EXECUTIVE SUMMARY

Investing in equities requires time, knowledge and constant monitoring of the market.
For those who need an expert to help to manage their investments, Portfolio Management
Service (PMS) comes as an answer.
The business of portfolio management has never been an easy one. Juggling the
limited choices at hand with the twin requirements of adequate safety and sizeable returns
is a task fraught with complexities. Given the unpredictable nature of the market it requires
solid experience and strong research to make the right decision. In the end it boils down
to make the right move in the right direction at the right time. Thats where the expert
comes in.
The term Portfolio Management in common practice refers to selection of securities
and their continuous shifting in a way that the holder gets maximum returns at minimum
possible risk. PMS are merchant banking activities recognized by SEBI and these activities
can be rendered by SEBI authorized portfolio managers or discretionary portfolio managers.
A Portfolio Manager by the virtue of his knowledge, background and experience helps
his clients to make investment in profitable avenues. A portfolio manager has to comply
with the provisions of the SEBI (portfolio managers) rules and regulations, 1993.
This project also includes the different services rendered by the portfolio manager. It
includes the functions to be performed by the portfolio manager.
The project also shows the factors that one considers for making an investment
decision and briefs about the information related to asset allocation.

Research Methodology
Objective of taking the Project

To get the overall knowledge of Securities and Investment.

To know how the Investment made in different Securities.

Minimizes the Risk and Maximizes the Returns.

To get the knowledge of different Factors that affects the Investment decision of
Investors.

To know how different Companies are managing their Portfolio i.e. when and in
which investors they are investing.

To know what is the need of appointing a Portfolio Manager and how does he
meets the needs of the various Investors.

To get the knowledge about the Role and Functions of Portfolio Manager.

To get the knowledge of Investment Decision and Asset

Allocation.

DATA COLLECTION METHOD

There are two sources of collecting data:
2

1. Primary Source
2. Secondary Source
Primary are those which are collected afresh & for the first time & thus happen to
be original in character. Primary data is collected in the form of survey through the
market by asking some close and open ended questions which help in analysing the
changing trends and its effect on already existing ones.

Secondary data on the other hand are those which have been already been collected
by someone else & which have already been passed through the statistical process.
Secondary data is collected through the Internet and past data.

Primary:

The first hand information is collected with the responses of

questionnaire & interview.

Secondary: These are sources containing data which have been collected and
complied for another purpose. Secondary sources consist of not only published
records and reports, but also unpublished records.
It is collected with the help of following sources:
i.

INTERNET

ii.

JOURNALS

iii.

COMPANY MAGZINES

LIMITATIONS

The study was limited to a brief period of two months only. Most of
the time was spent in preparation of the questionnaire and pilot testing. Also
due to the busy schedule of the employees, responses were delayed and
subsequently less time was spent in analyzing the results. With limited
interaction with the C.E.O. and other senior employees the survey results are
presented in this report, however a more comprehensive interpretation of results
still rests with the Organization. The questionnaire included objective answers,
so

it

was

difficult

to

reflect

the

reasons

for

certain

patterns.

Since

organizational climate is a study of perceptions the accuracy of the findings

remains doubtful.

Chapter 1
PORTFOLIO MANAGEMENT

 Introduction

A portfolio is a collection of assets. The assets may be physical or

financial like Shares, Bonds, Debentures, Preference Shares, etc. The individual
investor or a fund manager would not like to put all his money in the shares
of one company that would amount to great risk. He would therefore, follow
the age old maxim that one should not put all the eggs into one basket. By
doing so, he can achieve objective to maximize portfolio return and at the
same time minimizing the portfolio risk by diversification.
A Portfolio Management refers to the science of analyzing the Strengths
, Weaknesses, Opportunities & Threats for performing wide range of activities
related to the ones portfolio for maximizing the return at a given risk. It
helps in making selection of Debt V/S Equity, Growth V/S Safety, & various
other tradeoffs.

A Portfolio Management refers to the science of analyzing the strengths,

weaknesses, opportunities, and threats for performing wide range of activities
related to the ones portfolio for maximizing the return at a given risk. It
helps in making selection of Debt V/S Equity, Growth V/S Safety, and various
other tradeoffs.
Major tasks involved with Portfolio Management are as follows:
Taking decisions about investment mix & policy.
Matching investments to objectives.
Asset allocation for individuals & institution.
Balancing risk against performance.
There are basically 2 types of Portfolio Management in case of mutual
& exchange traded funds including Passive & Active.
Passive Management involves tracking of the market index or index
investing.
Active management involves active management of a funds portfolio by
manager or team of managers who take research based investment
decisions & decisions on individual holdings.
Portfolio management is the management of various financial assets which comprise
the portfolio.
Portfolio management is a decision support system that is designed with a view to
meet the multi-faced needs of investors.
In terms of Mutual Fund Industry, a Portfolio is built by buying additional
Bonds, Mutual Funds, Stocks, or other Investments. If a person owns more than one
security, he has an investment portfolio. The main target of the portfolio owner is to
increase value of portfolio by selecting investments that yield good returns.

As per the modern Portfolio Theory, a diversified portfolio that includes

different types or classes of securities reduces the investment risk. It is because any
one of the security may yield strong returns in any economic climate.
Investors choose to hold groups of securities rather than single security that
offer the greater expected returns. They believe that a combination of securities held
together will give a beneficial result if they are grouped in a manner to secure higher
return after taking into Consideration the risk element. That is why professional
investment advice through portfolio Management service can help the investors to
make an intelligent and informed choice between alternative investments opportunities
without the worry of post trading hassles.

Definition of Portfolio Management

According to Securities and Exchange Board of India Portfolio Manager is
defined as: Portfolio means the total holdings of securities belonging to any person.
The art and science of making decisions about investment mix and policy,
matching investments to objectives, asset allocation for individuals and institutions, and
balancing risk against performance.

Investopedia explains Portfolio Management

In the case of mutual and Exchange Traded Funds (ETFs), there are two
forms of Portfolio Management :
Passive Management It simply tracks a market index, commonly referred to as indexing or
index investing.
Active Management It involves a single manager, co-managers, or a team of managers
who attempt to beat the market return by actively managing a funds portfolio through
investment decisions based on research and decisions on individual holdings. Closed end
funds are generally actively managed.

Financial Dictionary and WikiAnswers.com

A collection of various company shares, fixed interest securities or moneymarket Instruments. People may talk grandly of 'running a portfolio' when they own a
couple of Shares but the characteristic of a serious investment portfolio is diversity. It
should show a Spread of investments to minimize risk - brokers and investment
advisers warn against 'Putting all your eggs in one basket'.

MEANING OF PORTFOLIO MANAGERS

Portfolio manager means any person who enters into a contract or arrangement with a
client. Pursuant to such arrangement he advises the client or undertakes on behalf of such
client Management or administration of portfolio of securities or invests or manages the
clients funds.
A discretionary portfolio manager means a portfolio manager who exercises or may
under a Contract relating to portfolio management, exercise any degree of discretion in
respect of the Investment or management of portfolio of the portfolio securities or the funds
of the client, as the Case may be.
He shall independently or individually manage the funds of each client in Accordance
with the needs of the client in a manner which does not resemble the mutual fund.
A non discretionary portfolio manager shall manage the funds in accordance with the
directions of the client.
A portfolio manager by virtue of his knowledge, background and experience is
expected to study the various avenues available for profitable investment and advise his
client to enable the latter to maximize the return on his investment and at the same time
safeguard the funds invested.

SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is an art of putting money in fairly safe, quite profitable and
reasonably in liquid form. An investors attempt to find the best combination of risk and
return is the first and usually the foremost goal.
In choosing among different investment opportunities the following aspects risk
management should be considered:
The selection of a level or risk and return that reflects the investors tolerance for
risk and desire for return, i.e. personal preferences.
The management of investment alternatives to expand the set of opportunities
available at the investors acceptable risk level.
The very risk-averse investor might choose to invest in mutual funds. The more risktolerant Investor might choose shares, if they offer higher returns. Portfolio management in
India is still in Its infancy. An investor has to choose a portfolio according to his
preferences.
The first preference normally goes to the necessities and comforts like purchasing a
house or domestic appliances. His second preference goes to some contractual obligations
such as life insurance or provident funds. The third preference goes to make a provision for
savings required for making day to day payments.
The next preference goes to short term investments such as UTI units and post office
Deposits which provide easy liquidity. The last choice goes to investment in company shares
and Debentures. There are number of choices and decisions to be taken on the basis of the
attributes of Risk, return and tax benefits from these shares and debentures.
The final decision is taken on the basis of alternatives, attributes and investor
preferences. For most investors it is not possible to choose between managing ones own
portfolio. They Can hire a professional manager to do it. The professional managers provide
a variety of services Including diversification, active portfolio management, liquid securities
and performance of Duties associated with keeping track of investors money.

NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in
assets and securities. It is a dynamic and flexible concept and involves regular and
systematic analysis, Judgment and action. The objective of this service is to help the
unknown

and

investors

with

the

expertise

of

professionals

in

investment

portfolio

management.
It involves construction of a portfolio based upon the investors objectives, constraints,
preferences for risk and returns and tax liability. The portfolio is reviewed and
from time to time in tune with the market conditions. The evaluation of

adjusted

portfolio is to be

done in terms of targets set for risk and returns.

The changes in the portfolio are to be effected to meet the changing condition.
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 more go towards the
assembly of proper combination of individual securities to form investment portfolio.
A combination of securities held together will give a beneficial result if they grouped
in a Manner to secure higher returns after taking into consideration the risk elements.
The modern theory is the view that by diversification risk can be reduced.
Diversification can Be made by the investor either by having a large number of shares of
companies in different Regions, in different industries or those producing different types of
product lines.
Modern theory believes in the perspective of combination of securities under
of risk and Returns.

10

constraints

OBJECTIVES OF PORTFOLIO MANAGEMENT

Favourable Tax Status

The major objectives of portfolio management are summarized as below:-

Security/Safety of Principal:
Security not only involves keeping the principal sum intact but also keeping intact its
purchasing power intact.

Stability of Income:
So as to facilitate planning more accurately and systematically the reinvestment
consumption of income.

Capital Growth:
This can be attained by reinvesting in growth securities or through purchase of
growth securities.

Marketability:
The case with which a security can be bought or sold. This is essential for providing
flexibility to investment portfolio

Liquidity i.e. Nearness To Money:

11

It is desirable to investor so as to take advantage of attractive opportunities

upcoming in the market.

Diversification:
The basic objective of building a portfolio is to reduce risk of loss
of capital and / or income by investing in various types of securities and over a wide range
of industries.

Favourable Tax Status:

The effective yield an investor gets form his investment depends on tax to which it
is subject. By minimizing the tax burden, yield can be effectively improved.

BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT

There are two basic principles for effective portfolio management which are given
below:-

Effective

investment

planning

for

the

investment

in

securities

by

considering the following factorsa) Fiscal, financial and monetary policies of the Govt. of India and the
Reserve Bank of India.
b) Industrial and economic environment and its impact on industry. Prospect in terms of
prospective technological changes, competition in the market, capacity utilization with
industry and demand prospects etc.

Constant Review of Investment:

It requires to review the investment in securities and to continue the selling and
purchasing of investment in more profitable manner. For this purpose they have to carry
the following analysis:
a) To assess the quality of the management of the companies in which investment has
been made or proposed to be made.

12

b) To assess the financial and trend analysis of companies Balance Sheet and Profit and
Loss Accounts to identify the optimum capital structure and better performance for the
purpose of withholding the investment from poor companies.

CHAPTER 2
TYPES OF PORTFOLIO MANAGEMENT
There are various types of portfolio management:

Types of Portfolio
Management

Investment Management
IT Portfolio Management
Project Portfolio Management
INVESMENT MANAGEMENT:
Investment management is the professional management of various securities (Shares,
Bonds etc.) And assets (e.g., Real Estate), to meet specified investment goals for the benefit
of the Investors. Investors may be institutions (insurance companies, pension funds,
corporations etc.) Or private investors (both directly via investment contracts and more
commonly via collective Investment schemes e.g. mutual funds or Exchange Traded Funds).
The term Asset Management is often used to refer to the investment management of

13

Collective investments, (not necessarily) whilst the more generic fund management may refer
to All forms of institutional investment as well as investment management for private
investors.
Investment managers who specialize in advisory or discretionary management on
behalf of (Normally wealthy) private investors may often refer to their services as wealth
management or Portfolio Management often within the context of so-called "private banking".
Fund manager (or investment adviser in the U.S.) refers to both a firm that provides
Investment Management services and an individual who directs fund management decisions.

IT PORTFOLIO MANAGEMENT :

IT Portfolio Management is the application of systematic management to large classes

of Items managed by enterprise Information Technology (IT) capabilities. Examples of IT
Portfolios would be planned initiatives, projects, and ongoing IT services (such as application
Support). The promise of IT portfolio management is the quantification of previously
mysterious IT efforts, enabling measurement and objective evaluation of investment scenarios.
The concept is analogous to financial portfolio management, but there are significant
Differences. IT investments are not liquid, like stocks and bonds (although investment
portfolios May also include illiquid assets), and are measured using both financial and nonfinancial Yardsticks (for example, a balanced scorecard approach); a purely financial view is
14

not sufficient. At its most mature, IT Portfolio management is accomplished through the
creation of two Portfolios:

Application Portfolio
Management of this portfolio focuses on comparing spending on established systems
based upon their relative value to the organization. The comparison can be based upon the
level of contribution in terms of IT investments profitability. Additionally, this comparison
can also be based upon the non-tangible factors such as organizations level of experience
with a certain technology, users familiarity with the applications and infrastructure, and
external forces such as emergence of new technologies and obsolesce of old ones.

Project Portfolio
This type of portfolio management specially address the issues with spending on the
development of innovative capabilities in terms of potential ROI and reducing investment
overlaps in situations where reorganization or acquisition occurs. The management issues with
the second type of portfolio management can be judged in terms of data cleanliness,
maintenance savings, and suitability of resulting solution and the relative value of new
investments to replace these projects.

PROJECT PORTFOLIO MANAGEMENT:

Project portfolio management organizes a series of projects into a single portfolio
consisting Of reports that capture project objectives, costs, timelines, accomplishments,
resources, risks and Other critical factors.
Executives can then regularly review entire portfolios, spread resources
Appropriately and adjust projects to produce the highest departmental returns.
Project management is the discipline of planning, organizing and managing resources
to Bring about the successful completion of specific project goals and objectives.
A project is a finite endeavour (having specific start and completion dates) undertaken
to Create a unique product or service which brings about beneficial change or added value.
This Finite characteristic of projects stands in contrast to processes, or operations, which are
Permanent or semi-permanent functional work to repetitively produce the same product or

15

Service.

CHAPTER 3
PORTFOLIO MANAGEMENT PROCESS

Process of Portfolio
Management.

THERE ARE THREE MAJOR ACTIVITIES INVOLVED IN AN

EFFICIENT

PORTFOLIO

MANAGEMENT

WHICH

ARE

AS

FOLLOWS: Identification of assets or securities, allocation of investment and also identifying the
classes of assets for the purpose of investment.
They have to decide the major weights, proportion of different assets in the portfolio
by taking in to consideration the related risk factors.
Finally they select the security within the asset classes as identify.
The above activities are directed to achieve the sole purpose of maximizing return
and minimizing risk on investment.
It is well known fact that portfolio manager balances the risk and return in a
portfolio investment. With higher risk higher return may be expected and vice versa.
16

 INVESTMENT DECISION
Objectives of Investment Portfolio:
This is a crucial point which a Finance Manager must consider. There can be many
objectives of making an investment. The manager of a provident fund portfolio has to look
for security and may be satisfied with none too high a return, where as an aggressive
investment company be willing to take high risk in order to have high capital appreciation.
How the objectives can affect in investment decision can be seen from the fact that
the Unit Trust of India has two major schemes: Its Capital Units are meant for those who
Wish to have a good capital appreciation and a moderate return, where as the Ordinary
Unit are meant to provide a steady return only.
The investment manager under both the scheme will invest the money of the Trust in
different kinds of shares and securities. So it is
obvious that the objectives must be clearly defined before an investment decision is taken.

Selection of Investment:
Having defined the objectives of the investment, the next decision is to decide the
kind of investment to be selected. The decision what to buy has to be seen in the context
of the following:a) There is a wide variety of investments available in market i.e. Equity shares,
preference Share, debentures, convertible bond, Govt. securities and bond, capital units
etc. Out of These what types of securities to be purchased.
b) What should be the proportion of investment in fixed interest dividend securities and
Variable dividend bearing securities? The fixed one ensures a definite return and thus
a Lower risk but the return is usually not as higher as that from the variable
dividend Bearing shares.
c) If the investment is decided in shares or debentures, then the industries showing a
Potential in growth should be taken in first line. Industry-wise-analysis is important
17

since Various industries are not at the same level from the investment point of view.
It is Important to recognize that at a particular point of time, a particular
industry may have a better growth potential than other industries. For example, there
was a time when jute Industry was in great favour because of its growth potential
and high profitability, the Industry is no longer at this point of time as a growth
oriented industry.
d) Once industries with high growth potential have been identified, the next step is to
select The particular companies, in whose shares or securities investments are to be
made.

FUNDAMENTAL ANALYSIS
FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED
COMPANIES:
One of the first decisions that an investment manager faces is to identify the
industries which have a high growth potential.
Two approaches are suggested in this regard. They are:

Statistical Analysis of Past Performance:

A statistical analysis of the immediate past performance of the share price indices of
various Industries and changes there in related to the general price index of shares of all
industries should be made. The Reserve Bank of India index numbers of security prices
published every month in its bulletin may be taken to represent the behaviour of share
prices of various industries in the last few years. The related changes in the price index of
each industry as compared with the changes in the average price index of the shares of all
industries would show those industries which are having a higher growth potential in the
past few years. It may be noted that an Industry may not be remaining a growth Industry
for all the time. So he shall now have to make an assessment of the various Industries
keeping in view the present potentiality also to finalize the list of Industries in which he
will try to spread his investment.

18

 Assessing the Intrinsic Value of an Industry/Company:

After an investment manager has identified statistically the industries in the share of
which the investors show interest, he would assess the various factors which influence the
value of a particular share. These factors generally relate to the strengths and weaknesses of
the company under consideration, Characteristics of the industry within which the company
fails and the national and international economic scene. It is the job of the investment
manager to examine and weigh the various factors and judge the quality of the share or the
security under consideration. This approach is known as the intrinsic value approach. The
major objective of the analysis is to determine the relative quality and the quantity of the
security and to decide whether or not is security is good at current markets prices. In this,
both qualitative and quantitative factors are to be considered.

INDUSTRY ANALYSIS
First of all, an assessment will have to be made regarding all the conditions and
factors relating to demand of the particular product, cost structure of the industry and other
economic and Government constraints on the same. As we have discussed earlier, an
appraisal of the particular industrys prospect is essential and the basic profitability of any
company is dependent upon the economic prospect of the industry to which it belongs. The
following factors may particularly be kept in mind while assessing to factors relating to an
industry.

19

 Demand and Supply Pattern for the Industries Products and Its
Growth Potential:
The main important aspect is to see the likely demand of the products of the industry
and The gap between demand and supply. This would reflect the future growth prospects of
the Industry. In order to know the future volume and the value of the output in the next ten
Years or so, the investment manager will have to rely on the various demand forecasts made
by various agencies like the planning commission, Chambers of Commerce and institutions
like NCAER, etc.

The management expert identifies fives stages in the life of an industry. These are
Introduction, Development, Rapid Growth, Maturity and Decline. If an industry has already
reached the maturity or decline stage, its future demand potential is not likely to be high.

Profitability:
It is a vital consideration for the investors as profit is the measure of performance
and a source of earning for him. So the cost structure of the industry as related to its sale
price is an important consideration. In India there are many industries which have a growth
potential on account of good demand position. The other point to be considered is the ratio
analysis, especially return on investment, gross profit and net profit ratio of the existing
companies in the industry. This would give him an idea about the profitability of the
industry as a whole.

Particular Characteristics of the Industry:

Each industry has its own characteristics, which must be studied in depth in order to
understand their impact on the working of the industry. Because the industry having a fast
changing technology become obsolete at a faster rate. Similarly, many industries are
characterized by high rate of profits and losses in alternate years. Such fluctuations in
earnings must be carefully examined.

20

 Labour Management Relations in the Industry:

The state of labour-management relationship in the particular industry also has a great
deal of influence on the future profitability of the industry. The investment manager should,
therefore, see whether the industry under analysis has been maintaining a cordial relationship
between labour and management. Once the industrys characteristics have been analyzed and
certain industries with growth potential identified, the next stage would be to undertake and
analyze all the factors which show the desirability of various companies within an industry
group from investment point of view.

COMPANY ANALYSIS
To select a company for investment purpose a number of qualitative factors have to
be seen. Before purchasing the shares of the company, relevant information must be collected
and properly analyzed. An illustrative list of factors which help the analyst in taking the
investment decision is given below. However, it must be emphasized that the past
performance and information is relevant only to the extent it indicates the future trends.
Hence, the investment manager has to visualize the performance of the company in future by
analyzing its past performance.

Size and Ranking

A rough idea regarding the size and ranking of the company within the economy, in
general, and the industry, in particular, would help the investment manager in assessing the
risk associated with the company. In this regard the net capital employed, the net profits, the
return on investment and the sales volume of the company under consideration may be
compared with similar data of other company in the same industry group. It may also be
useful to assess the position of the company in terms of technical knowhow, research and
development activity and price leadership.

21

 Growth Record
The growth in sales, net income, net capital employed and earnings per share of the
company in the past few years must be examined. The following three growth indicators
may be particularly looked in to: (a) Price earnings ratio, (b) Percentage growth rate of
earnings per annum and (c) Percentage growth rate of net block of the company. The price
earnings ratio is an important indicator for the investment manager since it shows the
number the times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar features. However,
this is not so in practice due to many factors. Hence, by a comparison of this ratio
pertaining to different companies the investment manager can have an idea About the image
of the company and can determine whether the share is under-priced or over-priced.

An evaluation of future growth prospects of the company should be carefully made.

This requires the analysis of the existing capacities and their utilization, proposed expansion
and diversification plans and the nature of the companys technology. The existing capacity
utilization levels can be known from the quantitative information given in the published
profit and loss accounts of the company.
The plans of the company, in terms of expansion or diversification, can be known
from the directors reports the chairmans statements and from the future capital commitments
as shown by way of notes in the balance sheets.
The nature of technology of a company should be seen with reference to
technological developments in the concerned fields, the possibility of its product being
superseded of the possibility of emergence of more effective method of manufacturing.
Growth is the single most important factor in company analysis for the purpose of
investment management. A company may have a good record of profits and performance in
the past; but if it does not have growth potential, its shares cannot be rated high from the
investment point of view.

22

 FINANCIAL ANALYSIS
An analysis of financial for the past few years would help the investment manager in
Understanding the financial solvency and liquidity, the efficiency with which the funds are
used, the profitability, the operating efficiency and operating leverages of the company. For
this purpose certain fundamental ratios have to be calculated. From the investment point of
view, the most important figures are earnings per share, price earnings ratios, yield, book
value and the intrinsic value of the share. The five elements may be calculated for the past
ten years or so and compared with similar ratios computed from the financial accounts of
other companies in the industry and with the average ratios of the industry as a whole.
The yield and the asset backing of a share are important considerations in a decision
regarding whether the particular market price of the share is proper or not. Various other
ratios to measure profitability, operating efficiency and turnover efficiency of the company
may also be calculated.
The return on owners investment, capital turnover ratio and the cost structure ratios
may also be worked out. To examine the financial solvency or liquidity of the company, the
investment manager may work out current ratio, liquidity ratio, debt equity ratio, etc. These
ratios will provide an overall view of the company to the investment analyst. He can
analyze its strengths and weakness and see whether it is worth the risk or not.

Quality of Management
This is an intangible factor. Yet it has a very important bearing on the value of the
shares. Every investment manager knows that the shares of certain business houses command
a higher premium than those of similar companies managed by other business houses. This
is because of the quality of management, the confidence that the investors have in a
particular business house, its policy vis--vis its relationship with the investors, dividend and
financial performance record of other companies in the same group, etc. This is perhaps the
reason that an investment manager always gives a close look to the management of the
company whose shares he is to invest.

23

Quality of management has to be seen with reference to the experience, skill and
integrity of the persons at the helm of the affairs of the company. The policy of the
management regarding relationship with the share holders is an important factor since certain
business houses believe in generous dividend and bonus distributions while others are rather
conservative.

Location and labour management relations

The locations of the companys manufacturing facilities determine its economic
viability which depends on the availability of crucial inputs like power, skilled labour and
raw materials etc. Nearness to market is also a factor to be considered. In the past few
years, the investment manager has begun looking into the state of labour management
relations in the company under consideration and the area where it is located.

Pattern of Existing Stock Holding

An analysis of the pattern of the existing stock holdings of the company would also
be relevant. This would show the stake of various parties associated with the company. An
interesting case in this regard is that of the Punjab National Bank in which the L.I.C. and
other financial institutions had substantial holdings. When the bank was nationalized, the
residual company proposed a scheme whereby those shareholders, who wish to opt out,
could receive a certain amount as compensation in cash. It was only at the instant and
bargaining strength of institutional investors that the compensation offered to the shareholders,
who wish to opt out of the company, was raised considerably.

Marketability of the Shares

Another important consideration for an investment manager is the marketability of
the shares of the company. Mere listing of the share on the stock exchange does not
automatically mean that the share can be sold or purchased at will.
There are many shares which remain inactive for long periods with no transactions
being affected. To purchase or sell such scrips is a difficult task. In this regard, dispersal of
share holding with special reference to the extent of public holding should be seen.

24

Fundamental analysis thus is basically an examination of the economics and financial

aspects of a company with the aim of estimating future earnings and dividend prospect. It
included an analysis of the macro economic and political factors which will have an impact
on the performance of the firm. After having analyzed all the relevant information about the
company and its relative strength vis--vis other firm in the industry, the investor is expected
to decide whether he should buy or sell the securities.

TIMING OF PURCHASES
The timing of dealings in the securities, specially shares is of crucial importance,
because after correctly identifying the companies one may lose money if the timing is bad
due to wide fluctuation in the price of shares of that companies.
The decision regarding timing of purchases is particularly difficult because of certain
psychological factors. It is obvious that if a person wishes to make any gains, he should
buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when
they are at a higher price. But in practical it is a difficult task.
When the prices are rising in the market i.e. there is bull phase, everybody joins in
buying without any delay because every day the prices touch a new high. Later when the
bear face starts, prices tumble down every day and everybody starts counting the losses. The
ordinary investor regretted such situation by thinking why he did not sell his shares in
previous day and ultimately Sell at a lower price. This kind of investment decision is
entirely devoid of any sense of timing.
In short we can conclude by saying that Investment management is a complex activity

which may be broken down into the following steps:

Specification Of Investment Objectives And Constraints

The typical objectives sought by investors are current income, capital appreciation, and
Safety of principle. The relative importance of these objectives should be specified further
the Constraints arising from liquidity, time horizon, tax and special circumstances must be
Identified.

25

 Choice Of The Asset Mix

The most important decision in portfolio management is the asset mix decision very
Broadly; this is concerned with the proportions of stocks (equity shares and units/shares of
equity-oriented mutual funds) and bonds in the portfolio.
The appropriate stock-bond mix depends mainly on the risk tolerance and investment
Horizon of the investor.

ELEMENTS OF PORTFOLIO MANAGEMENT

Portfolio management is on-going process involving the following basic tasks:
Identification of the investors objectives, constraints and preferences.
Strategies are to be developed and implemented in tune with investment policy
Formulated.
Review and monitoring of the performance of the portfolio.
Finally the evaluation of the portfolio.

TECHIQUES OF PORTFOLIO MANAGEMENT

26

As of now the under noted technique of portfolio management are in vogue in our
country.
The various modes of Technique of Portfolio Management are as follows:

Equity Portfolio
It is influenced by internal and external factors. The internal factors affect the inner
working of the companys growth plans are analyzed with referenced to Balance sheet, profit
& loss a/c (account) of the company. Among the external factor are changes in the
government policies, Trade cycles, Political stability etc.

Equity Stock Analysis

Under this method the probable future value of a share of a company is determined.
It can be done by ratios of earning per share of the company and price earnings ratio.
EARNING PER SHARE = _ PROFIT AFTER TAX__
NO. OF EQUITY SHARES
PRICE EARNING RATIO = _MARKET PRICE (PER SHARE)_
EARNING PER SHARE

Points to be considered while analyzing the securities:

Nature of the industry and its product:
Long term trends of industries, competition within, and outside the industry,
Technical changes, labour relations, sensitivity, to Trade cycle.

Industrial analysis :
Of prospective earnings, cash flows, working capital, dividends, etc.

Ratio analysis:
Ratios such as debt equity ratio, current ratio, net worth, profit earnings ratio, returns
on investment, are worked out to decide the portfolio. The wise principle of portfolio
management suggests that Buy when the market is low or BEARISH, and sell when the
market is rising or BULLISH.
27

Stock market operation can be analyzed by:

Fundamental approach- Based on intrinsic value of shares.
Technical approach- Based on Dow Jones Theory, Random Walk Theory, etc.

Prices are based upon demand and supply of the market

Objectives are maximization of wealth and minimization of risk.
Diversification reduces risk and volatility.
Variable returns, high illiquidity; etc.

CHAPTER 4
RISK RETURN ANALYSIS

RISK ON PORTFOLIO
28

The expected returns from individual securities carry some degree of risk. Risk on the
Portfolio is different from the risk on individual securities. The risk is reflected in the
variability Of the returns from zero to infinity. Risk of the individual assets or a portfolio is
measured by the Variance of its return.
The expected return depends on the probability of the returns and their weighted
contribution to the risk of the portfolio. These are two measures of risk in this context one
is the absolute deviation and other standard deviation.
Most investors invest in a portfolio of assets, because as to spread risk by not putting
all eggs in one basket. Hence, what really matters to them is not the risk and return of
stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly
reduced by Diversification.

Following are the some of the types of Risk

29

Financial Risk.

Interest Rate Risk

This arises due to the variability in the interest rates from time to time. A change in
the interest rate establishes an inverse relationship in the price of the security i.e. price of
the security tends to move inversely with change in rate of interest, long term securities
show greater variability in the price with respect to interest rate changes than short term
securities.
Interest rate risk vulnerability for different securities is as under:

TYPES

RISK EXTENT

Cash Equivalent

Less vulnerable to interest rate risk.

Long Term Bonds

More vulnerable to interest rate risk.

Purchasing Power Risk

It is also known as Inflation Risk also emanates from the very fact that inflation
affects the purchasing power adversely. Nominal return contains both the real return
30

component and an inflation premium in a transaction involving risk of the above type to
compensate for inflation over an investment holding period. Inflation rates vary over time
and investors are caught unaware when rate of inflation changes unexpectedly causing
erosion in the value of realized rate of return and expected return.
Purchasing power risk is more in inflationary conditions especially in respect of bonds
and fixed income securities. It is not desirable to invest in such securities during inflationary
periods. Purchasing power risk is however, less in flexible income securities like equity
shares or common stock where rise in dividend income off-sets increase in the rate of
inflation and provides advantage of capital gains.

Business Risk
Business risk emanates from sale and purchase of securities affected by business
cycles, technological changes etc. Business cycles affect all types of securities i.e. there is
cheerful movement in boom due to bullish trend in stock prices whereas bearish trend in
depression brings down fall in the prices of all types of securities during depression due to
decline in their market price.

Financial Risk
It arises due to changes in the capital structure of the company. It is also known as
leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis--vis equity in
the capital structure indicates that the company is highly geared. Although a leveraged
companys earnings per share are more but dependence on borrowings exposes it to risk of
winding up for its inability to honour its commitments towards lender or creditors. The risk
is known as leveraged or financial risk of which Investors should be aware and portfolio
managers should be very careful.

Systematic Risk or Market Related Risk

Systematic risks affected from the entire market are (the problems, raw material
availability, tax policy or government policy, inflation risk, interest risk and financial risk). It
is managed by the use of Beta of different company shares.

31

 Unsystematic Risks
The unsystematic risks are mismanagement, increasing inventory, wrong financial
policy, defective marketing etc. this is diversifiable or avoidable because it is possible to
eliminate or diversify away this component of risk to a considerable extent by investing in a
large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of
those factors different form one company to another.

RISK RETURN ANALYSIS

All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc. The risk over time can be represented by
the variance of the returns while the return over time is capital appreciation plus payout,
divided by the purchase price of the share.
`Risk-return is subject to variation and the objectives of the portfolio manager are to
reduce That variability and thus reduce the risk by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better; it is according to the
Modern Approach diversification should not be quantity that should be related to the quality
of scripts this leads to quality of portfolio. Experience has shown that beyond the certain
securities by adding more securities expensive.

RETURNS ON PORTFOLIO

32

Each security in a portfolio contributes return in the proportion of its investments in

Security. Thus the portfolio expected return is the weighted average of the expected return,
from Each of the securities, with weights representing the proportions share of the security
in the total Investment. Why does an investor have so many securities in his portfolio? If
the security ABC Gives the maximum return why not he invests in that security all his
funds and thus maximize Return? The answer to this question lie in the investors perception
of risk attached to Investments, his objectives of income, safety, appreciation, liquidity and
hedge against loss of Value of money etc. this pattern of investment in different asset
categories, types of investment, etc., would all be described under the caption of
diversification, which aims at the reduction or Even elimination of non-systematic risks and
achieve the specific objectives of investors.

CHAPTER 5
33

PORTFOLIO THEORIES
CAPITAL ASSETS PRICING MODEL (CAPM)
CAPM provides a conceptual framework for evaluating any investment decision. It is
used to estimate the expected return of any portfolio with the following formula:

E (Rp) = Rf +Bp (E( Rm) Rf )

Where,
E (Rp)

= Expected return of the portfolio

Rf

= Risk free rate of return

Bp

= Beta portfolio i.e. market sensitivity index

E(Rm)

= Expected return on market portfolio

[E(Rm)-Rf]

= Market risk premium

Uses of CAPM
Estimate the required rate of return to investors on companys common stock.
Evaluate risky investment projects involving real Assets.
Explain why the use of borrowed fund increases the risk and increases the rate of
return.
Reduce the risk of the firm by diversifying its project portfolio.

MOVING AVERAGE
It refers to the mean of the closing price which changes constantly and moves ahead
in time, there by encompasses the most recent days and deletes the old one.

34

 MODERN PORTFOLIO THEORY

Modern Portfolio Theory quantifies the relationship between risk and return and
assumes that an investor must be compensated for assuming risk. It believes in the
maximization of return through a combination of securities. The theory states that by
combining securities of low risks with securities of high risks success can be achieved in
making a choice of investments. There can be various combinations of securities. The
modern theory points out that the risk of portfolio can be reduced by diversification.

MARKOWITZ THEORY
Markowitz has suggested a systematic search for optimal portfolio. According to him,
the portfolio manager has to make probabilistic estimates of the future performances of the
securities and analyse these estimates to determine an efficient set of portfolios. Then the
optimum set of portfolio can be selected in order to suit the needs of the investors.

Assumptions of Markowitz Theory

Investors make decisions on the basis of expected utility maximization.
In an efficient market, all investors react with full facts about all securities in the
market.
Investors utility is the function of risk and return on securities.
The security returns are co-related to each other by combining the different securities.
The combination of securities is made in such a way that the investor gets maximum
return with minimum of risk.
An efficient portfolio exists, when there is lowest level of risk for a specified level
of expected return and highest expected return for a specified amount of portfolio
risk.
The risk of portfolio can be reduced by adding investments in the portfolio.

35

 SHARPES THEORY
William Sharpe has suggested a simplified method of diversification of portfolios. He
has made the estimates of the expected return and variance of indexes which are related to
economic activity. Sharpes Theory assumes that securities returns are related to each other
only through common relationships with basic underlying factor i.e. market return index.

RULES TO BE FOLLOWED BEFORE INVESTMENT IN PORTFOLIOS

Compile the financials of the companies in the immediate past 3 years such as
Turnover, gross profit, net profit before tax, compare the profit earning of company
with that of the industry average nature of product manufacture service render and it
future demand ,know about the promoters and their back ground, dividend track
record, bonus shares in the past 3 to 5 years ,reflects companys commitment to share
holders the relevant information can be accessed from the RDC (Registrant of
Companies) published financial results financed quarters, journals and ledgers.
Watch out the highs and lows of the scripts for the past 2 to 3 years and their
timing cyclical scripts have a tendency to repeat their performance, this hypothesis
can be true of all other financial.
The higher the trading volume higher is liquidity and still higher the chance of
speculation, it is futile to invest in such shares whos daily movements cannot be
kept track, if you want to reap rich returns keep investment over along horizon and it
will offset the wild intraday trading fluctuations, the minor movement of scripts may
be ignored, we must remember that share market moves in phases and the span of
each phase is 6 months to 5 years.

36

CHAPTER 6
PERSONS INVOLVED IN PORTFOLIO MANAGEMENT

Discretionary Portfolio
Manager.

INVESTOR
Are the people who are interested in investing their funds.

37

 PORTFOLIO MANAGERS

Is a person who is in the wake of a contract agreement with a client, advices or

directs or undertakes on behalf of the clients, the management or distribution or
management of the funds of the client as the case may be. A portfolio manager in the
Indian context has been Brokers (Big brokers) who on the basis of their experience,
market trends, Insider trader, helps the limited knowledge persons.
The ones who use to manage the funds of portfolio, now being managed by the
portfolio of Merchant Banks, professionals like MBAs CAs And many financial
institutions have entered the market in a big way to manage portfolio for their clients.
According to S.E.B.I. rules it is mandatory for portfolio managers to get them selfs
registered.
Registered merchant bankers can acts as portfolio managers. Investors must look
forward, For qualification and performance and ability and research base of the portfolio
managers.

DISCRETIONARY PORTFOLIO MANAGER

Means a manager who exercise under a contract relating to a portfolio management
exercise Any degree of discretion as to the investment or management of portfolio or
securities or funds of Clients as the case may be. The relationship between an investor
and portfolio manager is of a Highly interactive nature.

38

The portfolio manager carries out all the transactions pertaining to the investor under
the Power of attorney during the last two decades, and increasing complexity was
witnessed in the Capital market and its trading procedures in this context a key
(uninformed) investor formed) Investor found himself in a tricky situation, to keep track
of market movement, update his Knowledge, yet stay in the capital market and make
money, therefore in looked forward to Resuming help from portfolio manager to do the
job for him .
The portfolio management seeks to strike a balance between risks and return. The
generally rule in that greater risk more of the profits but S.E.B.I. in its guidelines
prohibits portfolio managers to promise any return to investor. Portfolio management is
not a substitute to the inherent risks associated with equity investment.

CRITERIA FOR A PORTFOLIO MANAGER

Only those who are registered and pay the required license fee are eligible to
operate as Portfolio managers.
An applicant for this purpose should have necessary infrastructure with professionally
qualified persons and with a minimum of two persons with experience in this
business and a minimum net worth of Rs. 50lakhs.
The certificate once granted is valid for three years. Fees payable for registration are
Rs 2.5lakhs every for two years and Rs.1lakhs for the third year. From the fourth
year onwards, renewal fees per annum are Rs 75000. These are subjected to change
by the S.E.B.I.

FUNCTIONS OF PORTFOLIO MANAGERS

Advisory role
Advice new investments, review the existing ones, identification of objectives,
recommending high yield securities etc.

39

 Conducting market and economic service

This is essential for recommending good yielding securities they have to study the
current fiscal policy, budget proposal; individual policies etc further portfolio manager
should take in to account the credit policy, industrial growth, foreign exchange possible
change in corporate laws etc.

Financial analysis
He should evaluate the financial statement of company in order to understand, their
net worth future earnings, prospectus and strength.

Study of stock market

He should observe the trends at various stock exchange and analysis scripts so that
he is able to identify the right securities for investment.

Study of industry
He should study the industry to know its future prospects, technical changes etc,
required for investment proposal he should also see the problems of the industry.

Decide the type of portfolio

Keeping in mind the objectives of portfolio a portfolio manager has to decide
whether the portfolio should comprise equity preference shares, debentures, convertibles,
non-convertibles or partly convertibles, money market, securities etc or a mix of more
than one type of proper mix ensures higher safety, yield and liquidity coupled with
balanced risk techniques of portfolio management.

NEED AND ROLE OF PORTFOLIO MANAGER

With the development of Indian Securities market and with appreciation in market
price of Equity share of profit making companies, investment in the securities of such
companies has Become quite attractive. At the same time, the stock market becoming
volatile on account of Various facts. He Has felt the need of an expert guidance in this
respect. Similarly non resident Indians are eager to Make their investments in Indian
companies.
They have also to comply with the conditions Specified by the RESERVE BANK
OF INDIA under various schemes for investment by the non Residents. The portfolio
40

manager with his background and expertise meets the needs of such Investors by
rendering service in helping them to invest their fund/s profitably.

RIGHTS AND DUTIES OF PORTFOLIO MANAGERS

The portfolio manager has number of obligations towards his clients, some of them
are:
He shall transact in securities within the limit placed by the client himself with
regard to dealing in securities under the provisions of Reserve Bank of India Act,
1934.
He shall not derive any direct or indirect benefit out of the clients funds or
securities.
He shall not pledge or give on loan securities held on behalf of his client to a third
person without obtaining a written permission from such clients.
He may hold the securities in the portfolio account in his own name on behalf of
his clients only if the contract so provides. In such a case, his records and his
report to his clients should clearly indicate that such securities are held by him on
behalf of his client.
He shall not place his interest above those of his clients.
He shall not disclose to any person or any confidential information about his client,
Which has come to his knowledge.
He shall endeavour to ensure that the investors are provided with true and adequate
information without making any misguiding or exaggerated claims.

DEFAULTS AND PENALTIES OF A PORTFOLIO MANAGER

The following aspects must be kept in view:
41

Liabilities for action in case of default - A portfolio manager is liable to penalties if

he:
Fails to comply with any conditions subject to which certificate of registration has
been granted.
Contravenes any of the provisions of the SEBI act, its Rules and Regulations.
In such a case, he shall be liable to any of the following penalties, after enquiry Suspension of registration for a specific period.
Cancellation of registration decision being made by them.
Render the best possible advice to his clients relating to his needs and the
environment and his own professional skills.
Ensure that all professional dealings are affected in a prompt, efficient and cost
effective manner.

COORDINATION WITH RELATING AUTHORITIES

The portfolio manager shall designate a senior officer as compliance offer. The
senior officer:
Shall coordinate with regulating authorities regarding various matters.
Shall provide necessary guidance to and ensure compliance internally by the portfolio
manager of all Rules, Regulations guidelines, Notifications etc. issued by SEBI,
government of India and other regulating authorities.
Shall ensure that observations made/ deficiencies pointed out by SEBI in the
functioning of the portfolio manager do not recur.

CHAPTER 7
INVESTMENT ANALYSIS
42

 MEANING OF INVESTMENT

Investment means employment of funds in a productive manner so as to create

additional income. The word investment means many things to many persons. Investment in
financial assets leads to further production and income. It is lending of funds for income and
commitment of money for creation of assets, producing further income. Investment also
means purchasing of securities, financial instruments or claims on future income. Investment
is made out of income and savings credit or borrowings and out of wealth. It is a reward
for waiting for money.

Concepts of Investment
Economic Investment
The concept of economic investment means additions to the capital stock of the
society. The capital stock of society is the goods which are used in the production of other
goods. The term investment implies the formation of new and productive capital in the form
of new construction and producers durable instrument such as plant and machinery,
inventories and human capital are also included in this concept. Thus, an investment, in
economic terms, means an increase in building, equipment, and inventory.

Financial Investment

43

This is an allocation of monetary resources to assets that are expected to yield some
gain or return over a given period of time. It is a general or extended sense of the term. It
means an exchange of financial claims such as shares and bonds, real estate, etc. in their
view; investment is a commitment of funds to derive future income in the form of interest,
dividends, rent premiums, pension benefits and the appreciation of the value of their
principal capital.
The economic and financial concepts of investment are related to each other
because investment is a part of the savings of individuals which flow into the capital
market either directly or through institutions. Thus, investment decisions and financial
decisions interact with each other. Financial decisions are primarily concerned with the
sources of money where as investment decisions are traditionally concerned with uses or
budgeting of money.

MEANING OF SECURITY
A security means a document that gives its owners a specific claim of ownership of
a particular financial asset. Financial market provides facilities for buying and selling of
financial claims and services. Thus, securities are the financial instruments which are bought
and sold in the financial market for investment.
The important financial instruments are shares, debentures, bonds, etc. other financial
instruments are also known as Treasury bills, Mutual Fund Units, Fixed Deposits, Insurance
Policies, Post Office Savings like National Savings certificates, Kisan Vikas Patras, public
provident Funds etc. These securities are used by the investors for their investment. Some of
these securities are transferable while some of them are not transferable.

INVESTMENT AVENUES

44

The alternative investment avenues for the investor are to be considered first so as to
satisfy the above objectives of investors.
The following categories of investors are open to investors as avenues for savings to
flow in financial form:
Investment in Bank Deposits Savings And Fixed Deposits
This is the most common form of investment for an average Indian and nearly 40%
of funds in financial savings are used in this form these are least risky but the return is
also low.

Investment in P.O. Deposits, National Savings Certificates and other

Postal Savings Schemes
Many people in villages and some urban areas are investors in these schemes
due to lower risk of loss of money and greater security of funds. But returns are also
lower than in Stocks & Shares.

Insurance Schemes of LIC/GIC etc. and Provident and Pension

Funds
About 20-25% of financial savings of the household sector are put in these forms and
P.F., Pension and other forms of contractual savings.

Investment in Mutual Fund Schemes or UTI Schemes as and when

announced
These are less risky than direct investment in stocks and shares as these enjoy the
expert management by the Portfolio Manager or Professional experts. They also have the
advantage of diversified Portfolio involving the reduction of risk and economies of scale
reducing the cost of investment.

Investment in New Issues Market

45

A new entrant in the Stock Market should preferably invest in New Issues of existing
and

well reputed companies either in equity or debentures.

Instruments of Investment
Following are the instruments of investment:
Equity issues through prospectus or rights announced by existing shareholders.
Preference shares with a fixed dividend either convertible into equity or not.
Debentures of various categories convertible, fully convertible, partly convertible
and non- convertible debentures.
P.S.U. Bonds taxable or free-taxed with interest rates. Investment in gold, silver,
precious metals and antiques.
Investment in real estates.
Investment

in

gilt-edged

securities

and

securities

of

Government

and

Semi-

Government organizations (e.g. Relief bonds, bonds of port trusts, treasury bills,
etc.). The maturity period is varying generally upto10 to20 years. Gilt-edged
securities market constitutes the largest segment of the Indian capital market. These
are fully secured as they have government backing. Tax benefits are available to
these securities.

NEW ISSUES MARKET INVESTMENT DECISION

46

Investors would prefer debentures if they are interested in a fixed income. They may
go for Convertible debentures, if they want to have both fixed income and likely capital
appreciation in Future. If they are risk taking and aim only at capital gains, then they may
invest in equity shares. Of the new issues those of well established existing companies are
least risky while those of new companies floated by little known new entrepreneurs are most
risky.
In choosing the new issues for investment decision, the investor has to read a copy
of the prospectus and note the following:
Who are the promoters and their past record?
Products manufactured and demand for those products at home or abroad the
competitors and the share of each in the market.
Availability of inputs, raw materials and accessories and the dependence on imports.
Project location and its advantages.
Prospects through projected earnings, net profits and dividend paying capacity, waiting
period involved, etc.
If the new issues belong to a company promoted by well known Business Groups
like
Tatas, Birlas etc. they are less risky.
The company should belong to an industry which is expanding and has good potential
like drugs, chemicals; Telecom etc. the terms of offer should be attractive like
conversion or immediate prospects of dividend etc.

STOCK MARKET INVESTMENT DECISION

47

As far as the stock market is concerned, investment in shares is most risky as the
likelihood of fall or rise in prices is uncertain. But the returns may also be high
commensurate with risk. A host of imponderable factors operate in the stock market and a
genuine investor has to do the following things:
Study the Balance Sheet of the company and analyze the prospects of sales and
profits.
Analyze the market price in terms of book value and profit earning capacity (or P/E
Ratio) and use them to know whether the share is overvalued or undervalued.
Study the expansion plans or tax savings plans and analyze the companys financial
strength, bonus and dividend paying strength, through the mechanism of financial
ratios.
Study whether the management is professional and good, whether other accounting
practices are dependable and consistent. The company becomes attractive to buy if the
financial ratios support the view that the fundamentals are strong and the shares are
worth buying.
Lastly, if the price of the share is undervalued on the basis of the projected earnings
for the coming half year or one year and its P/E Ratio is below the industry average,
then it is worth buying. The same is worth selling if in his judgement it is
overhauled.

GUIDELINES FOR INVESTORS IN THE STOCK MARKET

Never buy on rumours or market gossip.
Buy only on the basis of fundamental analysis of the companies based on balance
sheet data analysis.
Buy a diversified list of companies and not put all the money in one or two
companies. All investments in the stock market are risky. The risk can be reduced by
proper Diversification of the portfolio into 10 or 15 companies.
Study the sales, gross profit, net profit in relation
employed

and

attempt

a forecast
48

for

the coming

half

to
year

equity
or

capital

one year.

 The investor should also watch for low priced shares which are about to turn around
for more profitability in future. It means that if everyone is buying scrip, avoids that
scrip but if a scrip is deserted and your study has shown that is has potential; for
expanding earnings and profitability, then such scrips should be purchased by the
investor.
The investor should know how to analyze the security prices of companies and pick
up the undervalued shares. The valuation may be based on the net profits discounted
to the present by a proper discount rate or by the book value of share, estimated on
the basis of net worth of the company.
Timing of purchase and sale is also very important.

INVESTMENT STRATEGY
Portfolio management can be practiced by following either an active or passive
strategy.
Active strategy is based on the assumption that it is possible to beat the market. This
is done by selecting assets that are viewed as under priced or by changing the asset mix or
proportion of fixed income securities and shares.
The Characteristics of Active Strategy are:

Aggressive Security Management

Aggressive purchasing and selling of securities to achieve high yields from dividend
interest and capital gains.

Speculation And Short Term Trading

The objective is to gain capital profits. The risk is high and the composition of
portfolio is flexible.
Success of active strategy depends on correct decisions as regard the timing of
movement in the market as a whole, weight age of various securities in the portfolio and
individual share selection.
49

The passive strategy does not aim at outperforming the market, unlike the active
strategy. On the other hand the stocks could be randomly selected on the assumption of a
perfectly efficient market. The objective is to include in the portfolio a large number of
securities so as to reduce risks specific to individual securities.

ELEMENTS OF INVESTMENTS
Return
Investors buy or sell financial instruments in order to earn return on them. The
return on investment is the reward to the investors. The return includes both current income
and capital gains or losses, which arises by the increase or decrease of the security price.

Risk
Risk is the chance of loss due to variability of returns on an investment. In case of
every investment, there is a chance of loss. It may be loss of interest, dividend or principal
amount of investment. However, risk and return are inseparable. Return is a precise statistical
term and it is measurable. But the risk is not precise statistical term. However, the risk can
be quantified: The investment process should be considered in terms of both risk and return.

Time
Time is an important factor in investment. It offers several different courses of
action. Time period depends on the attitude of the investor who follows a buy and hold
policy. As time moves on, analysts believe that conditions may change and investors may
revaluate expected return and risk for each investment.

CHAPTER 8
ASSEST ALLOCATION
50

 INTRODUCTION
The portfolio manager has to invest in these securities that form the optimal portfolio. Once a
portfolio is selected the next step is the selection of the specific assets to be included in the portfolio.
Assets in this respect means group of security or type of investment. While selecting the assets the
portfolio manager has to make asset allocation. It is the process of dividing the funds among different
asset class portfolios.

ASSET ALLOCATION
The different asset class definitions are widely debated, but four common divisions
are Stocks, Bonds, Real-Estate and Commodities. The exercise of allocating funds among
these assets (And among individual securities within each asset class) is what investment
management firms are paid for.
Asset classes exhibit different market dynamics, and different interaction effects; thus,
the allocation of moneys among asset classes will have a significant effect on the
performance of the Fund. Some research suggests that allocation among asset classes has
more predictive power than the choice of individual holdings in determining portfolio return.
The skill of successful investment manager resides in constructing the asset allocation,
and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer
group of competing funds, bond and stock indices).In order to achieve long term success,
individual investors should concentrate on the allocation of their money among stocks, bonds
and cash.
Thus, the asset allocation decision is the most important determinant of investment
performance. The basic long term objective of any investor should be to maximize his real
overall return on initial investment after investment. To achieve this objective, the investor
should look where the best bargains lie. Asset allocation means different things to different
people.

SECURITY SELECTION

51

This means identifying groups of securities in each asset class and decides the
optimal portfolio.
Different Asset Class are as follows:
Equity shares-new issues.
Equity shares-old issues.
Preference Shares.
Debentures.
PSU bonds.
Government Securities.
Company Fixed Deposits.
Portfolio management is handling the fund on behalf of the company or institution in
order to determine the suitable combination of different assets so that the total risk can be
reduced to the minimum while the return can be achieved to the maximum extent. This is a
tricky job which needs efficiency of high calibre.

Requirements For Asset Allocation

Liquidity or marketability.
Safety of investment.
Tax Saving.
Maximization of return.
Minimization of return.
Capital appreciation or gain.
Funds requirements.
52

CHAPTER 9
MARKET RESEARCH AND ANALYSIS
What is the first thing that comes to your mind when you
think about Investment?
Modes

of Capital Market

Investment
Percentage

15%

Gold

FDs

Real Estate

35%

30%

20%

Life Coverage
25%

All above
40%

Investment

20%

Capital Market

15%

Gold
FDs
Real Estate

30%

35%

What is your Objective of Investing?

Objective
Percentage

Tax benefits
15%

Return
20%
53

Objective of Investment

Tax Benefits

15%

Returns
40%

Life Coverage
20%

All above

25%

Do you Invest in Different Financial Products?

Financial Products
Percentage

Yes
62%

No
38%

Financial Products

Yes
38%

No
62%

Do you know anyone who Invest only in Insurance?

54

Only Insurance
Percentage

Yes
35%

No
65%

Insurance

0.35
Yes
No

3.2

How do you perceive for your Investment?

Investment
Percentage

High Risk
30%

Moderate Risk
55%

55

Low Risk
15%

Risk in Investment

15%

High Risk

30%

Moderate Risk
Low Risk

55%

How much return do you expect on your investment?

Investment
Percentage

Low
15%

Satisfactory
60%

56

High
25%

Return on Investment

25%

15%

Low Risk
Satisfactory Risk
High Risk

60%

CHAPTER 10
PRACTICAL SUMS

57

 Calculate

the Expected Return and the Risk for the Following

Portfolio:

Securities

Probabilities

Return on Securities

A
B
C
D
E

0.2
0.3
0.1
0.3
0.1

30%
15%
25%
20%
10%

Sol:
Security

P x R

(R-ER)

A
B
C
D
E
TOTAL

0.2
0.3
0.1
0.3
0.1

30
15
25
20
10

6
4.5
2.5
6
1
(ER = 20)

10
(5)
5
0
(10)

(R-ER)

P.(R-ER)2

2
100
25
25
0
100

20
7.5
2.5
0
10
40

Where, P = Probabilities
R
= Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
Variance
=
40
= 6.32%
Conclusion - Therefore, the Expected Return on Portfolio is 20%
and the Risk on Portfolio is 6.32%.
Calculate the Expected Return and the Risk for the Following
Security under different conditions:

State of Economy

Probabilities

Return on Securities

Boom
Normal
Recession

0.3
0.5
0.2

40%
30%
20%

Sol:
58

Events

P x R

(R-ER)

(R-ER)

P.(R-ER)2

Boom
Normal
Recession

0.3
0.5
0.2

40
30
20

12
15
4
(ER=31)

TOTAL

9
(1)
(11)

81
1
121

24.3
0.5
24.2
49

Where, P = Probabilities
R = Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
Variance
=
49
=
7%
Conclusion - Therefore, the Expected Return on Portfolio is 31%
and the Risk on Portfolio is 7%.
The Rate of Return on Stock X and Y are given below.
Calculate the Expected Return and the Standard Deviation on
both the Securities. If you could invest in any one, which would
you prefer.

Particulars

Probability

Stock X

Stock Y

Boom
Normal
Recession

0.4
0.3
0.3

40%
30%
20%

30%
25%
15%

Sol:
For Stock X,
Events

P x R

(R-ER)

0.4
0.3
0.3

40
30
20

16
9
6
(ER=31)

9
(1)
(11)

(R-ER)

P.(R-ER)2

Boom
Normal
Recession
TOTAL

59

81
1
121

32.4
0.3
36.3
69

Where, P = Probabilities
R = Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
=
=

Variance
69
8.31%

For Stock Y,
Events

P x R

(R-ER)

(R-ER)

P.(R-ER)2

Boom
Normal
Recession

0.4
0.3
0.3

30
25
15

TOTAL

12
7.5
4.5
(ER=24)

6
1
(9)

36
1
81

14.4
0.3
24.3
39

Where, P = Probabilities
R = Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
=
=
Summary:

Expected Return
Risk

Variance
39
6.24%

Stock X

Stock Y

31%
8.31%

24%
6.24%

Conclusion:
A Risk-Taker Investor would prefer Stock X as returns are high
i.e.31% even though the risk is high i.e.8.31%.
A Risk-Averse Investor would prefer Stock Y as returns are low
i.e.6.24% even though the risk is low i.e.24%.

60

A Advisor would recommend Stock X as compare to Stock Y, Stock X

gives additional returns of 7% by bearing 2% extra Risk.

Chapter 11
Portfolio Management Case Studies
Case Study 1
A multi-billion dollar hedge fund was continually investing in a very limited
Portfolio Monitoring tool that needed to be replaced

because of business and

technical limitations. Every required or new change/update resulted in increasing

consulting costs with no end in sight. In addition, separate development efforts made
by each fund manager was resulting in a hodgepodge of systems- adding

to the

firms inability to consolidate data and applications from disparate systems into a
single place. They needed an immediate, milestone-focused solution, along with a
measurable, well-managed approach to business systems development.

Solution to the Case

North point Solutions developed and implemented a new Portfolio Monitoring
System (PMS) utilizing a business-focused phased implementation process. This type
of redesign gave the hedge fund the ability to add new data points dynamically
without the intervention of developers. It also supported all of their fund portfolios in
one consolidated application and was used by multiple business units, including their
Risk Management and Operations teams.

Benefits to the Case

\

Single, consolidated Portfolio Monitoring System.

Ability to move away from the high cost, low return

consulting approach.

Manageable, measurable approach to business system implementation.

Extensibility of the system to other critical business areas.
61

 Case

Study

Portfolio management case study in the telecommunication industry.

Objective of the Case

Executive
wanted

to

optimise

development.

In

products

in

the

allocate

valuable

alignments
goals,

leadership

at

its

particular,

Fortune
around

the

wanted

team

fund

the

resources

to

high

tactical
wanted

100

processes

pipeline,

between

the client

projects

to

innovation
to

most

be

implement

to

Kalypso

to

product

prioritize

and

new

projects

achieve

objectives.

a portfolio

company

new

innovation

products,

strategic

be

and

able

important

value

and

telecommunications

To

better

meet

these

management practice.

Solution to the Case

The
portfolio
decision

company

turned

management
making.

portfolio

framework

Kalypso

management

that

assisted

process

assistance

with

could

be

used

client

in

developing

the

and

for

solution

to

based

designing

improve

on

strategic

comprehensive

the

client

stock

priorities.

Result of the Case

Today,

the

client

Executives

have

now

projects

rank

is

increased
based

realizing

the

benefits

visibility

into

new

on

they

align

objectives.

The

client

is

decisions

related

to

project

how

able

to

funding

maximize
and

risk.

62

of

portfolio

products
with

being

the

firms

investments,

selection,

and

management.

developed

and

strategy

and

make
minimise

informed
project

 Additional

Benefits

Increased

communication

A single

record

The
high

ability

to

of

truth

stop

priority, high

on

low

value

how
for

to

new

value

optimally manage the

products

projects

projects.

Chapter 12
CONCLUSION
63

and

and

services

reallocate

portfolio.
in

pipeline.

resources

to

From the above discussion it is clear that portfolio functioning is based on market
risk, so one can get the help from the professional Portfolio Manager or the Merchant
banker if required before investment because applicability of practical knowledge through
technical analysis can help an investor to reduce risk.
In other words Security prices are determined by money manager and home
managers, students and strikers, doctors and dog catchers, lawyers and landscapers, the
wealthy and the wanting. This breadth of market participants guarantees an element of
unpredictability and excitement. If we were all totally logical and could separate our
emotions from our investment decisions then, the determination of price based on future
earnings would work magnificently. And since we would all have the same completely
logical expectations, price would only change when quarterly reports or relevant news was
released.
I can conclude from this project that portfolio management has become an important
service for the investors to identify the companies with growth potential. Portfolio managers
can provide the professional advice to the investors to make an intelligent and informed
investment.
Portfolio management role is still not identified in the recent time but due it
expansion of investors market and growing complexities of the investors the services of the
portfolio managers will be in great demand in the near future. Today the individual investors
do not show interest in taking professional help but surely with the growing importance and
awareness regarding portfolios managers people will definitely prefer to take professional
help.

CHAPTER 13
BIBLIOGRAPHY
64

 Reference Books
No.

Book Name

Author Name

Published By

Security Analysis and

S. Kevin

PHL. Learning

Chandra

McGraw-Hill Education

Portfolio Management.
2

Investment Analysis and

Portfolio Management.

Security Analysis and

(India) Ltd.
Fischer

Pearson

Portfolio Management, 6th Edition.

4

Practitioners Book on Trade Finance.Taxmann

Taxmann Publication

Managing projects in Organizations. J. Frame

Frame Publication

Reference Websites
www.allbankingsolution.com/DATA.htm
www.portfoliomanagement.com

65