PREFACE

The Analysis of Portfolio Analysis of Banking Sector briefly explains the importance of
Portfolio Analysis of Banking Sector in the investment decisions. The introduction of
Portfolio Analysis of Banking Sector
Will gives details about definition of portfolio management, objectives of Portfolio
Analysis of Banking Sector and advantages and disadvantages of portfolio management.
How the Portfolio Analysis of Banking Sector introduced in India and its role in Indias
finance sector and its importance was explained in introduction. The various investment
opportunities which are available to the investor in market are briefly introduced in the
analysis of portfolio management. Analysis gives the support to take decisions in the
construction process of portfolio management.

The investment process exhibits how the process should be and the required information
for invest in various investments. The analysis gives the data about the calculation of
various hypothesis like risk, return and variance in constructing a portfolio. The portfolio
construction shows how to choose optimum portfolio

INTRODUCTION:

Investing in securities such as shares, debentures and bonds is profitable as well as

exciting. It is indeed rewarding, but involves a great deal of risk and calls for scientific
knowledge as well as artistic skill. In such investments, both rational as well as emotional
responses are involved. Investing in financial securities is now considered to be one of
the best avenues for investing ones savings while it is acknowledged to be one of the
most risky avenues of investment.

It is rare to find investors investing their entire savings in a single security. Instead, they
tend to invest in a group of securities. Such a group of securities is called a portfolio.
Creation of a portfolio helps to reduce risk without sacrificing returns. Portfolio Analysis
of Banking Sector deals with the analysis of individual securities as well as with the
theories and practice of optimally combining securities into portfolios. An investor who
understands the fundamental principles and analytical aspects of Portfolio Analysis of
Banking Sector has a better chance of success.

NEED FOR THE STUDY

It is The study of analysis of portfolio management. The analysis of Portfolio Analysis of
Banking Sector provides the information to investor how to invest the savings in
various securities and the way how to get maximum returns from the securities and
how to decrease the risk which lies in securities.
The technical approach to investment is essentially a reflection of the idea that prices
move in trends, which are determined by the changing attitudes of investors toward a
variety of economic, monetary, political, and psychological forces.

The art of

analysis of Portfolio Analysis of Banking Sector is to identify trend changes at an

early stage and to maintain an investment posture until the weight of the evidence
indicates that the trend has reversed.

OBJECTIVES OF THE STUDY

1. To understand the portfolio selection process
2. To study the frontier technique in the portfolio selection
3. To study the process of generation of investible securities in portfolio
4. To understand the process of calculating risk of selected securities in portfolio

SCOPE OF THE PROJECT

The project provides the information regarding the Portfolio Analysis of Banking
Sector that is how to analyze the portfolio, how to construct the portfolio and the factors
which influence while constructing a portfolio. Analysis of Portfolio Analysis of Banking
Sector will helps to the investor in getting good returns and decreases the risk. The
project analysis considers the mission of the company and wealth maximization concept
of the investor.

LIMITATIONS:
The data is collected from the primary and secondary sources and there is subjected to
slight variation than what the study includes in reality.
Hence accuracy and correctness can be measured only to the extent of what the sample
group has furnished.
This study has been conducted purely to understand Portfolio Analysis of Banking Sector
for investor:
Construction of portfolio is restricted to two companies based on markwitz
model.
Very few and randomly selected scripts/companies are analyzed.
Data collection was strictly confined to secondary source. No primary data is
associated with the project.
Detailed study of the topic was not possible due to limited size of the project

 There was constraint with regard to the time allocation for the research study i.e.
for a period of two months.

METHODOLOGY OF THE STUDY

The data collection of the study consists of two kinds of data

1. Primary sources of data:
Which is first hand in nature, can be collected through.
. Meeting with concerned peoples.
. Personal observation.
2. Methods of collection of the data.
.secondary data: Which is already exists
.
. Financial management text books .
. Printed materials.
. Journals & magazines.
. News papers.
. Text books.
. World wide webs.

INDUSTRY PROFILE

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich
heritage. Popularly known as "BSE", it was established as "The Native Share & Stock
Brokers Association" in 1875. BSE has played a pioneering role in the Indian Securities
Market - one of the oldest in the world. Much before actual legislations were enacted,
BSE had formulated comprehensive set of Rules and Regulations for the Indian Capital
Markets. It also laid down best practices adopted by the Indian Capital Markets after
India gained its Independence.
Vision:
"Emerge as the premier Indian stock exchange by establishing global benchmarks"
BSE is the first stock exchange in the country to obtain permanent recognition in
1956 from the Government of India under the Securities Contracts (Regulation) Act,
1956.The Exchange's pivotal and pre-eminent role in the development of the Indian
capital market is widely recognized and its index, SENSEX, is tracked worldwide.
SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-Weighted"
methodology of 30 component stocks representing a sample of large, well-established
and financially sound companies. The base year of SENSEX is 1978-79. From September
2010, the SENSEX is calculated on a free-float market capitalization methodology. The
"free-float Market Capitalization-Weighted" methodology is a widely followed index
construction methodology on which majority of global equity benchmarks are based.

The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of
BSE National Index (Base: 1983-84 = 100). It comprised of 100 stocks listed at five
major stock exchanges in India at Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The
BSE National Index was renamed as BSE-100 Index from October 14, 1996 and since
then it is calculated taking into consideration only the prices of stocks listed at BSE. The
Exchange launched dollar-linked version of BSE-100 index i.e. Dollex-100 on May 22,
2013. The Exchange constructed and launched on 27th May, 1994, two new index series
viz., the 'BSE-200' and the 'DOLLEX-200' indices. The launch of BSE-200 Index in 1994
was followed by the launch of BSE-500 Index and 5 sectoral indices in 1999. In 2001,
BSE launched the BSE-PSU Index, DOLLEX-30 and the country's first free-float based
index - the BSE TECK Index. The Exchange shifted all its indices to a free-float
methodology (except BSE PSU index).
The Exchange has a nation-wide reach with a presence in 417 cities and towns of India.
The systems and processes of the Exchange are designed to safeguard market integrity
and enhance transparency in operations. During the year 2011-2012, the trading volumes
on the Exchange showed robust growth.
The Exchange provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary
system of the Exchange and is BS 7799-2-2009 certified. The surveillance and clearing &
settlement functions of the Exchange are ISO 9001:2000 certified.
The Exchange is professionally managed under the overall direction of the Board of
Directors. The Board comprises eminent professionals, representatives of Trading
Members and the Managing Director of the Exchange. The Board is inclusive and is
designed to benefit from the participation of market intermediaries.
BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the
benchmark equity index that reflects the robustness of the economy and finance. It was
the
First in India to introduce Equity Derivatives
First in India to launch a Free Float Index
8

 First in India to launch US$ version of BSE Sensex

First in India to launch Exchange Enabled Internet Trading Platform
First in India to obtain ISO certification for Surveillance, Clearing & Settlement

'BSE On-Line Trading System (BOLT) has been awarded the globally
recognized

the

Information

Security

Management

System

standard

BS7799-2:2009.
First to have an exclusive facility for financial training
Moved from Open Outcry to Electronic Trading within just 50 days
NATIONAL STOCK EXCHANGE OF INDIA LIMITED
The National Stock Exchange of India Limited has genesis in the
report of the High Powered Study Group on Establishment of New Stock Exchanges,
which recommended promotion of a National Stock Exchange by financial institutions
(FIs) to provide access to investors from all across the country on an equal footing. Based
on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a taxpaying

company

unlike

other

stock

exchanges

in

the

country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,
1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment commenced in June 2000.
The national stock exchange of India ltd is the largest stock exchange of the country. NSE
is setting the agenda for change in the securities markets in India. For last 5 years it has
played a major role in bringing investors from 347 cities and towns online, ensuring
complete transparency, introducing financial guarantee to settlements, ensuring
scientifically designed and professionally managed indices and by nurturing the
dematerialization effort across the country.
NSE is a complete capital market prime mover. Its wholly owned subsidiaries, National
securities cleaning corporation ltd (NSCCL) provides cleaning and settlement of
9

securities, India index services and products ltd (IISL) provides indices and index
services with a consulting and licensing agreement with Standard & Poors (S&P), and IT
ltd forms the technology strength that NSE works on.
Today, NSE is one of the largest exchanges in the world and still forging ahead. At NSE,
we are constantly working towards creating a more transparent, vibrant and innovative
capital market.

10

COMPANY PROFILE

11

Thus, Portfolio Analysis of Banking Sector

is all about strengths, weaknesses,

opportunities and threats in the choice of debt vs. equity, domestic vs. international,
growth vs. safety and numerous other trade-offs encountered in the attempt to
maximize return at a given appetite for risk.

Aspects of Portfolio Management:

Basically Portfolio Analysis of Banking Sector involves
A proper investment decision making of what to buy & sell
Proper money management in terms of investment in a basket of assets so as
to satisfy the asset preferences of investors.
Reduce the risk and increase returns.

OBJECTIVES OF PORTFOLIO MANAGEMENT:

The basic objective of Portfolio Analysis of Banking Sector is to maximize yield and
minimize risk. The other ancillary objectives are as per needs of investors, namely:
Regular income or stable return
Appreciation of capital
Marketability and liquidity
Safety of investment
Minimizing of tax liability.

12

NEED FOR PORTFOLIO MANAGEMENT:

The Portfolio Analysis of Banking Sector deals with the process of selection securities
from the number of opportunities available with different expected returns and carrying
different levels of risk and the selection of securities is made with a view to provide the
investors the maximum yield for a given level of risk or ensure minimum risk for a level
of return.
Portfolio Analysis of Banking Sector is a process encompassing many activities of
investment in assets and securities. It is a dynamics and flexible concept and involves
regular and systematic analysis, judgment and actions. The objectives of this service are
to help the unknown investors with the expertise of professionals in investment Portfolio
Management. It involves construction of a portfolio based upon the investors objectives,
constrains, preferences for risk and return and liability. The portfolio is reviewed and
adjusted from time to time with the market conditions. The evaluation of portfolio is to be
done in terms of targets set for risk and return. The changes in portfolio are to be effected
to meet the changing conditions.
Portfolio Construction refers to the allocation of surplus funds in hand among a variety of
financial assets open for investment. Portfolio theory concerns itself with the principles
governing such allocation. The modern view of investment is oriented towards the
assembly of proper combinations held together will give beneficial result if they are
grouped in a manner to secure higher return after taking into consideration the risk
element.
The modern theory is the view that by diversification, risk can be reduced. The investor
can make diversification either by having a large number of shares of companies in
different regions, in different industries or those producing different types of product

13

lines. Modern theory believes in the perspectives of combination of securities under

constraints of risk and return.

ELEMENTS:
Portfolio Analysis of Banking Sector is an on-going process involving the following
basic tasks.
Identification of the investors objective, constrains and preferences which help
formulated the invest policy.
Strategies are to be developed and implemented in tune with invest policy
formulated. This will help the selection of asset classes and securities in each
class depending upon their risk-return attributes.
Review and monitoring of the performance of the portfolio by continuous
overview of the market conditions, companys performance and investors
circumstances.
Finally, the evaluation of portfolio for the results to compare with the targets and
needed adjustments have to be made in the portfolio to the emerging conditions
and to make up for any shortfalls in achievements (targets).

Schematic diagram of stages in portfolio management:

14

Specification and
quantification of
investor
objectives,
constraints, and
preferences

Portfolio policies
and strategies

Capital market
expectations

Monitoring investor
related input factors

Portfolio construction
and revision asset
allocation, portfolio
optimization, security
selection,
implementation and
execution

Relevant
economic, social,
political sector
and security
considerations

Attainment of
investor
objectives
Performance
measurement

Monitoring
economic and
market input factors

Process of portfolio management:

The Portfolio Program and Asset Management Program both follow a disciplined
process to establish and monitor an optimal investment mix. This six-stage process helps
ensure that the investments match investors unique needs, both now and in the future.

15

1. IDENTIFY GOALS AND OBJECTIVES:

When will you need the money from your investments? What are you saving your
money for? With the assistance of financial advisor, the Investment Profile
Questionnaire will guide through a series of questions to help identify the goals and
objectives for the investments.
2. DETERMINE OPTIMAL INVESTMENT MIX:
Once the Investment Profile Questionnaire is completed, investors optimal
investment mix or asset allocation will be determined. An asset allocation represents
the mix of investments (cash, fixed income and equities) that match individual risk
and return needs. This step represents one of the most important decisions in your
portfolio construction, as asset allocation has been found to be the major determinant
of long-term portfolio performance.
3. CREATE A CUSTOMIZED INVESTMENT POLICY STATEMENT
When the optimal investment mix is determined, the next step is to formalize our
goals and objectives in order to utilize them as a benchmark to monitor progress and
future updates.
4. SELECT INVESTMENTS

16

The customized portfolio is created using an allocation of select QFM Funds.

Each QFM Fund is designed to satisfy the requirements of a specific asset class, and
is selected in the necessary proportion to match the optimal investment mix.
5 MONITOR PROGRESS
Building an optimal investment mix is only part of the process. It is equally important
to maintain the optimal mix when varying market conditions cause investment mix to
drift away from its target. To ensure that mix of asset classes stays in line with
investors unique needs, the portfolio will be monitored and rebalanced back to the
optimal investment mix
6. REASSESS NEEDS AND GOALS
Just as markets shift, so do the goals and objectives of investors. With the flexibility
of the Portfolio Program and Asset Management Program, when the investors needs
or other life circumstances change, the portfolio has the flexibility to accommodate
such changes.
RISK:
Risk refers to the probability that the return and therefore the value of an asset or security
may have alternative outcomes. Risk is the uncertainty (today) surrounding the eventual
outcome of an event which will occur in the future. Risk is uncertainty of the
income/capital appreciation or loss of both. All investments are risky. The higher the risk
taken, the higher is the return. But proper management of risk involves the right choice of
investments whose risks are compensation.
RETURN:
Return-yield or return differs from the nature of instruments, maturity period and the
creditor or debtor nature of the instrument and a host of other factors. The most important
factor influencing return is risk return is measured by taking the price income plus the
price change.
PORTFOLIO RISK:
Risk on portfolio is different from the risk on individual securities. This risk is reflected
by in the variability of the returns from zero to infinity. The expected return depends on
probability of the returns and their weighted contribution to the risk of the portfolio.
RETURN ON PORTFOLIO:

17

Each security in a portfolio contributes returns in the proportion of its investment in

security. Thus the portfolio of expected returns, from each of the securities with weights
representing the proportionate share of security in the total investments.
RISK RETURN RELATIONSHIP:
The risk/return relationship is a fundamental concept in not only financial analysis, but in
every aspect of life. If decisions are to lead to benefit maximization, it is necessary that
individuals/institutions consider the combined influence on expected (future) return or
benefit as well as on risk/cost. The requirement that expected return/benefit be
commensurate with risk/cost is known as the "risk/return trade-off" in finance.
All investments have some risks. An investment in shares of companies has its own risks
or uncertainty. These risks arise out of variability of returns or yields and uncertainty of
appreciation or depreciation of share prices, loss of liquidity etc. and the overtime can be
represented by the variance of the returns. Normally, higher the risk that the investors
take, the higher is the return.

TYPES OF RISKS:
Risk consists of two components. They are
1.

Systematic Risk

18

2.

Un-systematic Risk

1. SYSTEMATIC RISK:
Systematic risk refers to that portion of total variability in return caused by factors
affecting the prices of all securities. Economic, Political and sociological changes are
sources of systematic risk. Their effect is to cause prices of nearly all individual common
stocks and/or all individual bonds to move together in the same manner.
i.

Market Risk:

Variability in return on most common stocks that are due to basic sweeping changes in
investor expectations is referred to as market risk. Market risk is caused by investor
reaction to tangible as well as intangible events.
ii.

Interest rate-Risk:

Interest rate risk refers to the uncertainty of future market values and of the size of
future income, caused by fluctuations in the general level of interest rates.
iii.

Purchasing-Power Risk:

Purchasing power risk is the uncertainty of the purchasing power of the amounts to be
received. In more events everyday terms, purchasing power risk refers to the impact of or
deflation on an investment.

2. UNSYSTEMATIC RISK:
Unsystematic risk is the portion of total risk that is unique to a firm or industry.
Factors such as management capability, consumer preferences, and labor strikes Cause
systematic variability of return in a firm. Unsystematic factors are largely independent of
factors affecting securities markets in general. Because these factors affect one firm, they
must be examined for each firm.
Unsystematic risk that portion of risk that is unique or peculiar to a firm or an
industry, above and beyond that affecting securities markets in general. Factors such as
management capability, consumer preferences, and labor strikes can cause unsystematic
variability of return for a companys stock.
i.

Business Risk:
19

Business risk is a function of the operating conditions faced by a firm and the variability
these conditions inject into operating income and expected dividends.
Business risk can be divided into two broad categories
a. Internal Business Risk
b. External Business Risk
a. Internal business risk is associated with the operational efficiency of the firm. The
operational efficiency differs from company to company. The efficiency of operation
is reflected on the companys achievement of its pre-set goals and the fulfillment of
the promises to its investors.
b. External business risk is the result of operating conditions imposed on the firm by
circumstances beyond its control. The external environments in which it operates
exert some pressure on the firm. The external factors are social and regulatory factors,
monetary and fiscal policies of the government, business cycle and the general
economic environment within which a firm or an industry operates.

ii.

Financial Risk:

Financial risk is associated with the way in which a company finances its activities.
Financial risk is avoided risk to the extent that management has the freedom to decide to
borrow or not to borrow funds. A firm with no debit financing has no financial risk

ROLE OF PORTFOLIO ANALYSIS OF BANKING SECTOR

INDIA

20

IN

There was a time when Portfolio Analysis of Banking Sector was an elite practice beyond
the reach of ordinary people, in India. The scenario has changed drastically. Portfolio
Analysis of Banking Sector is now a familiar term and is widely practiced in India. The
theories and concepts relating to Portfolio Analysis of Banking Sector now find their
way to the frontpages of financial news papers and the cover pages of investment journals
in India.
In the beginning of nineties India embarked on a programme of economic liberalization
and globalization. This reform has made the Indian capital markets active. The Indian
stock markets are steadily moving towards higher efficiency, with rapid computerization,
increasing

market

transparency, with

rapid

computerization,

increasing

market

transparency , better infrastructure, better customer service, closer integration and higher
volumes. The markets are dominated by large institutional investors with their diversified
portfolios.
Professional portfolio management, backed by competent research, began to be practiced
by mutual funds, investment consultants and big brokers. The securities exchange board of
India, the stock market regulatory body in India, is supervising the whole process with a
view to making Portfolio Analysis of Banking Sector a responsible professional service
to be rendered by experts in the field.
With the advent of computers the whole process of Portfolio Analysis of Banking Sector
has become quite easy. The computer can absorb large amount of data, perform the
computations accurately and quickly give out the results in any desired form.Portfolios
now include not only domestic securities but also foreign securities. Diversification has
become international. In this context, financial investment cannot be conceived of with
out portfolio management. Another significant development in the field of investment
management is the introduction of derivative securities such as options and futures. The
trading in derivative securities, their

valuation, etc. have broadened the scope of

investment management.

ANALYSIS OF PORTFOLIO MANAGEMENT:

21

Analysis of Portfolio management:

Analysis of Portfolio management" is nothing but management of portfolio of an
investor. The objective is to analyse all the products available in details for an investor .
Analysis of Portfolio Analysis of Banking Sector includes analysis of various products
available to the investor like mutual funds, insurance, fixed deposits, saving bank account
and other Portfolio Analysis of Banking Sector services.

I ) MUTUAL FUNDS:
INTRODUCTION
Investments goals vary from person to person. While somebody wants security, others
might give more weightage to returns alone. Somebody else might want to plan for his
child's education while somebody might be saving for the proverbial rainy day or even life
after retirement. With objectives defying any range , it is obvious that the products required
will vary as well.
Indian Mutual Funds industry offers a plethora of schemes and serves broadly all tupe of
investors. The range of products includes equity funds, debt, liquid, gilt and balanced
funds. There are also funds meant exclusively for young and old, small and large investors.
Moreover, the setup of a legal structure, which has enough teeth to safeguard investors
intersts, ensures that the investors are not cheated out of their hard earned money. All in
all, benefits provided by them cut across the boundaries of investor category and thus
create for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt
for Mutual Funds for the sole reason that all benefits come in a package.The Mutual Fund
industry is having its hands full to cater to various needs of the investors by coming up with
new plans, schemes and options with respect to rate of returns, dividend frequency and
liquidity.

22

In view of the growing competition in the Mutual Funds industry, it was felt necessary to
study the investors orientation towards Mutual Funds i.e. their pattern of risk apetite and
preferences in various schemes, plans and options in order to provide a better service,The
study is an attempt in that direction.

ABOUT MUTUAL FUNDS:

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realised are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a Mutual Fund.

A Mutual fund is a body corporate registered with the Securities and Exchange Board of
India (SEBI) that pools up the money from individual/corporate investors and invests the
same on behalf of the investors/unit holders, in equity shares, Government securities,
Bonds, Call Money Markets etc, and distributes the profits. In the other words, a Mutual
Fund allows investors to indirectly take a position in a basket of assets.
23

Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread among a wide cross-section of industries and sectors
thus the risk is reduced. Diversification reduces the risk because all stocks may not move in
the same direction in the same proportion at same time. Investors of mutual funds are
known as unit holders.
The investors in proprotion to their investments share the profits of losses. The mutual
funds normally come out with a number of schemes with different investment objectives
which are launched from time to time. A Mutual Fund is required to be registered with
Securities Exchange Board of India (SEBI) which regulates securities markets before it can
collect funds from the public.

ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organizational set up
of a Mutual Fund:

Mutual Funds diversify their risk by holding a portfolio of instead of only one asset. This is
because by holding all your money in just one asset, the entire fortunes of your portfolio
depend on this one asset. By creating a portfolio of a variety of assets, this risk is
substantially reduced.
24

Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds
contains the same risk as investing in the markets, the only difference being that due to
professional management of funds the controllable risks are substantially reduced. A very
important risk involved in Mutual Fund investments is the market risk. When the market is
in doldrums, most of the equity funds will also experience a down turnover; the company
specific risks are largely eliminated due to professional fund management.
. TYPES OF MUTUAL FUNDS:
There are many types of mutual funds available to the investor.
Open-ended Mutual Funds:
An open-end fund is one that has units available for sale and repurchase at
investor can buy or redeem units from the fund itself at a price

all times. An

based on the net asset

value (NAV) per unit.

Closed-ended Mutual Funds:
A closed-end fund is one that has units available for fixed no of times. It does not allow
investors to buy or redeem units directly from the funds.
Exchange-traded funds
A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an
open-end investment company. ETFs combine characteristics of both mutual funds and
closed-end funds. ETFs are traded throughout the day on a stock exchange, just like closedend funds, but at prices generally approximating the ETF's net asset value. Most ETFs are
index funds and track stock market indexes.
Shares are issued or redeemed by institutional investors in large blocks (typically of
50,000). Most investors purchase and sell shares through brokers in market transactions.
Because the institutional investors normally purchase and redeem in in kind transactions,
ETFs are more efficient than traditional mutual funds.

25

Exchange-traded funds are also valuable for foreign investors who are often able to buy
and sell securities traded on a stock market, but who, for regulatory reasons, are limited in
their ability to participate intraditional U.S. mutual funds.
Equity funds
Equity funds, which consist mainly of stock investments, are the most common type of
mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the
United States. Often equity funds focus investments on particular strategies and
certaintypes of issuers.
Bond funds
Bond funds account for 18% of mutual fund assets. Types of bond funds include term
funds, which have a fixed set of time (short-, medium-, or long-term) before they
mature.Municipal bond funds generally have lower returns, but have tax advantages and
lower risk.
High-yield bond funds invest in corporate bonds, including high-yield or junk bonds With
the potential for high yield, these bonds also come with greater risk.
Funds of funds
Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds (i.e.,
they are funds comprised of other funds). The funds at the underlying level are typically
funds which an investor can invest in individually. A fund of funds will typically charge a
management fee which is smaller than that of a normal fund because it is considered a fee
charged for asset allocation services. The fees charged at the underlying fund level do not
pass through the statement of operations, but are usually disclosed in the fund's annual
report, prospectus, or statement of additional information.
The fund should be evaluated on the combination of the fund-level expenses and
underlying fund expenses, as these both reduce the return to the investor.
Hedge funds

26

Hedge funds in the United States are pooled investment funds with loose SEC regulation
and should not be confused with mutual funds. Some hedge fund managers are required to
register with SEC as investment advisers under the Investment Advisers Act. The Act does
not require an adviser to follow or avoid any particular investment strategies, nor does it
require or prohibit specific investments. Hedge funds typically charge a management fee of
1% or more, plus a "performance fee" of 20% of the hedge fund'sprofits. There may be a
"lock-up" period, during which an investor cannot cash in shares.
Mutual Fund types according to investment charges:
Load funds:
The charges made by the fund Managers to the investors to cover distribution
/sales/marketing expenses are often called Loads. In India, SEBI has defined a Load as
the one time fee payable by the investor to allow the fund to meet initial issue expenses
including brokers /agents /distributors commissions, advertising and marketing expenses.
Funds that charge front-end (Load charged at the time of investors entry in the scheme).
Back-end (Load charged at the time of investors exit from the scheme), or deferred loads
(Load charges to the scheme over a period of time) are called Load Funds.
No Load Funds:
Funds that make no charges, mentioned above for sales expenses are called No-Load funds

Tax Exempt Funds:

When a fund invests in tax-exempt securities, it is called Tax-exempt fund. In India, after
the 1999 Union Government Budget all of the dividend income received from any of the
mutual funds is tax-free in the hands of the investor.
27

Non Tax exempt funds:

Except equity mutual fund schemes are tax-exempt investment avenues. While other funds
are taxable for distributable income.
Mutual Fund types according to investment objective:
Mutual Funds / Schemes can also be classified on the basis of the nature of their Portfolio
and investment objective i.e., whether they invest in equities or fixed income securities or
some combination of both.
Equity Fund is the one in which much of the portfolio is invested in corporate securities
and Debt Fund is the one in which much of the portfolio is invested in Gilt and money
market securities.
In an Open-ended Mutual Fund, there are no limits on the total size of the corpus. Investors
are permitted to enter and exit the open-ended Mutual Fund at any point of time at a price
that is linked to the net asset value (NAV).
In case of Closed-ended funds, the total size of the corpus is limited by the size of the
initial offer.

II ) INSURANCE
The pooling of fortuitous losses by transfer of such risks to insurers, who agree to
indemnify insureds for such losses, to provide other pecuniary
occurrence, or to render services connected with the risk.

28

benefits on their

Insurance has its basic characteristics they are:

Pooling of losses:
It refers to the spread of loss of many one to many, in order to substitute actual loss with
average loss. Thus pooling technique involves sharing of losses and also prediction of
future losses.
Fortuitous Losses:
It pays fortuitous or accidental losses. Insurance covers unforeseen and unexpected or
accidental losses, which have been grouped under fortuitous losses and are unintentional
and occur due to a chance factor.
Transfer of Risk:
Insurance essentially involves transfer of risk from insured to the insurer. Since an insurer
is in a better financial position then individual insureds, he indemnifies the insured for
losses due to premature death, poor health, disability, theft or loss of property etc.
Indemnification:
Indemnification means restoring the insured to his financial position prior to suffering a
loss.

29

CLASSIFICATION OF INSURANCE BUSSINESS:

The insurance business was nationalized in 1956. Insurance business may be classified
broadly in two categories

Life insurance bussines:

life insurance business" means the business of effecting contracts of insurance upon
human life, including any contract whereby the payment of money is assured on death
(except death by accident only) or the happening of any Life Insurance Corporation of
India was established under Life Insurance Corporation Act,1956 to carry on Life Insurance
Business. Accordingly, the Life Insurance business was conducted only by the Life
Insurance Corporation of India. But now the Life Insurance Corporation Act,1956 has been
amended and private companies are also allowed to carry on Life Insurance Business.
Under Life Insurance contracts, the insurance company, in consideration of some regular
payment called premium guarantees to pay to the policy holder, or nominee, on reaching a
certain age or his death, whichever is earlier, a certain sum of money called policy amount.

General insurance business:

General Insurance covers all types of insurances except life insurance, such as fire
insurance, marine insurance, accident insurance etc. A common characteristic of all types
of general insurance is that a policy covers one year. The premium paid by the policy
holder provides protection to him for one year commencing with the date of payment of
premium. If there is no damage or loss during the year, there is no claim and, of course, the
premium paid is not refunded.

30

THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT,

1999:
An Act to provide for the establishment of an Authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance industry
and for matters connected therewith or incidental there to and f urther to amend the Act,
1938, the Life Insurance Corporation Act, 1956 and the General Insurance
Business(Nationalisation) Act, 1972..
(1) This Act may be called the Insurance Regulatory and Development Authority Act,
1999.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by notification in
the Official Gazette, appoint: Provided that different dates may be appointed for different
provisions of this Act and any reference in any such provision to the commencement of this
Act shall be construed as a reference to the coming into force of that provision.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
Establishment and incorporation of Authority.(1) With effect from such date as the Central Government may, by notification, appoint,
there shall be established, for the purposes of this Act, an Authority to be called "the
Insurance Regulatory and Development Authority".
(2) The Authority shall be a body corporate by the name aforesaid having perpetual
succession and a common seal with power, subject to the provisions of this Act, to acquire,
hold and dispose of property, both movable and immovable, and to contract and shall, by
the said name, sue or be sued.
(3) The head office of the Authority shall be at such place as the Central Government may
decide from time to time.

31

(4) The Authority may establish offices at other places in India.

Composition of Authority:
The Authority shall consist of the following members, namely:(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members, to be appointed by the Central Government from
amongst persons of ability, integrity and standing who have knowledge or experience in
life insurance, general insurance, actuarial science, finance, economics, law, accountancy,
administration or any othe discipline which would, in the opinion of the Central
Government, be useful to the Authority.
Provided that the Central Government shall, while appointing the Chairperson and the
whole-time members, ensure that at least one person each is a person having knowledge or
experience in life insurance, general insurance or actuarial science, respectively.

32

III) Savings Bank Account

A Saving Bank account (SB account) is meant to promote the habit of saving among
thepeople. It also facilitates safekeeping of money. In this scheme fund is allowed to be
withdrawn whenever required, without any condition. Hence a savings account is a safe,
convenient and affordable way to save your money. Bank deposits are fairly safe because
banks are subject to control of the Reserve Bank of India with regard to several policy and
operational parameters. Bank also pays you a minimal interest for keeping your money
with them.
Features:
The minimum amount to open an account in a nationalized bank is Rs 100. If cheque books
are also issued, the minimum balance of Rs 500 has to be maintained. However in some
private or foreign bank the minimum balance is Rs 500 or more and can be up Rs. 10,000.
One cheque book is issued to a customer at a time.
A Savings account can be opened either individually or jointly with another individual. In a
joint account only the sign of one account holder is needed to write a cheque. But at the
time of closing an account, the sign of the both the account holders are needed.
Return:
The interest rate of savings bank account in India varies between 2.5% and 4%. In Savings
Bank account, bank follows the simple interest method. The rate of interest may change
from time to time according to the rules of Reserve Bank of India. One can withdraw
his/her money by submitting a cheque in the bank and details of the account, i.e the Money
deposited, withdrawn along with the dates and the balance, is recorded in a passbook.
Advantages:
It's much safer to keep your money at a bank than to keep a large amount of cash in your
home. Bank deposits are fairly safe because banks are subject to control of the Reserve
Bank of India with regard to several policy and operational parameters. The federal

33

Government insures your money. Saving Bank account does not have any fixed period for
deposit. The depositor can takemoney from his account by writing a cheque to somebody
else or submitting a cheque directly. Now most of the banks offer various facilities such as
ATM card, credit card etc. Through debit/ATM card one can take money from any of the
ATM centres of the particular bank which will be open 24 hours a day. Through credit card
one can avail shopping facilities from any shop which accept the credit card. And many of
the banks also give internet banking facility through with one do the transactions like
withdrawals, deposits, statement of account etc
How to open
Savings Bank Account can be opened in the name of an individual or in joint names of the
depositors by filling up the appropriate forms. A minor who have completed ten years of
age can also open and operate the account. At the time of opening an account one must
submit the documents like photocopy of passport or Electoral card, Postal identification
cards as address proof and two passport size photos.
Most banks also require an introduction for opening an SB account. The introduction may
be obtained either from an existing account holder or from a respectable citizen, well
known to the bank, who should normally call on the bank and sign in the column specially
provided for the purpose of introduction in the account opening form.

34

IV ) Fixed Deposit
A fixed deposit is meant for those investors who want to deposit a lump sum of money for
a fixed period; say for a minimum period of 15 days to five years and above, thereby
earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at
the maturity of the deposit. Bank fixed deposits are one of the most common savings
scheme open to an average investor. Fixed deposits also give a higher rate of interest than a
savings bank account.
The facilities vary from bank to bank. Some of the facilities offered by banks are
overdraft (loan) facility on the amount deposited, premature withdrawal before maturity
period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks
are subject to control of the Reserve Bank of India.
Features:
Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of
India (RBI) with regard to several policy and operational parameters. The banks are free to
offer varying interests in fixed deposits of different maturities. Interest is compounded once
a quarter, leading to a somewhat higher effective rate. The minimum deposit amount
varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with
some banks. Deposits can be made in multiples of Rs. 100/. Before opening a FD account,
try to check the rates of interest for different banks for different periods. It is advisable to
keep the amount in five or ten small deposits instead of making one big deposit. In case of
any premature withdrawal of partial amount, then only one or two deposit need be
prematurely encashed. The loss sustained in interest will, thus, be less than if one big
deposit were to be encashed. Check deposit receipts carefully to see that all particulars have
been properly and accurately filled in. The thing to consider before investing in an FD is
the rate of interest and the inflation rate. A high inflation rate can simply chip away your
real returns.

35

Returns:
The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending
on the maturity period (duration) of the FD and the amount invested. Interest rate also
varies between each bank. A Bank FD does not provide regular interest income, but a lumpsum amount on its maturity. Some banks have facility to pay interest every quarter or every
month, but the interest paid may be at a discounted rate in case of monthly nterest. The
Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current
Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6
months, 1 year, 1.5 years to 10 years.

Duration

Interest rate (%) per annum

15-30 days

4 -5 %

30-45 days

4.25-5 %

46-90 days

4.75--5.5 %

91-180 days

5.5-6.5 %

181-365 days

5.75-6.5 %

1-2 years

6-8 %

2-3 years

6.25-8 %

3-5 years
Advantages

6.75-8

Bank deposits are the safest investment after Post office savings because all bank deposits
are insured under the Deposit Insurance & Credit Guarantee Scheme of India. It is possible
to get a loans up to75- 90% of the deposit amount from banks against fixed deposit

36

receipts. The interest charged will be 2% more than the rate of interest earned by the
deposit. With effect from A.Y. 1998-99, investment on bank deposits, along with other
specified incomes, is exempt from income tax up to a limit of Rs.12, 000/- under Section
80L. Also, from A.Y. 1993-94, bank deposits are totally exempt from wealth tax. The 1995
Finance Bill Proposals introduced tax deduction at source (TDS) on fixed deposits on
interest incomes of Rs.5000/- and above per annum.
How to apply
One can get a bank FD at any bank, be it nationalised, private, or foreign. You have to open
a FD account with the bank, and make the deposit. However, some banks insist that you
maintain a savings account with them to operate a FD. When a depositor opens an FD
account with a bank, a deposit receipt or an account statement is issued to him, which can
be updated from time to time, depending on the duration of the FD and the frequency of the
interest calculation. Check deposit receipts carefully to see that all particulars have been
properly and accurately filled in.

37

Data Analysis

Fixed deposit rates in public and private sector banks

Public Sector Banks

38

Fixed Deposit Rates in Public Sector Banks

Bank Name

1530466129
45
60
90
Days Days Days Days

91120
Days

120179
Days

180270
Days

271364
Days

Up to
5
Years

With
effect
from

Allahabad
Bank

5.00

5.50

6.50

6.50

7.00

7.00

8.00

8.00

9.50 10.00 10.50 11.00

1-4-99

Andhra Bank

5.50

5.50

7.00

7.00

8.00

8.00

9.50

9.50 10.00 10.50 11.00 11.00

1-4-99

Bank of
Baroda

5.00

5.00

6.00

6.00

6.00

6.00

7.00

7.00

8.00

9.51 10.50 10.50

5-4-99

Bank of India

5.00

5.00

5.50

6.50

6.50

6.50

7.00

7.00

8.00

9.50 10.00 10.00

21-7-99

Canara Bank

5.00

5.00

6.00

Central Bank

5.00

6.00

6.50

6.00

6.50

6.50

7.50

7.50

9.00

9.50 10.00 10.00

16-8-99

6.50

7.00

7.00

8.50

8.50

9.50

9.50 10.50 10.50

12-3-99

Dena Bank

6.00

6.00

Indian Bank

5.00

5.00

6.25

6.25

6.75

6.75

7.75

7.75

9.00 10.00 10.50 10.50

9-8-99

7.00

7.00

8.00

8.00

8.50

8.50 10.00 10.50 11.00 11.00

17-5-99

Indian
Overseas
Bank

5.00

5.00

6.00

6.00

7.50

7.50

8.00

8.00

9.50 10.00 10.50 10.50

1-4-99

Oriental Bank

5.00

5.00

6.50

6.50

7.00

7.00

8.00

8.00

9.50 10.00

10.5

10.5

1-4-99

Punjab & Sind

Bank

6.00

6.00

6.50

6.50

7.00

7.00

8.00

8.00

9.50 10.00

10.5

10.5

18-5-99

State Bank of
Hyderabad

5.00

5.00

6.50

6.50

7.00

7.00

8.00

8.00

9.50

9.50 10.50 10.50

15-3-99

State Bank of
India

5.00

5.00

5.50

5.50

5.50

5.50

7.00

7.00

9.00

9.50 10.50 10.50

15-3-99

State Bank of
Mysore

5.00

5.00

5.50

5.50

5.50

5.50

7.00

7.00

9.00

9.50 10.50 10.50

5-3-99

S.B.T

5.00

6.00

6.50

7.00

8.00

8.00

8.00

8.00

9.00 10.00 10.50 10.50

Syndicate
Bank

5.00

5.50

7.00

7.00

7.25

7.25

8.00

8.00 10.00 10.50 11.25 11.25

15-3-99

U.B.I

5.00

5.00

6.00

6.50

7.00

7.00

8.00

8.00

10.5

1-4-99

North Malabar
Grameen
Bank

5.00

7.00

8.00

8.00 10.00 10.00 10.00 10.00 10.50 11.00 11.00 12.00

1-12-99

Vijaya Bank

5.00

6.00

7.00

7.00

8.00

8.00

9.00

9.00

1-2
Years

2-3
Years

9.00 10.00

3-5
Years

10.5

9.50 10.50 11.00 11.00

8-3-99

Private Sector Banks

Fixed Deposit Rates in Private Sector Banks

Name of the
Bank

1529

3045

4660

6190

91- 120120 179

39

180270

271364

1 -2
Years

2-3
Years

3-5
Years

Up to
With
5 effective

days Days Days Days Days Days

Days

Days

Years

from

Bank of Madura

5.50

6.50

6.50

7.50

8.50

8.50

9.50

9.50 10.00 10.50 11.00 11.00

16-8-99

Centurion Bank

6.50

8.00

8.25

8.50

9.25

9.25 10.25 10.25 10.50 11.25 11.25 11.25

24-6-99

City Union Bank 5.00

6.00

7.00

8.00

9.00

9.00 10.00 10.00 10.50 10.50 10.00 10.00

1-6-99

Global Trust
India

6.50

8.00

8.00

8.00

9.25

9.25 10.00 10.00

H.D.F.C Bank

5.00

8.00

8.00

8.00

9.00

9.00 10.00 10.00 10.00 10.00 10.00

I.C.I.C.I Bank

5.00

6.00

7.00

7.00

8.00

8.00 10.00 10.00 10.50 10.50 10.50 10.50

I.D.B.I.

5.00

8.00

8.00

8.00

9.00

9.00

IndusInd Bank

5.50

8.00

8.00

8.00

9.00

9.00 10.00 10.00

Lord Krishna
Bank

5.50

5.50

8.00

8.00

8.00

8.00

Tamilnadu
6.00
Mercantile Bank

6.00

7.50

7.50

Catholic Syrian
Bank

6.00

6.00

8.00

Dhana lakshmi
Bank

7.00

7.00

Federal Bank

5.00

J.& K. Bank

9.50

10-4-99
1-8-99

- 11.25 11.25 11.25

2-8-99

9.50 11.25 11.25 11.25 11.25

1-5-99

9.50

9.50 10.50 10.50 11.00 11.00 11.50 11.50

7-5-99

8.00

8.50

8.50

9.00

9.00 10.00 10.50 11.00 11.00

19-4-99

8.00

8.00

9.00

9.00

9.50

9.50 10.50 11.00 11.50 11.50

1-9-99

5.00

7.00

7.00

7.50

7.50

8.00

8.00

9.50 10.00 10.75 10.75

1-9-99

5.50

5.50

7.00

7.00

9.25

9.25 10.00 10.00 10.25 10.50 11.00 11.00

15-1299

South Indian
Bank

5.00

5.00

7.00

7.00

7.50

7.50

9.50 10.25 10.75 10.75

15-9-99

Nedungadi
Bank

6.00

6.00

8.00

8.00

9.00

9.00 10.00 10.00 10.50 11.50 11.50 11.50

1-4-99

Vysya Bank

5.75

5.75

7.25

7.25

8.25

8.50

2-8-99

Times Bank

6.00

8.00

8.00

8.00

9.00

9.00 10.00 10.00

U.T.I. Bank

5.50

8.00

8.00

8.00

9.00

9.00

9.00
-

8.50

- 10.50

18-8-99

21-8-99

8.50

- 11.25 11.50

9.50

9.50

9.00 10.50 10.75 11.00 11.00

-

10.5

10.5

10.5

16-8-99

11.5

11.5

1-5-99

V ) Portfolio Analysis of Banking Sector Services

Portfolio Analysis of Banking Sector Services (PMS) has two new offerings, the Growth
Scheme and the Arbitrage Scheme, aimed at investors with low to moderate risk appetite

40

seeking to maximise returns on investments in this challenging economic environment.

Dedicated wealth managers will help the investors to carefully understand their financial
goals and advise them with the right product mix. It has robust Portfolio Analysis of
Banking Sector

software that enables the entire construction, monitoring and risk

management processes. It relieves investors from all the administrative hassles by using
proactive reporting measures.
PMS is fast gaining eminence as an investment avenue of choice for High Networth
Investors. While offering a range of specialized investment strategies to capitalize on
opportunities in the market,

Wealth's PMS combines competent fund management,

dedicated research and state of art technology, thereby ensuring a rewarding experience for
all clients. It will ensure that investors with unique needs, varying risk appetite and
focussed financial goals can maximise returns on investments and also get multiple
conveniences and benefits even in today's challenging financial environment."
Wealth PMS offers several benefits to investors. We professionally manage equity
investments with an aim to deliver consistent return while having a prudent eye on risk. We
have a well-defined investment philosophy & strategy, which acts as a guiding principle in
defining the investment universe. We understand the dynamics of equity as an asset class
and track investments continuously to maximize the returns. Dedicated wealth managers
will act as one-point contact, bestow personalized service and ensure that investors receive
periodic account performance reports."
Wealth Management is a new generation India venture targeted towards bringing a tangible
change to managing personal and family wealth. It recognises the essence of personal
savings and the need for financial understanding leading to long term peace of mind.
Tailoring unique solutions and providing access to our quality people both locally and
globally in order to provide a truly international standard within a proven risk management
and governance framework is the declared motto.
Strong proprietary research underpinned by proactive advice and communication will mean
our clients will be kept abreast and comfortable at all times. We seek to make a difference
and bring financial advice in an answerable and responsible manner to deserving people
who aspire to be financially secure and safe.
41

The Arbitrage Scheme is formulated to generate consistent reurns on a regular basis under
low risk environment to outperform the fixed income bearing financial instruments by
reasonably good margin. The scheme is recommended for investors with very low-risk
profile desiring higher liquidity and looking for regular, consistent and reasonable returns
to outperform inflation with reasonably good margin on a short (6 month & above) to
longer time horizon. Under this scheme, the minimum ticket size has been kept at Rs. 50
lacs for individuals & Rs. 1 crore for the corporate clients.
The Growth Scheme is formulated to primarily invest in equity or equity related
instruments to grow the wealth of the investor with medium to longer time horizon. The
scheme is suggested for investors with moderate risk appetite having inclination for better
than market returns on the portfolio during medium to long term perspective of 18 to 36
months. The minimum ticket size for this scheme is Rs. 10 lacs & Rs. 20 lacs for individual
& corporate investors respectively.
Arbitrage Scheme Investment Strategy:
The objective is to provide consistent, positive returns by taking advantage of mispricing
across different segments of financial markets; e.g., spot v/s future; NSE v/s BSE capital
markets; future v/s future, etc. It is a directionneutral arbitrage portfolio scheme. The
portfolio manager will enter into simultaneous transactions of long-position in one market
segment and short-position in other market segment, eventually creating a hedge. It
envisages index arbitrage where Nifty or any other index is bought/sold and the underlying
component basket of shares are sold/bought to lock in a profit in cash/future segment. It
envisages various derivative strategies & special situation arbitrage opportunities such as
dividend arbitrage & buy-back arbitrage. It offers extensive use of in-house developed
statistical & technical software to enhance the returns. It also provides optimal use of
algorithmic trading system to ensure fast, seamless & efficient execution of various
strategies to maximize the returns.
Growth Scheme Investment Strategy:
The objective is to provide unbiased equities investment strategy based on rigorous
fundamental analysis, while taking cognizance of market conditions & movements. It seeks
42

to use a combination of "top-down" and "bottom-up" approach to arrive at a basket of

investment-worthy stocks. It offers qualitative buy-and-hold strategy based on
fundamentals and flexible style large cap with long-term vision; fine balance between
value and growth stocks and mid-cap value investing; and use of hedging strategies to limit
the downside loss in market from time to time. The cash component is parked in liquid
funds/ bank deposit/ any other liquid money market instruments. It is diversified across
sectors and stocks with no concentration risk with priority to quality management with
intent of good corporate governance.
- End Wealth brings together a unique combination of attributes - combining comprehensive
knowledge base of one of India's most dynamic full services brokerage houses with the
highly responsive service & specialist wealth management expertise of an international
financial services' giant. The company takes pride in a strong talent pool with rich
international & onshore experience. Senior professionals drawn from globally reputed
MNC institutions are at the helm of its affairs providing focussed leadership & ensuring a
holistic Wealth Management approach.
In Wealth Management, it offers Financial Planning, Wealth Creation Advisory and Inhouse Research. In Wealth Creation, it offers PMS Schemes, Portfolio Advisory, Equity &
Derivatives Trading, Commodity Trading, Currency Trading, Depository Services, Mutual
Funds & IPOs, Fixed Income Products, Structured Products, Real Estate Funds, Risk-free
Arbitrage Products, Life & Non-Life Insurance Products, Alternate Asset Classes and
International Investment Products. Consistent with its global strategy, this partnership
enables the JV to focus on clients and distribution strengths

Introduction of Investment process:

The investment process will be dealt in all its aspects. The investment process helps the
entrepreneur to make a clear assessment of the rate of return on his investments in a
short and long-term basis:

43

Characteristics of Investment
The entrepreneur has to weigh the alternative investment process in accordance with his
preferences to achieve his business goal. The principal characteristics of investment are:
i. Risk:
Risk is inherent in any investment. This risk may relate to loss of capital, delay in
repayment of capital, non payment of interest, or variability of returns.
ii. Return:
All investments are characterized by the expectation of a return. In fact, investments are
made with the primary objective of deriving a return. The return may be received in the
form of yield plus capital appreciation.
iii. Safety:
the safety of an investment implies the certainty of return of capital with out loss of
money or time. Safety is another feature which an investor desires for his investments.
iv. Liquidity:
an investment which is easily saleable or marketable with out loss of money and with out
loss of time is said to process liquidity.
Investment Profile of an Entrepreneur
The investment process of an entrepreneur is multi-dimensional. He invests in land and
building, machinery and tools, procuring raw material, marketing etc. The entrepreneur
has to evaluate each process in an in-depth manner to gain from the investment decision.
Classification
Investment proposals are broadly classified as follows:
1.Replacement Investments
2. Modernization Investments
3. Rationalization Investments
4. Expansion Investments
5. New Product Investments
6. Research and Development Investments
7. Marketing and sales investments
8. Human resource development investments
9. Welfare investments
10. Obligatory investments

44

Utility of Investment
Investments play a vital role in the overall economic development. In fact, the quantum
of investment decides the process and direction of growth. In case of manufacturing
enterprises investment determines its performance.
Broadly, the utility of investment is directed towards development, profit, Power, wealth,
capital generation and social good.
INVESTMENT PROCESS
We follow a bottom-up approach to building a portfolio, which means that we pick
individual companies on a case-by-case basis on their own merits, rather than allocate
portfolio quotas, or invest based on sector momentum. To be successful with this
approach, it is imperative that we should have comprehensive coverage of the stocks we
analyze. We need

equity research

analysts, supporting the analysts are sector

specialists.
Sector specialists are support analysts, which means that they track aggregate sectors,
help build valuation models, and do preliminary ground-work on companies.
Each primary research analyst focuses on companies within a few select sectors. Their
research companies both qualitative and quantitative elements. Perhaps the most
important aspect on the qualitative side is their meetings with management, where a lot
of information on the health of a company can be extracted that may not be be found
purely by analyzing a balance sheet. Beyond management, they also speak to suppliers,
distributors, customers, competitors, and other stakeholders to get a sense of a companys
potential.
Of course, the quantitative aspects of our equity research process form the backbone of
our investment decision. They include building valuation frame works for the companys
industry and the company itself, comprehensive balance sheet and income statement
analysis, and trying to understand the macro-variables that could influence the stock price

45

factors that affect the overall economy and the companys sector, as well as currency
risks, interest rate changes, etc.
Ultimately the investment decision rests with the portfolio manager. When the elements
of this holistic approach are in place, the analysts float their stock recommendations to
portfolio manager and he take the final call.
The investment process is generally described in four stages. These stages are:
1. Investment policy,
2. Investment analysis,
3. Valuation of securities, and
4. Portfolio construction.

Portfolio construction re-quires knowledge of the different aspects of securities. These

are briefly recapitulated here, consisting of safety and growth of principal liquidity of
assets after taking into account the stage involving investment timing,selection
investment, al-location of savings to different investments and feedback of portfolio as
given in the table below:
The Process of Investing
I . Investment Policy

Determination of ingestible wealth

Determination of portfolio objectives Identification of potential investment assets

Consideration of attributes of investment assets

46

Allocation of wealth to asset categories.

II. Investment Valuation

Valuation of stocks

Valuation of Debentures and bonds

Valuation of other assets

III. Investment Analysis

IV. Portfolio Construction

Determination of diversification level Consideration of investment timing Selection of
investment assets Allocation of ingestible wealth to investment assets Evaluation of
portfolio for feedback.

Portfolio Construction
In today's financial marketplace, a well-maintained portfolio is vital to any investor's
success. As an individual investor, you need to know how to determine an asset
allocation that best conforms to your personal investment goals and strategies. In other
47

words, your portfolio should meet your future needs for capital and give you peace of
mind. Investors can construct portfolios aligned to their goals and investment strategies
by following a systematic approach. Here we go over some essential steps for taking such
an approach.
Step 1: determining the Appropriate Asset Allocation
Ascertaining the individual financial situation and investment goals is the first task in
constructing a portfolio. Important items to consider are age, how much time you have to
grow your investments, as well as amount of capital to invest and future capital needs. A
single college graduate just beginning his or her career and a 55-year-old married person
expecting to help pay for a child's college education and plans to retire soon will have
very different investment strstigies.
A second factor to take into account is your personality and risk tolerance. Is he the kind
of person who is willing to risk some money for the possibility of greater returns?
Everyone would like to reap high returns year after year, but if you are unable to sleep at
night when your investments take a short-term drop, chances are the high returns from
those kinds of assets are not worth the stress.
As you can see, clarifying your current situation and your future needs for capital, as well
as your risk tolerance, will determine how your investments should be allocated among
different asset classes. The possibility of greater returns comes at the expense of greater
risk of losses (a principle known as the risk/return tradeoff) - you don't want to eliminate
risk so much as optimize it for your unique condition and style. For example, the young
person who won't have to depend on his or her investments for income can afford to take
greater risks in the quest for high returns. On the other hand, the person nearing
retirement needs to focus on protecting his or her assets and drawing income from these
assets in a tax-efficient manner.
Conservative Vs. Aggressive Investors
Generally, the more risk you can bear, the more aggressive your portfolio will be,
devoting a larger portion to equities and less to bonds and other fixed-income securities.
Conversely, the less risk that's appropriate, the more conservative your portfolio will be.

48

Here are two examples: one suitable for a conservative investor and another for the
moderately aggressive investor.

The main goal of a conservative portfolio is to protect its value. The allocation shown
above would yield current income from the bonds, and would also provide some longterm capital growth potential from the investment in high-quality equities.

A moderately aggressive portfolio satisfies an average risk tolerance, attracting those

willing to accept more risk in their portfolios in order to achieve a balance of capital
growth and income.

Step 2: Achieving the Portfolio Designed in Step 1

Once you've determined the right asset allocation, you simply need to divide your capital
between the appropriate asset classes. On a basic level, this is not difficult: equities are
equities, and bonds are bonds.

49

But you can further break down the different asset classes into subclasses, which also
have different risks and potential returns. For example, an investor might divide the
equity portion between different sectors and market caps, and between domestic and
foreign stock. The bond portion might be allocated between those that are short term and
long

term,

government

versus

corporate

debt

and

so

forth.

Step 3: Reassessing Portfolio Weightings

Once you have an established portfolio, you need to analyze and rebalance it periodically
because market movements may cause your initial weightings to change. To assess your
portfolio's actual asset allocation, quantitatively categorize the investments and determine
their values' proportion to the whole.
The other factors that are likely to change over time are your current financial situation,
future needs and risk tolerance. If these things change, you may need to adjust your
portfolio accordingly. If your risk tolerance has dropped, you may need to reduce the
amount of equities held. Or perhaps you're now ready to take on greater risk and your
asset allocation requires that a small proportion of your assets be held in riskier small-cap
stocks.
Essentially, to rebalance, you need to determine which of your positions are over
weighted and underweighted. For example, say you are holding 30% of your current
assets in small-cap equities, while your asset allocation suggests you should only have
15% of your assets in that class. Rebalancing involves determining how much of this
position

you

need

to

reduce

and

allocate

to

other

classes.

Step 4: Rebalancing Strategically

Once you have determined which securities you need to reduce and by how much, decide
which underweighted securities you will buy with the proceeds from selling the over
weighted securities.
When selling assets to rebalance your portfolio, take a moment to consider the tax

50

implications of readjusting your portfolio. Perhaps your investment in growth stocks has
appreciated strongly over the past year, but if you were to sell all of your equity positions
to rebalance your portfolio, you may incur significant capital gains taxes. In this case, it
might be more beneficial to simply not contribute any new funds to that asset class in the
future while continuing to contribute to other asset classes. This will reduce your growth
stocks' weighting in your portfolio over time without incurring capital gains taxes.
At the same time, always consider the outlook of your securities. If you suspect that those
same over weighted growth stocks are ominously ready to fall, you may want to sell in
spite of the tax implications. Analyst opinions and research reports can be useful tools to
help gauge the outlook for your holdings. And tax-loss selling is a strategy you can apply
to reduce tax implications.
Importance of Diversification.
Throughout the entire portfolio construction process, it is vital that you remember to
maintain your diversification above all else. It is not enough simply to own securities
from each asset class; you must also diversify within each class. Ensure that your
holdings within a given asset class are spread across an array of subclasses and industry
sectors.
As we mentioned, investors can achieve excellent diversification by using mutual funds
and ETFs. These investment vehicles allow individual investors to obtain the economies
of scale that large fund managers enjoy, which the average person would not be able to
Produce with a small amount of money.

DATA ANALYSIS AND INTERPRETATION

It shows the calculation of Expected Return and Standard
Deviation:
a) Expected return:

51

The expected return on a portfolio is the weighted average of the returns of individual
assets, where each asset's weight is determined by its weight in the portfolio.
The formula is:
E (Rp) = [WaX E (Ra)] + [WaX E (Ra)]
Where
E= is stands for expected
Rp= Return on the portfolio
Wa= Weight of asset n where n may stand for asset a, betc.
Ra= Return on asset n where n may stand for asset a, betc
b) Standard deviation:
The portfolio standard deviation (p) measure the risk associated with the expected return
of the portfolio.
The formula is

p = (wa2 2 + wa2 2 + 2wawbrab a b)

The term rab represents the correlation between the returns of investments a and b. The
correlation coefficient, r, will always reduce the portfolio standard deviation as long as it
is less than +1.00.

Company name

Standard deviation (%)

Expected return (%)

CEMENT
GACL
LNT

19.03
63.69

52

56.91
65.12

PHARMACEUTICAL
RANBAXY
CIPLA

9.02
-8.25

54.82
52.43

13.71
125.18

17.97
126.51

12.46
49.43

68.25
38.83

-13.68
16.82

34.76
40.41

TELECOM
MTNL
BHARTI ARTL
BANKING
ING VYSYA
ICICI
I.T.
WIPRO
SATYAM

It shows the calculation of Portfolio Returns and Risks of

Companies:
RISK:
Risk refers to the probability that the return and therefore the value of an asset or security
may have alternative outcomes. Risk is uncertainty of the income/capital appreciation or
loss of both. All investments are risky. The higher the risk taken, the higher is the return.

53

RETURN:
Return-yield or return differs from the nature of instruments, maturity period and the
creditor or debtor nature of the instrument and a host of other factors. The most important
factor influencing return is risk return is measured by taking the price income plus the
price change.

Company name
CEMENT
GACL
LNT
PHARMACEUTICAL
RANBAXY
CIPLA
TELECOM
MTNL
BHARTI ARTL
BANKING
ING VYSYA
ICICI
I.T.
WIPRO
SATYAM

Returns (%)

Risks (%)

38.2338

44.23

-0.6512

48.63

253.99

252.45

48.3209

38.81

-1.175

28.47

54

It shows the calculation of correlation coefficient between the

companies:
Correlation coefficient:
The correlation coefficient is obtained by dividing the covariance by the product of the
standard deviation of the two securities. To facilitate comparison covariance can be
standardized.

rABCompany
= CovABname
/ AB

Correlation coefficient (r)

CEMENT
GACL
LNT

0.66

PHARMACEUTICAL
RANBAXY
CIPLA

0.65

TELECOM
MTNL
BHARTI ARTL

0.95

BANKING
ING VYSYA
ICICI

0.54

I.T.
WIPRO
SATYAM

0.17

It shows the calculation of Average return of companies:

55

Average return = R/N

GUJARAT AMBUJA CEMENT LTD (GACL):
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

164.00

303.85

139.85

85.27

2010-2011

306.10

401.55

95.45

31.18

2011-2012

405.00

79.60

-325.40

-80.35

2012-2013

80.00

141.30

61.30

76.63

2013-2014

144.80

119.35

-25.45

-17.58

Year

95.15

TOTAL RETURN
Average return = 95.15/5 = 19.03
LARSEN AND TOUBRO (LNT):
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

213.70

527.35

313.65

146.77

2010-2011

530.00

982.00

452.00

85.28

2011-2012

988.70

1844.20

855.50

86.53

2012-2013

1845.00

1442.95

-402.05

-21.79

2013-2014

1400.00

1703.20

303.20

21.66

Year

TOTAL RETURN
Average return = 318.45/5 = 63.69
RANBAXY LABORATORIES:

56

318.45

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

597.80

1098.20

500.40

83.71

2010-2011

1100.10

1251.40

151.30

13.75

2011-2012

1252.00

362.35

-889.65

-71.06

2012-2013

364.40

391.85

27.45

7.53

2013-2014

393.00

349.15

-43.85

11.16

Year

45.09

TOTAL RETURN
Average return = 45.09/5 =9.02

CIPLA:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

904.00

1317.25

413.25

45.71

2010-2011

1339.00

317.25

-1021.75

-76.31

2011-2012

320.00

443.40

123.40

38.56

2012-2013

445.00

250.70

-194.30

-43.66

2013-2014

253.40

239.30

-14.10

-5.56

Year

TOTAL RETURN
Average return = -41.26/5 = -8.25

MTNL:

57

-41.26

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

95.15

137.70

42.55

44.72

2010-2011

139.10

154.90

15.80

11.36

2011-2012

156.00

144.20

11.80

7.56

2012-2013

145.20

142.85

-2.35

-1.62

2013-2014

143.00

152.35

9.35

6.54

Year

68.56

TOTAL RETURN
Average return = 68.56/5 = 13.71
BHARTI ARTL:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

23.50

105.10

81.60

347.23

2010-2011

106.25

215.60

109.35

102.92

2011-2012

218.90

345.70

126.80

57.93

2012-2013

348.90

628.85

279.95

80.24

2013-2014

635.00

862.80

227.80

35.87

Year

TOTAL RETURN
Average return = 624.19/5 = 125.18

ING VYSYA:

58

624.19

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

2009-2010

252.05

549.00

296.95

117.81

2010-2011

560.00

585.75

25.75

4.60

2011-2012

585.00

162.25

-422.75

-72.26

2012-2013

164.50

157.45

-7.05

-4.29

2013-2014

159.00

185.15

26.15

16.45

Year

(P1-P0)/
P0*100

62.31

TOTAL RETURN
Average return = 62.31/5 = 12.46

ICICI:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

141.70

295.70

154.00

108.68

2010-2011

299.70

370.75

71.05

23.71

2011-2012

374.85

584.70

209.85

55.98

2012-2013

586.25

890.40

304.15

51.88

2013-2014

889.00

950.25

61.25

6.89

Year

TOTAL RETURN
Average return = 247.14/5 = 49.43

WIPRO:

59

247.14

Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

2009-2010

1644.40

1737.60

93.2

5.67

2010-2011

1744.40

748.00

-996.40

-57.12

2011-2012

753.00

463.45

-289.55

-38.45

2012-2013

464.00

604.55

140.55

30.29

2013-2014

607.90

554.35

-53.55

-8.81

Year

(P1-P0)/
P0*100

-68.42

TOTAL RETURN
Average return = -68.42/5 = -13.68
SATYAM COMP:
Opening
share price
(P0)

Closing
share price
(P1)

(P1-P0)

(P1-P0)/
P0*100

2009-2010

280.10

367.35

87.25

31.15

2010-2011

370.00

409.90

39.90

10.78

2011-2012

412.00

737.80

325.80

79.08

2012-2013

740.70

483.95

-256.75

-34.66

2013-2014

486.00

474.95

-11.05

-2.27

Year

TOTAL RETURN
Average return = 84.08/5 = 16.82

CALCULATION OF STANDARD DEVIATION:

Standard Deviation = Variance
60

84.08

Variance

1/n-1 (d2)

GUJARAT AMBUJA CEMENT LTD:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2009-2010

85.27

19.03

66.24

4387.74

2010-2011

31.18

19.03

12.15

147.62

2011-2012

-80.35

19.03

-61.32

3760.14

2012-2013

76.63

19.03

57.60

3317.76

2013-2014

-17.58

19.03

-36.66

1343.96
d2=12957.22

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (12957.22) = 56.91

Standard Deviation =

Variance

= 3239.305 = 56.91

LARSEN & TOUBRO:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2009-2010

146.77

63.69

83.08

6902.29

2010-2011

85.28

63.69

21.59

466.13

2011-2012

86.53

63.69

22.84

521.67

2012-2013

-21.79

63.69

-85.48

7306.83

2013-2014

21.66

63.69

-42.03

1766.52
d2=16963.44

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (16963.44) = 4240.86

Standard Deviation =

Variance

= 4240.86 = 65.1

61

RANBAXY LABORATORIES:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2009-2010

83.71

9.02

74.69

5578.60

2010-2011

13.75

9.02

4.73

22.37

2011-2012

-71.06

9.02

80.08

6412.81

2012-2013

7.53

9.02

-1.49

2.22

2013-2014

11.16

9.02

2.14

4.58
d2=12020.58

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (12020.58) = 3005.145

Standard Deviation =

Variance

= 3005.145 = 54.82

CIPLA:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2009-2010

45.17

-8.25

53.96

2911.68

2010-2011

-76.31

-8.25

-68.06

4632.16

2011-2012

38.56

-8.25

46.81

2191.18

2012-2013

-43.66

-8.25

-35.41

1253.87

2013-2014

-5.56

-8.25

-2.69

7.24
d2=10996.13

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (10996.13) = 2749.0325

Standard Deviation =

Variance

= 2749.0325 = 52.4

MTNL:

62

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2009-2010

44.72

13.72

31

961

2010-2011

11.36

13.72

-2.36

5.57

2011-2012

7.56

13.72

-6.16

37.95

2012-2013

-1.62

13.72

-15.34

235.32

2013-2014

6.54

13.72

-7.18

51.55
d2=1291.39

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (1291.39) = 322.8475

Standard Deviation =

Variance

= 322.8475 = 17.97

BHARTI ARTL:
Year

Return (R)

Avg. Return
(R )

d=
(R-R)

D2

2009-2010

347.23

125.18

222.05

49306.20

2010-2011

102.92

125.18

-22.26

495.51

2011-2012

57.93

125.18

-67.25

4522.56

2012-2013

80.24

125.18

-44.94

2019.60

2013-2014

37.59

125.18

-87.59

7672.01
d2=64015.88

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (64015.88) = 16003.97

Standard Deviation =

Variance

= 16003.97 = 126.51

ING VYSYA:

Year

Return (R)

Avg. Return

63

d=

D2

(R )

(R-R)

2009-2010

117.81

12.46

105.35

11098.62

2010-2011

4.60

12.46

-7.86

61.78

2011-2012

-72.26

12.46

-84.72

7177.48

2012-2013

-4.29

12.46

-16.75

280.56

2013-2014

16.45

12.46

3.99

15.92
d2=18634.36

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (18634.36) = 4658.59

Standard Deviation =

Variance

= 4658.59 = 68.25

ICICI:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2009-2010

108.68

49.43

59.25

3410.56

2010-2011

23.71

49.43

-25.72

661.52

2011-2012

55.98

49.43

6.55

42.90

2012-2013

51.88

49.43

2.45

6.00

2013-2014

6.89

49.43

-42.54

1809.65
d2=6030.63

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (6030.63) = 1507.6575

Standard Deviation =

Variance

= 1507.6575 = 38.83

WIPRO:

64

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2009-2010

5.67

-13.68

19.35

374.42

2010-2011

-57.12

-13.68

-43.44

1887.03

2011-2012

-38.45

-13.68

-24.77

613.55

2012-2013

30.29

-13.68

43.97

1933.36

2013-2014

-8.81

-13.68

-4.87

23.72
d2=4832.08

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (4832.08) = 1208.02

Standard Deviation =

Variance

= 1208.02 = 34.76

SATYAM:

Year

Return (R)

Avg. Return
(R )

d=
(R-R)

d2

2009-2010

31.15

16.82

14.33

205.55

2010-2011

10.78

16.82

-6.04

36.48

2011-2012

79.08

16.82

62.26

3876.31

2012-2013

-34.66

16.82

51.48

2050.19

2013-2014

-2.27

16.82

19.09

364.43
d2=6532.76

TOTAL

Variance = 1/n-1 (d2) = 1/5-1 (6532.76) = 1633.19

Standard Deviation =

Variance

= 1633.19 = 40.41

CALCULATION OF CORRELATION BETWEEN TWO COMPANIES:

Covariance (COVab) = 1/(n-1) (dx.dy)

65

Correlation of coefficient = COVab / a* b

GACL & LNT:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

Product of dev.
(dx)(dy)

2009-2010

66.24

83.08

5503.2192

2010-2011

12.15

21.59

262.3185

2011-2012

-61.32

22.84

-1400.5488

2012-2013

57.6

-85.48

-4923.648

2013-2014

-36.66

-42.03

1540.8198
dx. dy =
982.1607

TOTAL

COVab =1/(5-1)(982.1607) =245.54

Correlation of coefficient = 245.54/(56.91)(65.12) = 0.066
Interpretation:
The prime objective of this combination is to reduce risk of portfolio. Least preference is
given to the portfolio returns. As per the calculations GACL, bears a proportion of 0.57
whereas LNT bears a proportion of 0.43. The standard deviations of the companies are
56.91 for GACL and 65.12 for LNT.
This combination yields a return of a return of 38.2338 and a risk of 44.23
respectively.
RANBAXY & CIPLA:
YEAR

Dev. Of
GACL

Dev. Of LNT
(dy)

66

Product of dev.
(dx)(dy)

(dx)
2009-2010

74.69

53.96

4030.2724

2010-2011

4.73

-68.06

-321.9238

2011-2012

80.08

46.81

3748.5448

2012-2013

-1.49

-35.41

52.7609

2013-2014

2.14

2.69

-5.7566
dx. dy =
7503.8977

TOTAL

COVab =1/(5-1)(7503.8977) = 1875.97

Correlation of coefficient = 1875.97/(54.82)(52.43) = 0.65
Interpretation:
As per the calculations RANBAXY, bears a proportion of 0.44 whereas CIPLA bears a
proportion of 0.56. The standard deviations of the companies are 54.82 for RANBAXY
and 52.43 for CIPLA.
This combination yields a return of a return of -.6512 and a risk of 48.63
respectively. The investors shall not invest in this combination as there is negative return
and there is not much difference in their standard deviation.

MTNL & BHARTI ARTL:

YEAR

Dev. Of

Dev. Of LNT

67

Product of dev.

GACL
(dx)

(dy)

(dx)(dy)

2009-2010

31

222.05

6883.55

2010-2011

-2.36

-22.06

52.0616

2011-2012

-6016

-67.25

414.26

2012-2013

-15.34

-44.94

689.3796

2013-2014

-7.18

-87.59

628.8962
dx. dy =
8668.1474

TOTAL

COVab =1/(5-1)(8668.1474) = 2167.04

Correlation of coefficient = 2167.04/(17.97)(126.51)
Interpretation:
The proportion of investment for MTNL is -1.15 and for BHARTI ARTL 2.15. BHARTI
ARTL bears a major proportion which is dominating one. The standard deviations of the
two companies are 67.97 and 126.51 respectively.
This combination yields a return of 253.99 and a risk of 252.45. hence investor
should invest his major proportion in BHARTI ARTL in order to minimize risk.
ING VYSYA & ICICI:
YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

Product of dev.
(dx)(dy)

2009-2010

105.35

59.25

6241.9875

2010-2011

-7.86

-25.72

202.1592

2011-2012

-84.72

6.55

-554.916

2012-2013

-16.75

2.45

-41.0375

2013-2014

3.99

-42.54

-169.7346
dx. dy =
5678.4586

TOTAL

COVab =1/(5-1)(5678.4586) =1419.61

Correlation of coefficient = 1419.61/(68.25)(38.83) = 0.54

68

Interpretation:
In this situation optimum weights of ING VYSYA and ICICI are 0.03 and 0.97
respectively. The portfolio risk is 38.81, which is lesser than the individual risks of two
companies. Hence, it is recommended to invest the major proportion of the funds in
ICICI, in order to reduce the portfolio risk.

WIPRO & SATYAM:

YEAR

Dev. Of
GACL
(dx)

Dev. Of LNT
(dy)

Product of dev.
(dx)(dy)

2009-2010

19.35

14.33

277.2855

2010-2011

-43.44

-6.04

262.3376

2011-2012

-24.77

62.26

-1542.1802

2012-2013

43.97

51.48

2263.5756

2013-2014

-4.87

19.09

-92.9683
dx. dy =
1168.0802

TOTAL

COVab =1/(5-1)(1168.0802) = 233.62

Correlation of coefficient = 233.62/(34.76)(40.41) = 0.17
Interpretation:
The proportion of investments for WIPRO is 0.59 and for SATYAM it is 0.41. The
standard deviations of the companies are 34.76 and 40.41 respectively.
This combination yields a return of -1.175 with a risk of 28.47.

CALCULATION OF PORTFOLIO WEIGHTS:

69

Deriving the minimum risk portfolio, the following formula is used:

(b)2 - rab (a) (b)

Wa =

(a)2 + (b)2 2rab (a) (b)

Where,
Xa is the proportion of security A
Xb is the proportion of security B
a = standard deviation of security A
b = standard deviation of security B
rab = correlation co-efficient between A&B
GACL & LNT:
(65.12)2- 0.066(56.91) (65.12)
Xa =
(56.91)2 + (65.12)2-2 (0.066) (56.91) (65.12)
= 0.57
Xb = 1- Xa
=1- 0.57
= 0.43

RANBAXY & CIPLA:

70

(52.43)2- 0.65(54.82) (52.43)

Xa =
(54.82)2 + (52.43)2 -2 (0.65) (54.82) (52.43)
= 0.44
Xb = 1-Xa
= 1-0.44 = 0.56
MTNL & BHARTI ARTL:
(126.51)2 0.95 (17.97) (126.51)
Xa =
(17.97)2 + (126.51)2 2(0.95) (17.97) (126.51)
= -1.15
Xb = 1 Xa
= 1- (-1.15)
= 2.15
ING VYSYA & ICICI:
(38.83)2 0.54(68.25) (38.83)
Xa =
(68.25)2 + (38.83)2 2 (0.54) (68.25) (38.83)
= 0.03
Xb = 1 Xa
= 1 0.03
= 0.97

WIPRO & SATYAM:

71

(40.41)2 0.17(34.76) (40.41)

Xa =
(34.76)2 + (40.41)2 2 (0.17) (34.76) (40.41)
= 0.59
Xb = 1 Xb
= 1 0.59
= 0.41

CALCULATION OF PORTFOLIO RISK:

For two securities:
Two securities portfolio is a portfolio which consists two securities. In two securities
portfolio the investment takes place in companies securities.

= (a2*(Xa) 2 + b2*(Xb) 2 + 2rab*a*b*Xa*Xb)

Where,

P = portfolio risk
Xa = proportion of investment in security A
Xb = proportion of investment in security B
R12 = correlation co-efficient between security 1 & 2
a

= standard deviation of security 1

b = standard deviation of security 2

72

For three securities:

Three securities portfolio consists of three securities or which invests in three securities.
The following formula is used for standard deviation:

p =((a)2(Xa)2+(b)2(Xb)2+ (c)2(Xc)2+ 2(Xa)(Xb)(rab)(a)(b) +

2(Xa)(Xc)(rac)(a)(c) + 2(Xb)(Xc)(rbc)(b)(c))

GACL & LNT:

p = (0.57)2 *(56.91)2 +(0.43)2 *(65.12)2 +2(0.57)(0.43)(0.066)(56.91)(65.12)
= 1956.259145
= 44.23

RANBAXY & CIPLA:

p = (0.44)2 *(54.82)2 +(0.56)2 *(52.43)2 +2(0.44)(0.56)(0.65)(54.82)(52.43)
= 2364.537348
= 48.63
MTNL & BHARTI ARTL:
p =(-1.15)2 *(17.97)2+(2.15)2*(126.51)2+2(-1.15)(2.15)(0.95)(17.97)(126.51)
= 63729.36593
73

= 252.45

ING VYSYA & ICICI:

p = (0.03)2 *(68.25)2 + (0.97)2 *(38.83)2 +2(0.03)(0.97)(0.54)(68.25)(38.83)
= 1506.140849
= 38.81

WIPRO & SATYAM:

p = (0.59)2 *(34.76)2 + (0.41)2 *(40.41)2 +2(0.59)(0.41)(0.17)(34.76)(40.41)
= 810.6233835
= 28.47

CALCULATION OF PORTFOLIO RETURN:

Rp = W1R1 + W2R2 (for two securities)
Rp = W1R1+ W2R2 + W3R3 (for three securities)

74

Where,
W1, W2, W3 are the weights of the securities
R1, R2, R3 are the Expected returns
GACL & LNT:
Rp = (0.57)(19.03) + (0.43)(63.69)
= 38.2338
RANBAXY & CIPLA:
Rp = (0.44)(9.02) + (0.56)(-8.25)
= -0.6512
MTNL & BHARTI ARTL:
Rp = (-1.15)(13.17) + (2.15)(125.18)
= 253.99
ING VYSYA & ICICI:
Rp = (0.03)(12.46) + (0.97)(49.43)
= 48.3209
WIPRO & SATYAM:
Rp = (0.59)(-13.68) + (0.41)(16.82)
= - 1.175

SUGGESTIONS:

75

 Select your investments on economic grounds.

Public knowledge is no advantage.
Buy stock with a disparity and discrepancy between the situation of the firm - and
the expectations and appraisal of the public (Contrarian approach vs. Consensus
approach).
Buy stocks in companies with potential for surprises.
Take advantage of volatility before reaching a new equilibrium.
Listen to rumors and tips, check for yourself.
Dont put your trust in only one investment. It is like putting all the eggs in one
basket . This will help lesson the risk in the long term.
The investor must select the right advisory body which is has sound knowledge
about the product which they are offering.
Professionalized advisory is the most important feature to the investors.
Professionalized research, analysis which will be helpful for reducing any kind of
risk to overcome.

CONCLUSIONS:

76

When we form the optimum of two securities by using minimum variance equation, then
the return of the portfolio may decrease in order to reduce the portfolio risk.
The combination of securities will lead to increase the returns for that we have to follow
appropriate techniques and always the combination of securities should decrease the risk.

BIBLIOGRAPHY
77

Books referred:
Security analysis and Portfolio Analysis of Banking Sector

- V.A. Avadhani

Security analysis and Portfolio Analysis of Banking Sector - Fischer & Jordan
Investment decisions - V.K. Bhalla
Security analysis & Portfolio Analysis of Banking Sector - Robbins
Portfolio Analysis of Banking Sector S.Kevin

Websites:
www.geojit.com
www.investopedia.com
www.capitalmarket.com
www.icicidirect.com
www.bse.com
www.nse.com

78

79