Investment decisions: Practical aspects

Introduction:

The principles of portfolio management can be applied in practice. It is often considered to be a specialists job because it requires a data bank and professional advice. However, Indian capital market has developed in such a way that investors can get quick and up-to-date information for investment decisions. There are few firms who offer their expertise for individual portfolio management. There are no simple rules, tricks, charts or devices which will provide a return above the average. The market is quite rational, efficient and responsive mechanism that usually cannot be beaten by any single individual. Therefore the following aspects are discussed:

Blue chips:

'Blue Chips' means the shares of particularly, well-known and established companies which have shown consistant growth over the years, which have bright future prospects, and which are expected to continue sustained growth in the future. In other words, strong, profitable, established and diviednd paying companies are known as 'Blue Chips'. They are safe investments and they yield regular dividends and appreciate value with satisfying regularity. The yield and appreciation in Blue chips is modest and less than riskier shares. Blue chip companies have a long history of dividend payments. For example, Coca-Cola, an American company has been paying dividends each year since 1893. TICO and ITC, are the Indian bluechip companies. These shares attract the attention of the investors due to their moderate yields and high capital gains. Blue chips do not always remain as blue chips. The stattus of a blue chip changes from time to time on the basis of their performance. 'Blue Chips' are well-established, financially strong and stable companies having a long and unbroken record of earnings and dividends. These companies are leaders and pace-setters in their respective industries. They are also actively traded and fairly priced. The shares of Tata Iron and Steel Co. Ltd., Hindustan Lever Ltd., and MafatlalIndustries Ltd. are some of the examples of Indian blue chips. These companies are managed by farsighted managements. Bluechips can be classified on the basis of the parentage and the years taken to achieve. The parentage blue chips are multinational corporations and large Indian groups. The other group consists of companies having completed 5, 10 and 15 years.

Emerging Blue Chip:

The new companies started by new promoters or existing business groups start experiencing growth in sales and profits. These companies achieve a high rate of growth in assets of ploughing back of profits. They launch new projects, acquire new assets and raise more money from investors. They emerge as blue chips. The most distinguishing feature of emerging blue chips is rapid-fire growth accompained by high levels of profitability. Most of these companies enjoy a high profile and positive public image. For example, Dr. Reddy's Laboratories Ltd. which was started by Dr. Anji Reddy in 1984 has shown tremendous record of Rs.37.99 crores of net profit in 1994-95 as against Rs.4 lakh in 1985. Today, it is reckoned with an international drug market. Similarly, Apple Industries, GTC, ICICI, Sese Goa are some of the emerging blue chips in India. Emerging blue chips are normally atarted with technical and financial collaboration of multinational companies. They go for latest technology and become more quality oriented and productive. They eventually transform into established growth stocks and become leaders in their product market segments. Investors should be careful in identifying an emerging blue chip. They should also take proper care for the timing of buying and selling of these stocks. In case of emerging blue chip timing is far more crucial for success than in the case of established growth stocks. It is better to invest in emerging blue chips during the growth phase of the company and quit during it,s maturity phase.

Growth stocks:

Growth stock means a stock in a company that retains a good portion of it's earnings in anticipation of being able to reinvest them profitabily in the company. The growth stocks are the shares of fast growing companies whixh show increasing and higher than average earnings per share than the industry. It is good for long term investment, although the current yield of such shares can be insignificant because of their high priceearning ratios. Growth stock is a stock that is expected to show above average capital appreciation in the future.

Growth stocks are in the eye of the beholder. A great deal of stock analysts time is spent trying to discover little known growth stocks. Many companies do not pay dividends and they publicly state that they have no plans to do so. Investors should not consider these stocks as growth stocks because a stock that pays no dividends and doesnot increase in value would not be a very attractive investment. Income stocks pay out a relatively high percentage of their earnings as cividends but growth stocks do not. Instead, the company reinvests it's earnings into profitable investment opportunities that are expected to increase the value of the company as well as it's stocks. There is little doubt that when other things are equal the forward looking investor will prefer stocks with growth potential to those without. But other things rarely are equal particularly in a sophisticated market that is extremely sensitivite to growth. When the growth potential of a stock becomes widely recognised, it's price is expected to react favourably and to advance ahead of stockd lacking growth appeal so that it's price-earnings ratio and dividend yield fall out of line according to conventional standards. There are two problems encountered in appraising growth stocks. The first is, the practical difficulties of forecasting sales, earnings and dividends. The second is the theorotical difficulties of reducing these forecasts to present values. Growth stocks are also actively traded. They are volatile in the sense that price appreciation would be faster when positive signals are recieved but the price could tumble down fast once the signals of sales ar profits levelling acts are noticed though the situation may be only temporary. Examples of established growth stocks are Reliance Industries Ltd., Asian Paints Ltd., Bombay Dyeing Ltd., Bajaj Auto Ltd., Escorts Ltd., Voltas Ltd. These growth stock companies are usually well-established for a number of years. For example, Bombat Dyeing was established in 1879. These stocks belong to the medium risk category. They offer medium returns. These companies enjoy healthy cash flows. They plough back their profits, spent considerable amounts on research and development in orderto innovate new products. Investors should try tofind out growth stocks. However, it is a difficult task because going by just one or two characteristics, they cannot find out the growth stocks. Again, time of buying and selling of growth stock is also important for investment decisions. Normallly the investors should buy the growth stocks during their early phase or growth phase. Though in it,s early pjase the stock is unnoticed and low priced it gets it gets wide publicity during it's growth phase giving the investors excellent rewards. During the maturity phase it's growth stagnates and price stagnates at a high level. Thus, an investor has to sell his growth stock during the later stagnation phase or early decline phase.

Institutional portfolio management:

There is not much difference between the principles governing the management of a portfolio of an individual and an institutional portfolio. The composition of a portfolio depends upon the need and objectives. The institutional investors are the Mutual Funds, UTI, LIC, GIC and Commercial Banks. They have both time and resources to dig deeper than the individual investors. They can employ Skilled Economists, Financial Analysts and Investment Managers. They can purchase copies of registration, documents of the relevant corporations or companies and read them with understanding. They can have a continuous review and

scrutinity of their investment portfolio. Thus, institutional investor has a great advantage over the average individual investor in managing the portfolio. Institutional investors such as UTI and other mutual funds typically hire Asset Management Companies(AMCs) to invest their funds. AMCs or managers are specialised in a particular asset class, such as shares or fixed income securities. The clients establish performance benchmarks for their managers. These benchmarks may be market indices or specialised benchmarks marks that reflect specific investment styles. The clients hire some managers to simply match the performance of the benchmarks. These managers are called passive managers. The clients hire other managers to exceed the returns produced by the benchmarks. These managers are called active managers. In the case of active managers, the portfolio selection is a problem. They simply buy and hold these securities that contitute their assigned benchmarks. Their portfolios are called index funds. Passive managers need to make no refeerence to the effiecient set or risk return preferences. Active managers face a much more difficult task. They must create portfolios that produce returns exceeding the return on their assigned benchmarks in sufficient magnitude and consistency to satisfy their clients. The Institutional investors operate under the advantages of diversification, quality of management and liquidity of funds. There are different institutional investors. There are closed ended and open ended institutional investors. The closed ended institutions operate like a company. Their main objective is to sell shares to the public through public subscribtion. It is listed in a stock exchange and it's shares are traded on the stock exchanges. On the other hand, the open ended institutional investors are often called mutual funds. Their special nature is that unlike closed ended institutions, there is continuous purchase and sale of securities. UTI is an example of open ended institution. It operates with the understanding that the quality of management is superior to the quality of investment in funds by an individual investor. It has superior knowledge about the liquidity factors of the funds and it is able to draw upon the special dividend as well as capital appreciation factors of a particular security. The specialised knowledge helps the institution to diversify in those stocks which will give the ideal combination of securities. The professional consultants have the following superiority over individual investorsin managing the portfolios: a. b. c. d. e. Management Liquidity Diversification Analysis and selection of securities Specialised knowledge due to expertise and timing in evaluating investments

Investment councelling:
An investment advisor councels his clients for a fee. Information on councellors and councelling activities is limited because it is considered to be private. The instruments under

councellor's supervision may not be known exactly. However, the large commercial banks with their extensive trust activities also are heavily involved in investment councelling services. The brokers and independent councellors also render investment advice. In India, Investment Agencies and Portfolio Managers render advisory services as well as manage portfolio for their investors. They require highly qualified and expert staff. Rational investment decisions require skill and knowledge. Individual investors in India, do not possess these skills and knowledge. Therefore they have to depend upon these councellors. Many investors need advice and guidance on the construction and revision of their investment portfolio. Investing is an art which is required for becoming successful investor. Thus, investment councelling plays an important role in the field of investment. If investor decides to use an investment councellor, usually a one year contract will be drawn up between the two parties. The councelling involves three stages. First, the councellor and the investor will evaluate the investor's needs and develop a portfolio objective. The means of arriving at the objective will usually be fairly similar to that of the traditional approach. Second, the investor's present holding will be analysed with respect to this objective. The securities and other investments are not turned over the councellorbut the investor retains the possession and title. This is the main difference between councelling and the trust business, which involves a transfer of title to the trustee. The councellor make specific recommendations about the purchase and sale of existing investments and the investment of any available cash. However, the investor has the option of accepting or rejecting the councellor's recommendations. Third, the account is subject to constant supervision and councellor will be in close contact with the client for updating portfolio performance and making recommendations for changes. Investment councellor requires a wide range to knowledge in the fields of economics, finance, taxation, capital market and security analysis. He should have deep knowledge in specific areas of the investment. He has to stidy regularly for fimding out innovative ideas and research in order to assist his clients. He has to match the needs of the investors and the type of investment medias. He should have professional competence in order to maintain high degree of standards. He has to keep good relationship with the investors. He should see that the investor maintains a systematic record of transactions in securities. He should also see that the follow up measures regarding reciept of shares, tranfer, endorsement, delivery, etc. have been carried out by his clients from time to time.