassurance: Private insurers have adopted bancassurance in

a much bigger way than the state-owned Life Insurance
Corporation (LIC) in recent years. Bancassurance is distribution of
insurance products through a bank's network.

In 2008-09, private insurers forked out US$ 44.64 million as

commission for bancassurance, while the payout by LIC for this
distribution model was only US$ 26,075, as per official data.

According to Towers Watson India, Bancassurance Benchmarking

survey 2009-10, released in May 2010, bancassurance will play a
crucial role in the overall development of the Indian insurance
sector with the channel expected to generate 40 per cent of
private insurer’s premium income by 2012, compared to the
current 25-28 per cent. In general insurance, presently 17 per
cent of premium income comes from bancassurance.

Participants in the Insurance Sector

Regulatory authorities: Regulatory authorities act in a

supervisory capacity over the insurance industry.

Insurance agents and brokers: Insurance Agents and Brokers

may deal with a number of insurers and may, in their dealings
with customers, act on behalf of the insured (the customer) or on
behalf of the insurer.

11
Insurance underwriters: Underwriters collect premiums from
all those insured and pay out any claims. They determine the
premium rates to be charged and the level of cover provided for
each policy. Their underwriting guidelines set out which risks can
be insured and whether standard policy terms will apply or
whether special conditions are necessary.

Reforms
Key Recommendations of Malhotra Committee

Structure

• Government stake in the insurance Companies to be brought

down to 50%.
• Government should take over the holdings of GIC and its
subsidiaries so that these subsidiaries can act as
independent corporations.
• All the insurance companies should be given greater
freedom to operate.

Competition

• Private Companies with a minimum paid up capital of

Rs.1billion should be allowed to enter the industry.
• No Company should deal in both Life and General Insurance
through a single Entity.
• Foreign companies may be allowed to enter the industry in
collaboration with the domestic companies.
• Postal Life Insurance should be allowed to operate in the
rural market.
• Only one State Level Life Insurance Company should be
allowed to operate in each state.

Regulatory Body

• The Insurance Act should be changed.

• An Insurance Regulatory body should be set up.

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 • Controller of Insurance should be made independent.

Investments

• Mandatory Investments of LIC Life Fund in government

securities to be reduced from 75% to 50%.
• GIC and its subsidiaries are not to hold more than 5% in any
company.

Customer Service

• LIC should pay interest on delays in payments beyond 30

days
• Insurance companies must be encouraged to set up unit
linked pension plans.
• Computerisation of operations and updating of technology to
be carried out in the insurance industry.

Malhotra Committee also proposed setting up an independent

regulatory body - The Insurance Regulatory and Development
Authority (IRDA) to provide greater autonomy to insurance
companies in order to improve their performance and enable
them to act as independent companies with economic motives.

Insurance sector in India was liberalized in March 2000 with the

passage of the Insurance Regulatory and Development Authority
(IRDA) Bill, lifting all entry restrictions for private players and
allowing foreign players to enter the market with some limits on
direct foreign ownership. There is a 26 percent equity cap for
foreign partners in an insurance company. There is a proposal to
increase this limit to 49 percent. The opening up of the insurance
sector has led to rapid growth of the sector.

Mutual Funds

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Definition

“A mutual fund is made up of money that is pooled together by a

large number of investors who give their money to a fund
manager to invest in a large portfolio of stocks and / or bond”

Mutual fund is a trust that manages the pool of money collected

from various investors and it is managed by a team of
professional fund managers (usually called an Asset
Management Company) for a small fee. The investments by
the Mutual Funds are made in equities, bonds, and debentures,
call money etc., depending on the terms of each scheme
floated by the Fund. The current value of such investments is
now a day is calculated almost on daily basis and the same is
reflected in the Net Asset Value (NAV) declared by the funds
from time to time. This NAV keeps on changing with the
changes in the equity and bond market.

Types of Mutual Funds

Closed-End Mutual Funds: A closed-end mutual fund has a set

number of shares issued to the public through an initial public
offering. These funds have a stipulated maturity period generally
ranging from 3 to 15 years. Once underwritten, closed-end funds
trade on stock exchanges like stocks or bonds.

Open Ended Mutual Funds: Open-end funds are operated by a

mutual fund house, which raises money from shareholders and
invests in a group of assets, as per the stated objectives of the
fund. Open-end funds raise money by selling shares of the fund to
the public, in a manner similar to any other company, which sell
its stock to raise the capital. An open-end mutual fund does not
have a set number of shares. It continues to sell shares to
investors and will buy back shares when investors wish to sell.
Units are bought and sold at their current net asset value.

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Large Cap Funds: Large cap funds are those mutual funds,
which seek capital appreciation by investing primarily in stocks
of large blue chip companies with above-average prospects for
earnings growth.

Mid Cap Funds: Mid cap funds are those mutual funds, which
invest in small / medium sized companies. As there is no
standard definition classifying companies as small or
medium, each mutual fund has its own classification for
small and medium sized companies. Generally, companies
with a market capitalization of up to Rs 500 crore are
classified as small. Those companies that have a market
capitalization between Rs 500 crore and Rs 1,000 crore are
classified as medium sized.

Equity Mutual Funds: Equity mutual funds are also known as

stock mutual funds. Equity mutual funds invest pooled
amounts of money in the stocks of public companies.
Stocks represent part ownership, or equity, in companies,
and the aim of stock ownership is to see the value of the
companies increase over time. Stocks are often categorized
by their market capitalization (or caps), and can be
classified in three basic sizes: small, medium, and large.

Balanced Fund: Balanced fund is also known as hybrid fund. It is

a type of mutual fund that buys a combination of common stock,
preferred stock, bonds, and short-term bonds, to provide both
income and capital appreciation while avoiding excessive risk.

Growth Funds: Growth funds are those mutual funds that aim
to achieve capital appreciation by investing in growth stocks.
They focus on those companies, which are experiencing
significant earnings or revenue growth, rather than companies
that pay out dividends. Growth funds tend to look for the fastest-
growing companies in the market.

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Value Funds: Value funds are those mutual funds that tend to
focus on safety rather than growth, and often choose
investments providing dividends as well as capital
appreciation. They invest in companies that the market
has overlooked, and stocks that have fallen out of favour
with mainstream investors, either due to changing
investor preferences, a poor quarterly earnings report, or
hard times in a particular industry.

Money Market Mutual Funds: A money market fund is a

mutual fund that invests solely in money market instruments.
Money market instruments are forms of debt that mature in
less than one year and are very liquid. Treasury bills make up
the bulk of the money market instruments. Securities in the
money market are relatively risk-free. Money market funds are
generally the safest and most secure of mutual fund
investments.

Sector Mutual Funds: Sector mutual funds are those mutual

funds that restrict their investments to a particular segment or
sector of the economy. Also known as thematic funds, these
funds concentrate on one industry such as infrastructure,
banking, technology, energy, real estate, power heath care,
FMCG, pharmaceuticals etc.

Index Funds: An index fund is a mutual fund or exchange-traded

fund) that aims to replicate the movements of an index of a
specific financial market. An Index fund follows a passive
investing strategy called indexing. It involves tracking an
index say for example, the Sensex or the Nifty and builds a
portfolio with the same stocks in the same proportions as
the index. The fund makes no effort to beat the index and
in fact it merely tries to earn the same return.

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Growth Facts & Market Share

• In the past 6 years, Mutual Funds in India have recorded a

growth of 100 %.
• In India, the rate of saving is 23 %.
• In the future, there lies a big scope for the Indian Mutual
Funds industry to expand.
• Several asset management companies, which are foreign
based, are now entering the Indian markets.
• A number of commodity Mutual Funds will be introduced in
the future. The SEBI (Securities Exchange Board of India) has
granted the permission for the same.
• There is also enough scope for the Indian Mutual funds to
enter into the semi-urban and rural areas.

Financial planners will play a major role in the Mutual Funds

market by providing people with proper financial planning.

Distribution of Assets under management by Mutual funds

– Aug 2010

Particulars Rs. (Crores) % Total

Income 347,321 49

Equity 179,200 25

Balanced 18,781 3

Liquid/ Money Market 128,843 18

GILT 3,324 1

ELSS-Equity 25,598 4

Gold ETF's 2,639 NA

Other ETF's 1,427 NA

Investing Overseas 2,533 NA

Source: amfiindia.com

17
Debt Markets

Debt market refers to the financial market where investors buy

and sell debt securities, mostly in the form of bonds. These
markets are important source of funds, especially in a developing
economy like India. India debt market is one of the largest in Asia.
Like all other countries, debt market in India is also considered a
useful substitute to banking channels for finance.

The most distinguishing feature of the debt instruments of Indian

debt market is that the return is fixed. This means, returns are
almost risk-free. This fixed return on the bond is often termed as
the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of
bond) is giving the seller a loan at a fixed interest rate, which
equals to the coupon rate.

Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Government Securities Market (G-Sec Market): It consists of

central and state government securities. It means that, the
central and state government is taking loans. It is also the most
dominant category in the India debt market.

Bond Market: It consists of Financial Institutions bonds,

corporate bonds and debentures and Public Sector Units bonds.
These bonds are issued to meet financial requirements at a fixed
cost and hence remove uncertainty in financial costs.

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Advantages

The biggest advantage of investing in Indian debt market is its

assured returns. The returns that the market offer is almost
risk-free (though there is always certain amount of risks, however
the trend says that return is almost assured). Safer are the
government securities. On the other hand, there is certain
amount of risk in the corporate, FI and PSU debt instruments.
However, investors can take help from the credit rating agencies,
which rate those debt instruments. The interest in the
instruments may vary depending upon the ratings.

Another advantage of investing in Indian debt market is its high

liquidity. Banks offer easy loans to the investors against
government securities.

Disadvantages

As there are several advantages of investing in Indian debt

market, there are certain disadvantages as well. As the returns
here are risk free, those are not as high as the equity market at
the same time. So, at one hand you are getting assured returns,
but on the other hand, you are getting less return at the same
time.

Retail participation is also very less here, though increased

recently. There are also some issues of liquidity and price
discovery as the retail debt market is not yet quite well
developed.

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Types of Debt Instruments
There are various types of debt instruments available that one
can find in Indian debt market.

Government Securities: It is the Reserve Bank of India that

issues Government Securities or G-Secs on behalf of the
Government of India. These securities have a maturity period of 1
to 30 years. G-Secs offer fixed interest rate, where interests are
payable semi-annually. For shorter term, there are Treasury Bills
or T-Bills, which are issued by the RBI for 91 days, 182 days and
364 days.

Corporate Bonds: These bonds come from PSUs and private

corporations and are offered for an extensive range of tenures up
to 15 years. There are also some perpetual bonds. Comparing to
G-Secs, corporate bonds carry higher risks, which depend upon
the corporation, the industry where the corporation is currently
operating, the current market conditions, and the rating of the
corporation. However, these bonds also give higher returns than
the G-Secs.

Certificate of Deposit: These are negotiable money market

instruments. Certificate of Deposits (CDs), which usually offer
higher returns than Bank term deposits, are issued in
dematerialised (demat) form and also as a Usance Promissory
Notes. There are several institutions that can issue CDs. Banks
can offer CDs which have maturity between 7 days and 1 year.
CDs from financial institutions have maturity between 1 and 3
years. There are some agencies like ICRA, FITCH, and CARE;

20
CRISIL etc. that offer ratings of CDs. CDs are available in the
denominations of Rs. 1 Lac and in multiple of that.

Commercial Papers: There are short-term securities with

maturity of 7 to 365 days. CPs is issued by corporate entities at a
discount to face value.

Reforms in Debt Market

• The system of auction introduced to sell the government

securities

• The introduction of delivery versus payment (DvP) system by

the Reserve Bank of India to nullify the risk of settlement in
securities and assure the smooth functioning of the
securities delivery and payment

• The computerization of the SGL

• The launch of innovative products such as capital indexed

bonds and zero coupon bonds to attract more and more
investors from the wider spectrum of the populace

• Sophistication of the markets for bonds such as inflation

indexed bonds

• The development of the more and more primary dealers as

creators of the Government of India bonds market.

• The establishment of the a powerful regulatory system

called the trade for trade system by the Reserve Bank of
India which stated that all deals are to be settled with bonds
and funds

21
 • A new segment called the Wholesale Debt Market (WDM)
was established at the NSE to report the trading volume of
the Government of India bonds market

• Issue of ad hoc treasury bills by the Government of India as

a funding instrument was abolished with the introduction of
the Ways And Means agreement.

Recent Developments in Bond Market

• The domestic debt market is becoming increasingly sensitive

to developments beyond the nation’s borders; the 10-year
Indian government bond mimicked the movements of its US
counterpart last month.

• In May2010, yields on both Indian and US 10-year treasury

paper fell substantially. The yield on US paper fell to 7.90%
and yields on the Indian security dropped to 6.6%. Bond
prices and yields move in opposite direction.

• In absolute terms, yields dropped 30 basis points and 53

basis points, respectively. One basis point is one-hundredth
of a percentage point.

• According to debt market participants, the close tracking of

movements in the 10-year US treasury by its Indian
counterpart showed the linkages India has developed with
global markets. As a result, say bond dealers, all financial
markets have reason to track developments overseas.

• The yield on the domestic 10-year bond closed at 7.506%,

down from 7.515% on Tuesday.

22
 • Commercial Paper rates in India are attractive at 7.5 per
cent and after deduction of cost of hedging, that is, 3.6 per
cent (one year rupee dollar forward), FIIs would still make
3.9 per cent, far higher than the 1.1 per cent on the one-
year US Dollar LIBOR (London Interbank Offered Rate)

• The sudden surge in FII inflows is due to the prop books of

foreign banks, emerging market bond funds and India-
dedicated fixed income funds. With 10- year paper at 2.9 per
cent in the US and 2.6-2.7 per cent in Germany, inflows into
Indian debt market is relatively more attractive

• The enhancement of FII investment cap in debt from $5

billion a couple years ago to $20 billion ($5 billion - G sec +
$15 billion-corporate paper) is another reason for rising
inflows

Evaluation of the Present Scenario & Estimation Future

Prospects of Portfolio Management

The portfolio management is growing rapidly serving broad array

of investors – both individual and institutional – with investment
portfolio ranging in asset size from few thousands to crores of
rupees. Despite growing importance, the subject of portfolio and
investment management is new in the country and is largely
misunderstood. In most cases, portfolio management has been
practiced as an investment management counselling in which the
investor has been advised to seek assets that would grow in value
and / or provide income.

Portfolio management is concerned with efficient management of

investment in the securities. An investment is defined as the
current commitment of funds for a period of time in order to
derive a future flow of funds that will compensate the investing
unit:

- For the time the funds are committed.

23
- For the expected rate of inflation, and

- For the uncertainty involved in the future flow of funds.

Evaluation of Portfolio Management Evaluation

There are two basic approaches to the portfolio

management - passive and active.

The optimal allocation of the above mentioned components of the

passive management approach requires a reliable estimate of the
variance and expected return that are possible to measure with
some analysis. Moreover, according to the Efficient Market
Hypothesis (EMH) all the assets on the market should be
efficiently priced that implies that the described passive
management strategy should work.

However, there is some evidence that active managers may have

a superior performance relative to the managers that utilize
passive strategy. One of the objectives of the active portfolio
managers is to construct a risky portfolio that maximizes the
Sharpe's measure that means maximizing the slope of Capital
Allocation Line (CAL). Thus a "good" active manager has a steeper
CAL or reward-to-variability ratio than that of a passive manager.
This relation points out one of the ways to evaluate the
performance of active versus passive strategy managers through
the use of a realized Sharpe's ratio as one of the ways to assess
relative risk-adjusted return. Ideally, clients will pick the manager
with a higher Sharpe's ratio that probably has the real ability to
forecast returns. The constant stability over time in performance
of such a manager will help to define the optimal fracture of the
portfolio to be invested with the manger to get a desired return
within the specified variance level.

24
The choice of an optimal measure to assess the performance of
an actively managed portfolio depends on the role of the
observed portfolio. For example, Sharpe's ratio is used when the
portfolio represents the entire investment fund, Treynor measure
- when the scrutinized portfolio represents one sub-portfolio of
many, and the Information ratio can be applied to measure the
return, when the portfolio under question is composed of both
actively and passively managed portfolios.

The perfect market timing is able to add value to the performance

of active mangers; however, the rate of return for such manager
will be uncertain. Moreover, this means that standard portfolio
risk measures are unable to catch the real risk characteristics
thus providing also an opportunity for a downside scenario.

With this being distressing, the studies of mutual fund

performance did not reveal any considerable ability to outperform
the market index; however it is believed that good active
managers can save the losses during the market downswings
thus adding overall value to the portfolio.

To evaluate active portfolio management from the client's

perspective, it is important to remember that is has its price. In
other words, potential customer should weight expected value-
added from the active portfolio management versus additional
expenses and make a decision based on the adjusted price.

Portfolio evaluating refers to the evaluation of the performance of

the portfolio. It is essentially the process of comparing the return
earned on a portfolio with the return earned on one or more other
portfolio or on a benchmark portfolio. Portfolio evaluation
essentially comprises of two functions, performance
measurement and performance evaluation. Performance
measurement is an accounting function which measures the
return earned on a portfolio during the holding period or
investment period. Performance evaluation, on the other hand,

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address such issues as whether the performance was superior or
inferior, whether the performance was due to skill or luck etc.

The ability of the investor depends upon the absorption of latest

developments, which occurred in the market. The ability of
expectations if any, we must able to cope up with the wind
immediately. Investment analysts continuously monitor and
evaluate the result of the portfolio performance. The expert
portfolio constructer shall show superior performance over the
market and other factors. The performance also depends upon
the timing of investments and superior investment analyst’s
capabilities for selection. The investor will have to assess the
extent to which the objectives are achieved. For evaluation of
portfolio, the investor shall keep in mind the secured average
returns, average or below average as compared to the market
situation. Selection of proper securities is the first requirement.
The evaluation of a portfolio performance can be made based on
the following methods:

a) Sharpe’s Measure

b) Treynor’s Measure

c) Jensen’s Measure

(a) Sharpe’ Measure:

The objective of modern portfolio theory is maximization of return

or minimization of risk. In this context the research studies have
tried to evolve a composite index to measure risk based return.
The credit for evaluating the systematic, unsystematic and
residual risk goes to Sharpe, Treynor and Jensen. Sharpe measure
total risk by calculating standard deviation. The method adopted
by Sharpe is to rank all portfolios on the basis of evaluation
measure. Reward is in the numerator as risk premium. Total risk

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is in the denominator as standard deviation of its return. We will
get a measure of portfolio’s total risk and variability of return in
relation to the risk premium. The measure of a portfolio can be
done by the following formula:

SI =(Rt – Rf)/σf

Where,

SI = Sharpe’s Index

Rt = Average return on portfolio

Rf = Risk free return

σf = Standard deviation of the portfolio return.

(b) Treynor’s Measure:

The Treynor’s measure related a portfolio’s excess return to non-

diversifiable or systematic risk. The Treynor’s measure employs
beta. The Treynor based his formula on the concept of
characteristic line. It is the risk measure of standard deviation,
namely the total risk of the portfolio is replaced by beta. The
equation can be presented as follow:

Tn =(Rn – Rf)/βm

Where, Tn = Treynor’s measure of performance

Rn = Return on the portfolio

Rf = Risk free rate of return

βm = Beta of the portfolio (A measure of systematic risk)

(c) Jensen’s Measure:

Jensen attempts to construct a measure of absolute performance

on a risk-adjusted basis. This measure is based on CAPM model. It
measures the portfolio manager’s predictive ability to achieve

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higher return than expected for the accepted riskiness. The ability
to earn returns through successful prediction of security prices on
a standard measurement. The Jensen measure of the
performance of portfolio can be calculated by applying the
following formula:

Rp = Rf + (RMI – Rf) x β

Where,

Rp = Return on portfolio

RMI = Return on market index

Rf = Risk free rate of return

Future Prospects of Portfolio Management

Foreign institutional investors increasingly drive the Indian stock

market. They own over 15% of the country’s market capital and
their significance is much more when looking at free float.
Emerging market could continue to re-rate themselves given
sustained improvement in economic fundamentals. Emerging
market countries have been able to maintain strong fundamentals
aided by strong real GDP growth, lower levels of interest rates
and inflation. This should allow for improved risk-return profiles
for overseas investors. Overseas investors also face reduced risks
while investing in emerging markets as they have sound
economic fundamentals compared to those of the developed
world. Even though fund floes to emerging markets have been
seeing record levels, portfolio weightages are yet to touch peaks.

Role of SEBI in Portfolio Management

The S.E.B.I. has imposed a number of obligations and a code of

conduct on them. The portfolio manager should have a high

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standard of integrity, honesty and should not have been convicted
of any economic offence or moral turpitude. He should not resort
to rigging up of prices, insider trading or creating false markets,
etc. their books of accounts are subject to inspection to inspection
and audit by S.E.B.I. The observance of the code of conduct and
guidelines given by the S.E.B.I. are subject to inspection and
penalties for violation are imposed. The manager has to submit
periodical returns and documents as may be required by the SEBI
from time-to- time.

The difference between a discretionary portfolio manager

and a non- discretionary portfolio manager as per SEBI

The discretionary portfolio manager individually and

independently manages the funds of each client in accordance
with the needs of the client.
The non-discretionary portfolio manager manages the funds
in accordance with the directions of the client.

The procedure of obtaining registration as a portfolio

manager from SEBI

For registration as a portfolio manager, an applicant is required to

pay a non-refundable application fee of Rs.1, 00,000/- by way of
demand draft drawn in favour of ‘Securities and Exchange Board
of India’, payable at Mumbai.
The application in Form A along with additional information
submitted to SEBI office at Bandra Office, Mumbai

The capital adequacy requirement of a portfolio manager

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The portfolio manager is required to have a minimum net worth of
Rs. 2 crore.
Registration fee to be paid by the portfolio managers
Yes. Every portfolio manager is required to pay Rs. 10 lakhs as
registration fees at the time of grant of certificate of registration
by SEBI.
Validity period for the certificate of registration to remain
valid
The certificate of registration remains valid for three years. The
portfolio manager has to apply for renewal of its registration
certificate to SEBI, 3 months before the expiry of the validity of
the certificate, if it wishes to continue as a registered portfolio
manager.

The renewal fee to be paid by the portfolio manager

The portfolio manager is required to pay Rs. 5 lakh as renewal

fees to SEBI.

Is there any contract between the portfolio manager and

its client?

Yes. The portfolio manager, before taking up an assignment of

management of funds or portfolio of securities on behalf of the
client, enters into an agreement in writing with the client, clearly
defining the inter se relationship and setting out their mutual
rights, liabilities and obligations relating to the management of
funds or portfolio of securities, containing the details as specified
in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993.

Fees a portfolio manager can charge from its clients for

the services rendered

SEBI Portfolio Manager Regulations have not prescribed any scale

of fee to be charged by the portfolio manager to its clients.

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However, the regulations provide that the portfolio manager shall
charge a fee as per the agreement with the client for rendering
portfolio management services. The fee so charged may be a
fixed amount or a return based fee or a combination of both. The
portfolio manager shall take specific prior permission from the
client for charging such fees for each activity for which service is
rendered by the portfolio manager directly or indirectly (where
such service is outsourced).

Specified value of funds or securities below which a

portfolio manager can’t accept from the client while
opening the account for the purpose of rendering portfolio
management service to the client

The portfolio manager is required to accept minimum Rs. 5 lakhs

or securities having a minimum worth of Rs. 5 lakhs from the
client while opening the account for the purpose of rendering
portfolio management service to the client.
Portfolio manager can only invest and not borrow on behalf of his
clients.

Reports a Portfolio Manager has to keep and show it to

client

The portfolio manager shall furnish periodically a report to the

client, as agreed in the contract, but not exceeding a period of six
months and as and when required by the client and such report
shall contain the following details, namely:-

(a) The composition and the value of the portfolio, description of

security, number of securities, value of each security held in the
portfolio, cash balance and aggregate value of the portfolio as on
the date of report;

(b) Transactions undertaken during the period of report including

date of transaction and details of purchases and sales;

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(c) Beneficial interest received during that period in respect of
interest, dividend, bonus shares, rights shares and debentures;

(d) Expenses incurred in managing the portfolio of the client;

(e) Details of risk foreseen by the portfolio manager and the risk
relating to the securities recommended by the portfolio manager
for investment or disinvestment.

This report may also be available on the website with restricted

access to each client. The portfolio manager shall, in terms of the
agreement with the client, also furnish to the client documents
and information relating only to the management of a portfolio.
The client has right to obtain details of his portfolio from the
portfolio managers.

The disclosure mechanism of the portfolio managers to

their clients

The portfolio manager provides to the client the Disclosure

Document at least two days prior to entering into an agreement
with the client.
The Disclosure Document contains the quantum and manner of
payment of fees payable by the client for each activity, portfolio
risks, complete disclosures in respect of transactions with related
parties, the performance of the portfolio manager and the audited
financial statements of the portfolio manager for the immediately
preceding three years.
Please note that the disclosure document is neither approved nor
disapproved by SEBI nor does SEBI certify the accuracy or
adequacy of the contents of the Documents.

Approvation by SEBI of any of the services offered by

portfolio managers

No. SEBI does not approve any of the services offered by the
Portfolio Manager. An investor has to invest in the services based
on the terms and conditions laid out in the disclosure document

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and the agreement between the portfolio manager and the
investor.

Does SEBI approve the disclosure document of the

portfolio manager?

The Disclosure Document is neither approved nor disapproved by

SEBI. SEBI does not certify the accuracy or adequacy of the
contents of the Disclosure Document.

The rules governing services of a Portfolio Manager

The services of a Portfolio Manager are governed by the
agreement between the portfolio manager and the investor. The
agreement should cover the minimum details as specified in the
SEBI Portfolio Manager Regulations. However, additional
requirements can be specified by the Portfolio Manager in the
agreement with the client. Hence, an investor is advised to read
the agreement carefully before signing it.

Lock-in period a portfolio manager can impose on the

investor

Portfolio managers cannot impose a lock-in on the investment of

their clients. However, a portfolio manager can charge exit fees
from the client for early exit, as laid down in the agreement.

The basis on which the performance of the portfolio

manager calculated

The performance of a discretionary portfolio manager is

calculated using weighted average method taking each individual
category of investments for the immediately preceding three
years and in such cases performance indicator is also disclosed.

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Bibliography

Portfolio Management – T.Y.B.F.M

Portfolio Management - ICFAI

www.strategy2act.com

www.sebi.gov.in

www.amfiindia.com

www.equitymaster.com

www.moneycontrol.com

www.money.rediff.com

www.irda.com

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www.google.com/news

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