16

PORTFOLIO
management

What is a Portfolio?

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In finance, a portfolio is an appropriate mix of or collection of investments held

by an institution or a private individual.
Holding a portfolio is part of an investment and risk-limiting strategy called
diversification. By owning several assets, certain types of risk (in particular
specific risk) can be reduced. The assets in the portfolio could include stocks,
bonds, options, warrants, gold certificates, real estate, futures contracts,
production facilities, or any other item that is expected to retain its value.
In building up an investment portfolio a financial institution will typically conduct
its own investment analysis, whilst a private individual may make use of the
services of a financial advisor or a financial institution which offers portfolio
management services.

Meaning of Portfolio:

Portfolio means combined holding of many kinds of finanacial securities i.e.

shares, debentures, government bonds, units and other financial assets. Making
a portfolio means putting ones eggs in different baskets with varying elements
of risks and return. The object of portfolio is to reduce risk by diversification
and maximise gains.

The term investment portfolio refers to the various assets of an investor which are
to be considered as a unit. Thus, an investment portfolio is not merely a collection

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of unrelated assets but a carefully blended asset combination within a unified

teamwork. It is necessary for investors to take all decisions regarding their wealth
position in a context of portfolio.

What is Portfolio Management?

Portfolio management involves deciding what assets to include in the portfolio,
given the goals of the portfolio owner and changing economic conditions.
Selection involves deciding what assets to purchase, how many to purchase, when
to purchase them, and what assets to divest. These decisions always involve some
sort of performance measurement, most typically expected return on the portfolio,
and the risk associated with this return (i.e. the standard deviation of the return).
Typically the expected returns from portfolios of different asset bundles are
compared.
Portfolio management means selection of securities and constant shifting of
portfolio in the light of varying attractiveness of the constituents of portfolio. It is
a choice of selecting and revising spectrum of securities to it in with the
characteristics of an investor. Management means utilisation of resources in the
best possible manner. Portfolio management involves maintainng a proper
combination of securities which comprise the investors portfolio in such a
manner that they give maximum return with minimum risk. This requires forming
of a proper investment policy which is a policy of formation of guidelines for
allocation of available funds among the various types of securities.

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Markowitz analysed the implications of the fact that the investors, although
seeking high expected returns, generally wish to avoid risk. It is the basis of all
scientific portfolio management. Although the expected return on portfolio is
directly related to the expected return on component securities, it is not possible to
deduce portfolio riskness simply by knowing the riskness of individual securities.
The riskness of portfolio depends upon the attributes of individual securities as
well as the interrelationships among the securities.
A professional who manages other people or institutions investment portfolio with
the object of profitability, growth and risk minimization is knonw as a Portfolio
Manager. He is expected to manage the investors assets prudently and choose
particular investment avenues appropriate for particular times aiming at
maximization of profit.

Portfolio management includes portfolio planning,

selection and construction, review and evaluation of securities. The skill in

portfolio management lies in achieving a sound balance between the objectives of
safety, liquidity and profitability.
Timing is an important factor of portfolio revision. Ideally, investors should sell at
market tops and sell at market bottoms. They should be guarded against buying at
high prices and selling at low prices. Timing is a crucial factor while switching
between shares and bonds. Investors may switch from bonds to shares in a bullish
market and vice-versa in a bearish market.

OBJECTIVES OF PORTFOLIO MANAGEMENT

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The basic objective of portfolio management is to maximmise yield and minimise

risk. The other objectives are as follows:
a) Stability of Income:

An investor considers stability of income from his

investment. He also considers the stability of purchasing power of income.

b) Capital Growth:

Capital appreciation has become an important investment

principle. Investors seek growth stocks which provide a very large capital
appreciation by way of rights, bonus and appreciation in the market price of a
share.
c) Liquidity: An investment is a liquid asset. It can be converted into cash with the
help of stock exchange. Investment should be liquid as well as marketable. The
portfolio should contain a planned proportion of high-grade and readily salable
investment.
d) Safety: Safety means protection for investment against loss under reasonably
variations. In order to provide safety, a careful review of economic and industry
trends is necessary. In other words, errors in portfolio are unavoidable and it
requires extensive diversification. Even investor wants that his basic amount of
investment should remain safe.
e) Tax incentives: investors try to minimise their tax liabilities from the
investments. The portfolio manager has to keep a list of such investment avenues
along with the return risk, profile, tax implications, yields and other returns. An
investment programme without considering tax implications may be costly to the
investor.

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ELEMENTS OF PORTFOLIO MANAGEMENT

Portfolio management is a dynamic process whch involves the following basic tasks:
a) Identification of the objectives, constraints and preferences of investors for
formulation of investment policy.
b) Develop and implement strategies in tune with investment policy formulated.
It will help the selection of asset classes and securities in each class depending
upon their risk return attributes.
c) Review and monitoring of the perfomance of the portfolio by continuous
overview of the market conditions and perfomance of the companies.
d) Evaluation of the portfolio for the results to compare with targets and make
some adjustments for the future.

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CONSTRUCTION OF PORTFOLIO:
PORTFOLIO CONSTRUCTION means determining the actual composition of
portfolio. It refers to the allocation of funds among variety of financial assets open
forinvestment. Portfolio theory concerns itself with the principles governing such
allocation. Therefore, the objective of the theory is to elaborate the principles in
which the risk can be minimised subject to desired level of return on the portfolio
or maximise the return subject to the constraints of a certain level of risk. The
portfolio manager has to set out all the alternative investments along with their
projected return or risk and choose investments which satify the requirements of
the investor and cater to his preferences.
It is a critical stage because mix is the single most determinant of portfolio
performance. Portfolio construction requires knowledge of different aspects of
securities. The componenrs of portfolio construction are

(a) Asset location

(b) Security location (c) Portfolio structure. Asset location means setting the asset
mix. Security selection involves choosing the appropriate security to meet the
portfolio target and portfolio structure involves setting the amount of each
security to be included in the portfolio.
Investing in securities presupposes risk. a common way of reducing risk is to
follow the principle of diversification. Diversification is investing in number of
different securities rather than concentrating in one or two securities. The
diversification assures the benefit of obtaining the anticipated return on the
portfolio of securities. In a diversification portfolio, some securities may exceed

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expectatins with the effect that the actual result of the portfolio will be reasonably
close to the anticipated results.

APPROACHES TO CONSTRUCTION OF PORTFOLIO:

There are two approaches to constructing portfolio of securities:
(a) Interior Decorating Appraoch (b) Markowitz Approach.

(a)

Interior Decorating Approach: interior decorating approach is tailor made to the

investment objectives and constraints of each investor. In case of exterior building
or room structure, the furnishing and intrior decoration to be carried out inside the
structure will depend on the purpose for which it is to be used. Similarly, the
portfolio will consist of securities which will suit the individuals investment
objectives and constraints. An individual investor has to carefully develop his
portfolio over aperiod of years to suit his needs and match his investment
objectives. A serious minded investor will have to consider the following
important categories of investment oppurtunities.

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1) Protective Investments: These investments protect the investors against the

uncertainities in life. The life insurance policy is a good example of this type
of investment.
2) Tax Oriented Investment: Some investments provide tax incentives to the
investors. For example, Public Provident Fund, National Savings Certificate
etc.
3) Fixed Income Investment: These investment yield a fixed rate of return on
the investments. For example, investment in preference shares, debentures,
bank, deposits etc.
4)

Emotional Investment: These investments are made for the emotional

security and satisfaction. Investors get some satisfaction from these
investments made in house property, jewellery, household appliances.

5) Speculative Investments: these investments are made for the purpose of

speculation. The motive behind is tomake quick gain out of fluctuations in the
market. For example, investment in real estate, shares, comodity trading etc.
6) Growth Investments: these investments are made for the purpose of earning
capital gains. These are not made for getting regular income. For example,
investment in growth shares, real estates, land, gold etc.
With the help of these varieties of investments, we can attempt to develop
a matrixfor matching the indi vidual characteristics of specific investments
so that a suitable portfolio can be developed for each investor. In real life,
building a portfolio is a simple thing. A young family which may have a
lot of insurance and considerable growth portfolio should add some real

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estate by the time it reaches the midstream. At the middle-age sets, the
investors should avoid making risky and speculative investments. They
should make the necessary emotional investments which will provide
security and mental peace in the old age. Whn they are on the verge of
retirement and even during retirement their portfolio should preferably
consist of safe and income generating investments.
(b) Markowitz Approach: Markowitz approach provides a systematic seacrh for
optimal portfolio. It enables the investors to locate minimumvariance
portfolios i.e. portfolios with the least amount of risk for diferent levels of
expected returns. It is more analytical than simple diversification because it
considers correlations between asset rturns for lowering risk. There are
computer based packages available for determinig efficient portfolios. If we
go through this available process for different levels of expected returns, we
can locate minimum variance portfolio. Application of the above package will
tell us how much we can invest in each security to form an efficient portfolio
for a given level of return.

PORTFOLIO COMPOSITION

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The principla objective of the traditional approach is to select the portfolio of

securities that most appropriately meets the investors needs. The investor will
attempt to maximise expected return subject to the level of risk involved. The
first step is to obtain the pertinent facts about the individual. This information
aids the portfolio manager in determining the constraints on thye portfolio and the
most appropriate portfolio objectives. If the major objective is income , the
portfolio will be made up of high-quality long-term bonds. If safety principle is
the objective, the portfolo will be made up of high-quality short-term debt
instruments. Objectives for common stock portfolios are more complex and range
from income to rapid appreciation.

PRINCIPLES OF PORTFOLIO CONSTRUCTION

The portfolio manager has to follow certain principles while constructing a
portfolio. These principles are as follows:
1) Safety Principle: The safety principle means that the portfolio must
maintain its principal value in the event of forced liquidation. Normally,
the investor does not want to accept a loss of principal amount of
investment. There are two important considerations involved in
determining the need for safety principal tenure of ownership and the
effect of inflation. If the tenure of ownership is weak, the portfolio may be
liqiudated to meet some contengencies. Another consideration is the effect

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of a rising level on the principal invested initially in the portfolio. For this
purpose, many portfolio managers attempt to hedge against inflation by
including at least a portion of the portfolio in common stock.
2) Need for income: In formulating the objective for a portfolio the starting
point is usually to establish an amount of income the portfolio must
generate. This involves two stages. In first stage, it is necessary to
determine the amount of income the portfolio must provide based on
current conditions. This involves determining a family budget that is
consistent with the standard of living desired and then determining
whether there are other sources of income in addition to the proposed
portfolio of securities. As inflation is a fact of life , it is necessary to
estimate its impact and attempt to provide a stream of income from a
securities portfolio that offsets it, as well as possible.

3) Taxation: There mey be strong incentive for many investors in the high
tax brackets to invest in tax-exempt securities rather than common stock.
It offers investors to combine high effective high yield with relatively low
risk. Those investors who qualify tax-exempt securities may constitute a
worthwhile investment.

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4) Temperament: A higher return may be expected from a well-diversified

portfolio of common stock than a portfolio of bonds, some investors may
not be willing to accept tohe greater risk associated with the common
stock. Thus, temperament is the most important principle on the formation
of portfolio objectives. It indicates the investors willingness to accept
risk. Common stock prices are volatile. Investors, who find this volatility
disturbing, may not have the temperament for common stock investment.
Temparament may be the overriding constraint in arriving at an
appropriate portfolio policy for the investor.

COLLECTING THE BASIC DATA

Initially, the portfolio manager has to devote a great dealof attention to basic
considerationsuch as pension plans, life insurane and educational funds for
children. Usually, the basic needs must be satisfied before making an investment
programme. Every individaul investor has a priority to expenditures. The
followinglist of priority expenditure is probably representative.
(a) Food, clothing, housing and transportation.
(b) Life insurance.

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(c) Pension plan.

(d) Savings for emergency.
(e) Investments.
Investments in securities can be considered only after basic family needs re satisfied. The
type of data that can be collected about the investors includes the following items:
(a) Stated purpose for the portfolio.
(b) Age and health of the family.
(c) Martial status and responsibilities.
(d) Occupation.
(e) Approximate income, sources and expected duration.
(f) Saving habits.
(g) Property ownership.
(h) Current security holdings.
If all priority expenditures have been satisfied, the portfolio manager has greater
freedom to pursue a more aggressive policy.

FORMULATING THE PORTFOLIO OBJECTIVES

The portfolio objectives can be determined by ascertaining the constraints on a
portfolio. The greater the number of constraints and the more binding these

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constraints, the more conservative the portfolio must be. The following are the six
possible portfolio constraints which are evaluated to determine the appropriate
objectives:
(1) Need for current income to meet the living expenses.
(2) Need for constant income to face inflation.
(3) Need for safety principal to liquidate the investment on a shoet notice.
(4) Need for safety principal to reduce the effect of purchasing power.
(5) Need for tax exemption.
(6) Temperament.

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WEIGHING CONSTRAINTS
The last stage in determining portfolio policies is ti be establish the constraints on
the portfolio. This involves weighing each constraint individually and determining
its importance by using a ranking scale. We can use a ranking scale of one to five
for each constraint as follows:
Need for current income
Need for constant income
Need for safety principal (liquidity)
Need for safety principal (inflation)
Taxability
Temperament

1
1
1
1
1
1

2
2
2
2
2
2

3
3
3
3
3
3

4
4
4
4
4
4

5
5
5
5
5
5

A low ranking (1 or 2) would mean that the particular constraint is not that
important. A high ranking would mean that the constraint is quite important. Once
the checklist is competed, it becomes a matter of weighing the trade off among the
various constraints to determine the appropriate portfolio objectives.

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SELECTING THE SECURITIES

Once the objective of the portfolio is determined the securities to be included in
the portfolio must be selected. For bond portfolios this task is not difficult.
Normally, the portfolio is selected from a list of high quality bonds that the
portfolio manager has at hand. Common stock portfolios , however are somewhat
more complex because the objective may range from income only to pure
appreciation. The portfolio manager has to decide the goals before selecting the
common stock. The goal may be to achieve pure growth, growth with some
income or income only. Once the goal has been selected, the portfolio manager
can select the common stocks as follows:
(1) Select one industry appropriate to goal.
(2) Select one company per industry.
(3) Determine the size of participation.

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In addition to certain qualitative considerations, the decision to select the

company will also be based on current uncertainty, growth, yield, expected
earnings, past earnings, expected dividends, expected price earning-ratio and past
price earning-ratio. The final step is to determine the number of shares of each
company to purchase. This involves determining the number of different stocks
that would require tot give adequate diversification. If the size of the portfolio
permits an equal amount can invested in each stock adjusted to round lots. The
Markowitz approach proposes selecting certain securities for inclusion in a
portfolio from a list of 100 or 200 stocks. The expected return and risk are
calculated for each stock and the expected return would include both appreciation
and dividend income. He assumed that individuals would select portfolios of
securities to maximize their expected return and at the same time minimize the
risk associated with that return. This meant that individuals would prefer the
portfolio of securities with the highest expected return for a given level of risk;
for a given expected return individuals would prefer portfolios with the lowest
risk.

SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is the 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

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different investment opportunities the following aspects of risk management

should be considered.
a) The selection of a level of risk and return that reflects the investors
tolerance for risk and desire for return, i.e. personal preferences.
b) The management of investment alternatives to expand the set of
opportunities available at the investors acceptable risk levels.
The very averse investor might choose to invest in mutual funds. The more risk
tolerant investor might choose shares, if they offer higher returns. Much more can be
done to help the investor to secure most desirable opportunities. Investment opportunities
can be packaged together by forming portfolios. This will increase the number of
investment opportunities available at any specified risk level. Thus, the potential for
creating portfolios changes the whole problem of investment choice. Risk adverse
investors may be unable to find a way to invest in shares and debentures to earn the
higher returns from the opportunities through portfolios.
Portfolio management in India is still in its infancy. An investor has to choose a
portfolio according to his preferences normally goes to necessities and comforts like
purchasing a house or domestic appliances. His second preference goes to contractual
obligations such as life insurance or provident funds. The third preference goes to make
some a provision for savings required for cash transactions in the form of cash or bank
deposits which are required to make day to day payments. The next preference goes to
short-term investments like UTI units and post office deposits which provide liquidity.

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The last choice goes to investment in company 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 manager
provides a variety of services including diversification, active portfolio management,
liquid securities and performance of duties associated with keeping track of investors
money. Professionally managed funds include open-ended mutual funds, money market
funds and close-ended mutual funds. A great variety of investment objectives, portfolio
management styles and management expense levels are present in the professional fund
management industry. Investors are often able to select a fund ideally suited to their
personal needs, wealth levels and objectives.

EFFICIENT PORTFOLIO
Portfolio management involves construction of portfolio based upon investors
objectives, constraints, preferences for his risk and returns and his tax liability. It is
reviewed and adjusted from time to time in tune with the market conditions. The
evaluation is to be done in terms of targets set for risk and return changes in the portfolio
are to be made in order to meet the changing conditions.
In order to construct an efficient portfolio, we have to conceptualize various
combinations of investments in a basket and designate them as expected portfolios. Then
expected returns from these portfolios have to be worked out. The risk on these portfolios

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is to be estimated by measuring the standard deviation of different portfolio returns. We

can diversify into a number of securities whose risk return profiles vary in order to reduce
the risk.

The shaded region represents all possible portfolios that can be obtained from a
given set of securities. The portfolios lying on the curve ABC are efficient portfolios
because they offer a maximum return for a given level of risk and minimum risk for a
given level of return. The portfolio at point D is on the boundary of the feasible region
but it is not efficient, because the portfolio on curve ABC offering the same expected
return is less risky. The Markowitz assumes that any rational investor will prefer efficient
portfolios to all other portfolios. The choice of a particular efficient portfolio depends on
the investors preferences or utility function.

SELECTING THE APPROPRIATE PORTFOLIO:

The investor has to select the most appropriate portfolio from among the many
portfolios. He has the option (a) maximizing expected returns for a given level of risk or
(b) minimizing risk for a given level of expected return. The Markowitz model allows a
trade-off between expected returns and risk which depends upon each investors risk
preferences. The investor can select the risk combination that best satisfies unique
personal preferences.

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Portfolios differ from one another not just in number and type of securities held
but also in combination of risk and return they offer. Therefore, everyone will not choose
the same portfolio. If they choose from among alternative portfolios on the basis of
expected return and variance they will pick up efficient portfolios.

REVIEW AND REVISION OF PORTFOLIO:

Investors have to review and revise their portfolios regularly. Some investors do
not review their portfolios due to lack of time and inclination to undertake review. Many
investors have reluctance to sell their securities because they are linked to gold or real
estate to be liquidated only during time of financial distress. The world of investments is
highly dynamic and rapidly changing. Therefore, every investor should review
periodically their portfolios and revise them in the light of changing circumstances.

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Several changes are likely to take place in the world. Relative market value of
various securities in the portfolio may change and new information may alter the risk
return prospects of various securities. The funds available for the portfolio may be
changed. In order to face these changes periodic review and revision of portfolio is
necessary. It helps the investor in the following ways.
a) To maintain adequate diversification if the relative values of various securities
are changed.
b) To expand or contract the size of the portfolio to absorb surplus funds or after
withdrawal of funds.
c) To reflect changes in investor risk disposition.
d) To incorporate new information relevant for risk return assessment.
The portfolio review and revision can be taken up from time to time but the object
is to maximize benefits in relation to its costs. It depends upon the changes in the
investment environment, size of the portfolio and investment approach followed
by the investor.

PORTFOLIO MIX

INTRODUCTION

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When investors make decisions with reference to their portfolio they should make
a portfolio mix. The portfolio theory is the basis of portfolio management. It
relates to the efficient portfolio investment in financial assets like shares,
debentures and bonds. The basic objective of investment portfolio is to maximize
returns with minimum risk. Other objective may be to get regular returns, capital
appreciation, and liquidity and tax benefits. Portfolio management is a dynamic
and flexible concept and it involves regular and systematic analysis, judgment and
basic actions. The basic operations of management are to identify investors
objectives, constraints and preferences to frame the investment policy, which may
be constant mix policy or variable mix policy. The portfolio is reviewed and
adjusted from time to time in tune with the market conditions.

Portfolio selection is concerned with choosing specific securities to be purchased

and included in the portfolio. This process requires allocation of total investment
into major categories of investment and then further allocation into specific
investments, which is known as portfolio mix decision. In practice, major mix
decision for stock and bond portfolios is the proportion of total investment to be
invested in each category.

TRADITIONAL PORTFOLIO THEORY

Traditional portfolio theory believes that the market is inefficient and the
fundamental analyst can take advantage of this situation. It is a very subjective

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nature. The normal method of estimating the return on an individual security is to

find out the amount of dividends, price earning ratios, the common holding period
and market value of shares. The traditional theory recognizes specific types of risk
and non-risk factors bearing upon return such as interest rate risk, purchasing
power risk and financial risk and non-risk variables such as taxation and liquidity.
The traditional theory is based on the fact that risk can be measured on each
individual security through the process of finding out the standard deviation.
Greater variability and higher standard deviation shows high risk and vice-versa.

The traditional theory believes that the investors prefer larger to smaller returns
from securities. The ability to achieve higher returns depends upon the individual
investors judgment of risk and his ability to assume specific risks. Investors can get
higher returns by analyzing internal financial statement of the company. The analysis is
based on the risk and return criteria of single security. The following steps are need in
traditional portfolio theory:
1)

Background information- the investor has to get the background information

such as minimum amount of investment, family background and economic
factors.

2)

Investment goals- an investor has to establish a suitable goal for building his
portfolio mix.

3)

Investment policies- in order to achieve the desired goals, the investor has to
establish clear cut policies. The traditional portfolio reflects a mixture of
concentration and diversification.

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4)

Security selection- With the help of goals and policies, the investor has to
select securities for building his portfolio. The ideal portfolio mix would be
based on earnings, dividends, P/E ratio and efficiency of the management of
the company.

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 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 risk of a portfolio can be reduced by

diversification. Harry Markowitz and William Sharpe have developed the modern
portfolio theory. They have developed combination of securities to get the most efficient
portfolio.

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 performance
of the securities and analyze 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. The following are the assumptions of Markowitz theory:

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1) Investors make decisions on the basis of expected utility maximization.

2) In an efficient market, all investors react with full facts about all securities in
the market.
3) Investors utility is the function of risk and return on the securities.
4) The security returns are correlated to each other by combining the different
securities.
5) The combinations of securities are made in such a way that the investor gets
maximum return with minimum of risk.
6) An efficient portfolio exists, when there is lowest level of risk for a specific
level of expected return and highest expected return for a specified amount of
portfolio risk.
7) The risk of a portfolio can be reduced by adding investments in the portfolio.

The effect of two securities can also be studied when one security is more risky as
compared to the other security. A combination of two securities will produce
superior results to an investor rather than holding only one security. It is also
believed that holding two securities in the portfolio. When two securities are taken
on a portfolio and if they have negative correlation then risk can be completely
reduced because the gain on one security can be set off against the loss of the
other security.

MARKOWITZS TWO SECURITY ANALYSIS

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Markowitz hypothesized that individuals would select portfolio of securities to maximize

expected return and at the same time minimize the risk associated with the return. in other
words, individuals are assumed to be risk averse, which meant they would not accept risk
without being compensated for it. This means that individuals would prefer the portfolio
of securities with the highest expected return for a given level of risk. For a given
expected return individuals would prefer portfolios with the lowest risk. Portfolios that
met this criterion are described as efficient portfolios.

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 economics 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. Individual securities return is determined solely by random factors and on
its relationship to this underlying factor with the following formula
Sharpe has identified the optimal portfolio through his single index model.
According to him, the beta ratio is the most important in a portfolio. The optimal
portfolio is directly related to the beta.

EVALUATION OF RISK AND RETURN

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A portfolio is a combination of securities. It is essential that every security should

be evaluated in portfolio content. Portfolio analysis considers the determination of future
risk and return in holding various combinations of individual securities. Expected return
on a portfolio is a weighted average of the expected return of individual securities.
However, portfolio variance can be less than a weighted average of security variances.
Thus an investor can reduce portfolio risk by adding more securities with greater
individual risk than any other security in the portfolio. An investor can estimate expected
return and expected risk level of a given portfolio of securities. In order to estimate the
total risk of a portfolio, several estimates are needed. This requires the variance of each
individual security and the co-variance or correlation co-efficient of each security.

PORTFOLIO RISK

Modern portfolio theory believes in the maximization of return through a

combination of securities. It determines the relationship between different securities and
then draws inert-relationships of risks between them. Although the expected return for a
portfolio is an average of the individual securities returns. A portfolio risk can be less
than the average of the risk of its component securities returns, a portfolio risk can be less
than the average of the risk of its component securities. This fact yields the risk reducing
benefits of diversifying. The key to the amount of risk reduction that diversification can
achieve is the degree of correlation between the returns on the security and the returns on
the existing portfolio. Correlation is the strength of the relationship between two

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variables. It is positive when the two variables move together a majority of the time and
negative when they move primarily in opposite directions. If the action of one variables is
completely independent of the other variable, then the two variables have no correlation.
The measure of the degree of correlation is the correlation co-efficient which always
takes a value between -1 and +1. a correlation co-efficient of 0 indicates no correlation.
When the correlation co-efficient is greater than 0, it is

PORTFOLIO MIX

Portfolio mix is a carefully blended securities combination within a unified frame

work. When the mixture of securities is considered as a whole, it is worth more than the
sum of the considered securities independently of one another. Thus, the mixture of
portfolio as a whole has characteristics of its individual securities. In order to build a
portfolio mix, we have to conceptualize various combinations of investments basket.
Then, the expected returns from these portfolios have to be worked out. Thereafter, the

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risk on these portfolios has to be estimated by measuring standard deviation of different

portfolio given level of risk or which offers minimum risk for a given level of return is an
optimal portfolio mix. Thus, the choice of a particular portfolio mix depends upon the
investors preference or utility function.
Guidelines for building an optimal portfolio mix
Optimal portfolios cannot be built overnight. It requires time and patience. Wise
investors do not pull all their money in just one or two securities, because the risk of such
concentration is very high. If they diversify too much, the average performance of their
portfolio may be reduced. Hence, portfolio should be reviewed periodically. It should be
managed properly. In order to build an optimal portfolio mix, an investor or portfolio
manager should analyze the following questions:
a)

How often do we readjust the holdings in the portfolio? Do we

reallocate the holdings at the end of each year or do we let the holdings
stay intact after the portfolio is chosen?

b)

What is the proper number of stocks to be included?

16

FORMULATION OF FLEXIBLE MODEL ON INDIVIDUAL PORTFOLIO MIXES:

The traditional approach of portfolio construction involves two major decisions

determining the appropriate portfolio objective and actually selecting the securities, to be
included in the portfolio. This evaluates the individual investors needs in terms of
income and capital appreciation and then selects the appropriate securities to meet these
needs. The process normally involves the following steps:

1) To obtain the pertinent facts about the individual.

2) Determine the portfolio objectives: These are known as constraints or attributes.

Normally, the following objectives or attributes can be used for this purpose.

Stability of income

Safety of money

Rate of return or profitability

Inflation protection

Capital appreciation or growth

Liquidity and marketability

Tax benefits

Availability of funds

Frequency of returns

Provision for post-retirement benefits

16

Degree of control

Social status and obligation

3) Using the scale: This may be undertaken in different ways. We can use a scale of
00 to 5 points. Thus, 0 to 5 points can be given for the investment item with
reference to the individual attribute. A low scale say 1 or 2 would mean that the
particular attribute is not very important, whereas a high scale would mean that
the attribute is quite important.
4) Ranking for investment attributes: We can give ranks to investment items. The
highest rank would be 12 given for the investment which will give highest
benefits and lowest rank 1 for investment which will give lowest benefits.

5) Product: The scale and ranks given for each investment attribute for every
investment item will be multiplied in order to get product.

6) Total product: The product obtained for each investment attribute are then added
to get the total product.

7) Weighted value: The total product value is multiplied by the amount invested in
each investment item in order to obtain the weighted value.

16

8) Total weighted value: The weighted value of all investment items is added to
determine total weighted value.

9) Total ranks: The total value of ranks is obtained by adding all the ranks given to
investment attributes.

Chapter 4
ASSET ALLOCATION AND PORTFOLIO
DESIGN

16

Asset allocation & Portfolio Design

Basis of Selection of Equity Portfolio
Classes of Asset allocation
Management of Asset allocation
Asset allocation Discipline
Implementation Asset allocation
Portfolio Design

ASSET ALLOCATION AND PORTFOLIO DESIGN

16

Introduction:
The portfolio manager has to invest in those 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. This requires
the forecast of the expected return and standard deviation for both the optimal stock and
the optimal bond portfolio, along with the covariance between the two portfolios.
Asset allocation:
Asset allocation is the evaluation of the needs of a plan or endowment and the assessment
of the appropriate asset mix required to meet those needs. It is an important subject which
has attracted enormous interest in modern times. Asset allocation means different things
to different people. The portfolio manager has to complete the following stages before
making asset allocation.
a) Security selection: This means identifying groups of securities in each
asset class and decides the optimal portfolio. The following are the
different asset classes:
1) Equity shares new issues
2) Equity shares old issues
3) Preference shares
4) Debentures

16

5) PSU Bonds
6) Government securities
7) 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 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 caliber. Therefore, the portfolio manager has
to keep in mind the following factors while making asset allocation and design an
efficient portfolio.
(1) Liquidity or marketability
(2) Safety of investment
(3) Tax saving
(4) Maximization of return
(5) Minimization of risk
(6) Capital appreciation or gain
(7) Funds requirements

BASIS OF SELECTION OF EQUITY PORTFOLIO

A portfolio is a collection of securities. It is essential that every security be viewed in
portfolio context. It is logical that the expected return of a portfolio should depend on the
expected return of each of the security contained in it. Moreover, the amounts invested in
each security should also be important.

16

There are two approaches to the selection of equity portfolio. One is technical analysis ad
the other is fundamental analysis. Technical analysis assumes that the price of a stock
depends on supply and demand in the capital market. All financial and market
information of given security is already reflected in the market price. Charts are drawn to
identify price of a given security over a period of time. These charts enable us to predict
the future movement of the security.
The fundamental analysis includes the study of Ratio analysis, past and present track
record of the company, quality of management, government policies etc. An efficient
portfolio manager can obviously give more weight to fundamental analysis than technical
analysis.

MARKOWITZ MODEL
Markowitz used mathematical programming and statistical analysis in
order to arrange for the optimum allocation of assets within a portfolio. He
generated portfolios within a reward-risk context. He considered the
variance in the expected returns from assets and their relationship to each
other in constructing portfolios. To build an efficient portfolio an expected
return level is chosen and the securities are substituted until the portfolio
combination with the smallest variance of the return level is found.
b) Group selection: Means identifying groups of securities in each asset
class and decide the optimal portfolio. For example, appropriate
combination of the groups within each asset class will be: say 50%

16

Manufacturing industries such as Cement, Sugar, Textiles, Petro-chemicals

etc., and 30% in Utilities like Electricity, transport etc. and 20% in new
industries like Computer software, Entertainment etc.
There may be several combinations of investment portfolio. Allocation of
available funds among possible investment instrument is a question of top
most importance to any portfolio manager. Among all risky investment
avenues, selection of the best possible combination and allocation of resources
among these selected investment groups is a problem of great importance.

CLASSES OF ASSET ALLOCATION:

There are three distinct classes of asset allocation which are as follows:
(a) Strategic Asset Allocation: It is the identification of the normal asset mix policy
which represents the best compromise between a need for stability and a need for
performance. It refers to what the portfolio manager would do for the long-term needs of

16

plan. It also shows how a portfolios funds would be divided, given the portfolio
managers long-term forecasts of expected returns, variances and co variances.
(b) Tactical Asset Allocation: It refers to an active management process in which the
investor seeks to opportunistically respond to the changing patterns of capital markets. It
refers to what the portfolio manager should do under current market conditions the
objective of tactical asset allocation is to make money by shifting the asset mix in
response to changing opportunities. The portfolio manager should know how to divide
the funds at any particular movement given the investors short-term forecasts. Tactical
asset allocation has several key attributes. First, it is comparable to sector rotation, except
that instead of rotating among the economic sectors of the equity market, we are rotating
among the sectors of asset classes. Secondly, it is based on a strategy which objectively
measures the likely relative returns of the major liquid asset classes such as shares, bonds
and cash. Thirdly, the strategy involves a disciplined, quantitative structure for measuring
available return. Thus, the tactical asset allocation is designed to exploit shifts in the
relative attractiveness among the asset classes. It is strategy which provides the discipline
to take a contrarian position. In each of the tactical asset allocation strategies employed
by various portfolio managers, the tendency is to buy the out-of favour asset class.
(c) Dynamic Asset Allocation: It is an active asset allocation strategy. The objective is
to protect the portfolio against adverse consequences. This is also known as portfolio
insurance. The long term policy of asset allocation is to shape the normal risk profile of
portfolio to meet the long term needs of a plan. It requires careful balancing of need for
return against the aversion to risk.

16

MANAGEMENT OF ASSET ALLOCATION

Asset allocation represents the single greatest opportunity to enhance performance
available in the modern capital markets. Therefore, the long term asset allocation is
established on a careful analysis. The trade-offs between uncertainty and performance
are carefully weighed in the light of long-term needs of the funds. Short-term adjustments
handled through little cash flows with little or no formal analysis. The management has to
see that proper allocation of assets add value by shifting the asset mix. This would also
depend upon the capital flows in the markets. The capital flows help to keep securities
from straying very far from fair value. If capital flows do not occur , then markets can
stray from fair value.

ASSET ALLOCATION DISCIPLINE

A disciplined structure for asset allocation is generally predicted on the key assumptions
which are given below:
(a) The market tells us what rewards are available.
(b) There is normal equilibrium, relationship in these rewards.
(c) When rewards offered by the asset classes stray from normal market forces will pull
them back into line.

16

The capital markets include what rates of return are available in the various asset classes.
We know the yield to maturity, and also price earnings ratio on the stock market. It gives
us an indication of the long term rewards available in stocks. There is normal
relationship among this implied rewards or returns. The capital market also corrects
disequilibrium conditions when they occur. As equity returns stray from their normal
relationship with fixed income returns, the forces of the capital market will pull them
back into line towards normalcy.
A tactical asset allocation discipline can give an investor the confidence to take the
contrarian stance. There are subtle differences which make same tactical asset allocation
process more effective. There are differences which lead towards one asset class or
another over an extended period of time. There are subtle differences which lead some
asset allocation process to time market tops and bottoms rather poorly. The best asset
allocation strategies combine several key decisions such as:
(1) A measurement of disequilibrium conditions
(2) An evaluation of economic implication
(3) Considerations of patterns of sentiments
These strategies begin with a evaluation of these kinds of market opportunities. The
measurement of how far the markets have strayed from equilibrium relationships must lie
at the foundation of any successful asset allocation approach. Most tactical asset
allocation processes share a highly disciplined structure.

16

ASSET ALLOCATION IMPLEMENTATION:

Tactical asset allocation does not require the use of futures. It can be implemented
without resorting to the use of futures. The transaction costs are slashed to low levels.
Instead of an asset allocation discipline having to add 150 basis points, it need only add
10 to 20 points to cover the transaction cost. The markets are very deep and liquid. They
provide excellent liquidity. An investor can execute asset allocation shift easily and
quickly. Futures permit simultaneous trades. However, equity holders will have to
carefully follow buy programme consistent with their investment management
disciplines. A shift in mix implemented by futures is not disruptive to the management of
the underlying assets.

The futures strategy can be overlayed on top of another manager without the other
manager even being aware of the trades. This has another advantage. If the active asset
managers outperform the index, the use of futures permits the investors to fully capture
the value added by management within the asset classes. The futures only reflect the
index return, while the asset earns the index return plus something extra. The use of
futures does not disrupt the income stream of organizations where income is
consideration. If the portfolio is shifted from stocks into bonds, the income rises. The
futures may be favorably mispriced. If a futures trading strategy uses the futures

16

mispricing, as a part of the decision rule, a strategy can be designed which benefits from
any ongoing pattern of futures mispricing. Thus, mispricing is highly advantages for most
conventional asset allocation process.

PORTFOLIO DESIGN
Combined holding of financial securities is known as portfolio. It is a range of
investments held by a person or a company. A portfolio design is a plan or sketch for
making a portfolio. The basic objective of portfolio management is to maximize yield and
minimize risk. The other objectives are depending on the needs of the investor. However,
regularity of income, capital appreciation, liquidity, marketability, safety and minimizing
tax liabilities are some of the important objectives of the investors. The portfolio design
has to be carefully developed to suit the needs of the investor and match his investing
objectives. The portfolio manager can develop a matrix for individual portfolio design.
There are two approaches for construction or designing a portfolio.

(a) INTERIOR DECORATING APPROACH:

16

Interior decorating approach is tailor-made to the investment objectives and constraints of

each investor. The interior decoration which is adopted inside the house/shop depends
upon the purpose for which it is used. Similarly, the portfolio would consists of the
securities which would suit the individuals investment objectives and constraints. The
individual investor has to develop his portfolio carefully over a period of years to suit his
needs and match his investment objectives. A serious minded investor has to consider the
following important categories of investment opportunities:
(1) Protective investments: These investments protect the investors against the
uncertainties in the life. The life insurance policy is a good example of this type of
investment opportunity.
(2) Tax oriented investment: Some investments provide tax incentives to the investors.
For example, investment Public Provident Fund, National Savings Certificates etc.
(3) Fixed income investment: These investments yield a fixed rate of return on the
investments. For example, investment in preference shares, debentures, bank deposits etc.
(4) Emotional investments: These investments are made for the purpose of emotional
security and satisfaction. Investors get some satisfaction from the investments. For
example, investment made in house property, jewellery, household appliances.
(5) Speculative investments: These investments are made for the purpose of speculation.
The motive behind it is to make quick gains out of fluctuations in the market. For
example: investment in real estates, shares, commodity trading etc.

16

(6) Growth investments: The investments are made for the purpose of earning capital
gains. These are not made for getting regular income. For example, investment in growth
shares, real estates, land, gold etc.

With the help of this variety of investments, we can attempt to develop a matrix for
matching the individual characteristics of specific investments so that a suitable portfolio
can be developed for each investor. In real life, building up a good portfolio is a simple
thing. A young family which may have a lot of insurance and considerable growth
portfolio should add some real estate by the time it reaches the midstream. At the middleage sets, the investors should avoid making risky and speculative investments. They
should make the necessary emotional investments which will provide security and mental
peace in the old age. When they are on the verge of retirement and even during retirement
their portfolio should preferably consist of safe and income generating investments.

A matrix for portfolio management can be used as follows:

Individual
characteristics

Protective

Tax saving

investments investments

Fixed
income

Emotional

Speculative

investments investments inve

16

investments
Age
Risk taking

Young/old
Low

ability
Liquidity

High
Low

needs
Current

High
Low

income needs
Growth needs

High
Low

Tax liability

High
Low
High

(b) MARKOWITZ APPROACH:

Markowitz approach provides a systematic search for optimal portfolio. It
enables the investors to locate minimum variance portfolios i.e. portfolios with
minimum amount of risk for different levels of expected returns. It is the process
of combining assets that are less than perfectly positively correlated in order to
reduce portfolio risk without sacrificing portfolio returns. Markowitz approach is
more analytical than simple diversification because it considers correlations
between assets return for lowering risks. There are computer based packages
available for determining the efficient portfolios. If we go through this process for

16

different levels of expected returns, we can locate minimum variance portfolio.

Application of the package will tell us how much we can invest in each security to
form an efficient portfolio design for a given level of return. Investment
management is an ongoing process and it requires continuous monitoring of
information that may affect a securitys value. Such a periodic review points out
the need for revision s in the existing portfolios of assets. Portfolio revision
involves making required changes in the portfolio design at an appropriate time.

Chapter 5

16

EVALUATION

OF

PORTFOLIO

PERFOMANCE
Introduction
Need for Consistent Portfolio Evaluation
Portfolio Evaluation
Measure of Portfolio Return

16

EVALUATION OF PORTFOLIO PERFOMANCE

Introduction:
Portfolio evaluation is a critical and often poorly handled part of the portfolio
management. The important problem of portfolio evaluation is the human
tendency to focus on the return on portfolio over a period of time with little regard
to the risk taken in achieving that return. Performance should evolve recognition
of both the return and risk ness of the investment. The portfolio has to be
continuously reviewed over a period of time and if necessary, should be revised
depending upon the objectives of the investor.
NEED FOR CONSISTENT PORTFOLIO EVALUATION:
Portfolio management involves maintaining a proper combination of securities
which comprise the investors portfolio in a manner that they give maximum
return with minimum risk. It requires framing of a proper investment policy and
guidelines for allocation of available funds among various types of securities
under different proportions. The investor should have continuous review and
scrutiny of his investment portfolio. Performance of a fund should be measured
by computing the actual rates of return on the assets of the fund. These rates of
return should be based on the market value of the assets of the fund. Complete
evaluation of the portfolio performance must include examining the degree of risk
taken by the fund.

16

According to Robert A. Strong, a percept of finance theory is the

concept of utility maximization. When given the choice, people
avoid distasteful events and seek out satisfying phenomena. They try to maximize
the expected utility associated with their decisions. Investors must choose
between investment alternatives where the future performance of the competing
investment choices is uncertain. There is a tradition of using the variance or
equivalently the standard deviation of return as a quantitative measure of risk.
Therefore, the essence of performance evaluation of an investment portfolio is
associated with a measure of risk with the portfolio return.

Portfolio Evaluation:
A portfolio manager, by evaluating his own performance can identify sources of
strength or weakness. It can be viewed as a feedback and control mechanism that
can make the investment management process more effective. Good performance
in the past might have resulted from good luck, in which case such performance
may not be expected to continue in the future. On the other hand, poor
performance in the past might have been the result of bad luck. Therefore, the first
task in performance evaluation is to determine whether the past performance was
good or poor. Then the second

task is to determine whether such performance

was due to skill or luck. Good performance in the past may have resulted from the
action s of a highly skilled portfolio manager. The performance of a portfolio
should be measured periodically, preferably once in a month or a quarter. The

16

performance of an individual stock should be compared with the overall

performance of the market as indicated by a market index like a BSE Sensex. You
can develop a relative perspective of performance by making such a comparison.
Portfolio management involves maintaining a proper combination of securities
which comprise the investors portfolio in a manner that these combinations give
maximum returns with minimum risk. It requires framing a proper investment
policy which means formation of guidelines for allocation of available funds
among the various types of securities including variation in such proportion under
changing conditions requires continuous review and scrutiny of investment
portfolio by the investor.

MEASURE OF PORTFOLIO RETURN

Portfolio performance is evaluated over a time interval. William Sharpe has
suggested that portfolio performance evaluation can be made over a time interval
of at least four years with returns measured for a number of periods within the
interval, typically monthly or quarterly. In practice, monthly evaluation would be
preferred.

16

In the situation, where there are neither additions nor subtractions from the
portfolio during the time period, calculation of the portfolios periodic return is
very simple. All that is required is the market value of the portfolio at the
beginning and at the end of the period. The market value of a portfolio at a point
of time is determined by adding the market values of
that particular time.

Chapter 6

all the securities held at

16

DIFFERENCE
BETWEEN
PORTFOLIO MANAGEMENT SERVICES
AND
MUTUAL FUND

16

Portfolio Management Services and Mutual Funds:

The Differences.

FEATURES

PMS

MUTUAL FUND

Management

Provide ongoing, personalized access to Provide access to professional

professional money management servicesmoney management services

Customization Portfolio can be tailored to address each Portfolio structured to meet the
investor's specific needs

fund's stated investment

objectives

Management

Provide ongoing, personalized access to Provide access to professional

professional money management servicesmoney management services

Ownership

Investors directly own the individual

Shareholders own shares of the

securities in their portfolio, allowing for fund and cannot influence buy
tax management flexibility

and sell decisions or control

their exposure to incurring tax
liabilities

Liquidity

Although managers may hold cash, they Mutual funds generally hold
are not required to hold cash to meet

some cash to meet redemptions

redemptions
Minimums

Significantly higher minimum

Provide ongoing, personalized

investments than mutual funds.

access to professional money

Generally, minimum ranges from:

management services

Rs. 1 Crore + for Equity Options

Rs. 5 Crore + for Fixed Income

16

Options
Rs. 20 Lacs + for Structured
Products
Flexibility

Generally more flexible than mutual

Comparatively less flexible

funds. The Portfolio Manager may move

to 100% cash if required.
The Portfolio Manager may take his own
time in building up the portfolio. The
Portfolio Manager can also manage a
portfolio with disproportionate allocation
to select compelling opportunities

Chapter 7

COMPANIES OFFERING PMS

MOTILAL OSWAL SECURITIES LTD,

INDIA INFOLINE,

16

RELIANCE MONEY

16

MOTILAL OSWAL SECURITIES LIMITED

16

16

MOTILAL OSWAL SECURITIES LIMITED

OVERVIEW

Motilal Oswal Securities Ltd. was founded in 1987 as a small sub-broking unit, with just
two people running the show. Focus on customer-first-attitude, ethical and transparent
business practices, respect for professionalism, research-based value investing and
implementation of cutting-edge technology has enabled us to blossom into an almost
2000 member team.

16

Today we are a well diversified financial services firm offering a range of financial
products and services such as

Wealth Management

Broking & Distribution

Commodity Broking

Portfolio Management Services

Institutional Equities

Private Equity

Investment Banking Services and

Principal Strategies

We have a diversified client base that includes retail customers (including High Net worth
Individuals), mutual funds, foreign institutional investors, financial institutions and
corporate clients. We are headquartered in Mumbai and as of March 31st, 2009, had a
network spread over

548 cities and towns

comprising 1,289 Business Locations operated by

our Business Partners and us. As at March 31st, 2009, we had 5, 41,372 registered
customers.
In 2006, the Company placed 9.48% of its equity with two leading private equity
investors based out of the US New Vernon Private Equity Limited and Bessemer Venture Partners.
The company got listed on BSE and NSE on September 9, 2007. The issue which was
priced at Rs.825 per share (face value Rs.5 per share) got a overwhelming response and

16

was subscribed 27.18 times in turbulent market conditions. The issue gave a return of
21% on the date of listing.
As of end of financial year 2008, the group net worth was Rs.7 bn and market
capitalization as of March 31, 2008 was Rs.19 bn.
For year ended March 2008, the company showed a strong top line growth of 91% to
Rs.7 bn as compared to Rs.3.68 bn, last year. New businesses like investment banking,
asset management and fund based activities have contributed to this growth.

Rs. Crores

FY 2007- 08 Growth (YoY)

Total Revenues 701

91%

EBIDTA

270

97%

PAT

156

100%

Credit rating agency Crisil has assigned the highest rating of P1+ to the Companys shortterm debt program.

Shareholding Pattern at on 31st December 08

As of December 31st, 2008; the total shareholding of the Promoter and Promoter
Group stood at 70.37%. The shareholding of institutions stood at 10.07% and noninstitutions at 19.56%.

16

Our Business Streams

Our businesses and primary products and services are:

Wealth Management

Financial planning for individual, family and business wealth creation and management
needs. These are provided to customers through our Wealth Management service called
Purple.

Broking & Distribution services

Equity (cash and derivatives)

Commodity Broking

Portfolio Management Services

Distribution of financial products

Financing

Depository Services

IPO distribution

We offer these services through our branches, Business Partner locations, the internet and
mobile channels. We also have strategic tie-ups with State Bank of India and IDBI Bank
to offer our online trading platform to its customers.

16

Commodity Broking
Through Motilal Oswal Commodities Broker (P) Ltd our fully owned subsidiary; we
provide commodity trading facilities and related products and services on MCX and
NCDEX. Besides access to the best of research in the form of Daily Fundamentals &
Technical Reports on highly traded commodities, our clients also get access to our
exclusive Customized Trading Advice on both the trading platforms. We offer these
services through our branches, Business Partner locations, the internet and mobile
channels.
Portfolio Management Services
Motilal Oswal Portfolio Management Services offer a range of investments solutions
through discretionary services. We at Motilal Oswal have helped create wealth for our
customers through our Portfolio Management Services. Our knowledge of the markets
together with our understanding of our customers and their risk profiles has helped us
design a range of portfolio offerings for our clients. These include the
,

Eye Strategy Trillion Dollar Opportunity Strategy

Value Strategy Bulls

and Focused Strategy Series I. As of March 31st, 2009,

the Assets under Management of our various portfolio schemes stood at Rs.4.77 bn.
Motilal Oswal group has applied to the regulatory bodies for a license to operate as a
Domestic Asset Management Company (Mutual Fund) and we expect to begin operations
soon.
Institutional Equities

16

We offer equity broking services in the cash and derivative segments to institutional
clients in India and overseas. These clients include companies, mutual funds, banks,
financial institutions, insurance companies, and FIIs. As at March 31st, 2009, we were
empanelled with over 300 institutional clients including 200 FIIs. We service these clients
through dedicated sales teams across different time zones.
Investment Banking
We offer financial advisory services relating to mergers and acquisitions (domestic and
cross-border), divestitures, restructurings and spin-offs through Motilal Oswal Investment
Advisors Private Ltd. (MOIAPL).

We also offer capital raising and other investment banking services such as the
management of public offerings, private placements (including qualified institutional
placements), rights issues, share buybacks, open offers/delistings and syndication of debt
and equity.

MOIAPL has closed 23 transactions in 2007-08 worth US$ 1.8 billion and had 18
mandates in hand as at March 31, 2008.

Principal Strategies Group

16

For effective management of treasury operations and to capitalize on market

opportunities, the Group has set up a 30 member team which would be responsible for
effective deployment of funds into different trading and arbitrage strategies.

Focus on Research

Research is the solid foundation on which Motilal Oswal Securities advice is based.
Almost 10% of revenue is invested on equity research and we hire and train the best
resources to become advisors. At present we have 22 equity analysts researching over 27
sectors. From a fundamental, technical and derivatives research perspective; Motilal
Oswal's research reports have received wide coverage in the media (over a 1000 mentions
last year). Our consistent efforts towards quality equity research have reflected in an
increase in the ratings and rankings across various categories in the AsiaMoney Brokers
Poll over the years.

Our unique Wealth Creation Study, authored by Mr. Raamdeo Agrawal, Managing Director, is
now in its 13th year. Investors keenly await this annual study for the wealth of
information it has on the companies that created wealth during the preceding five years.

Awards and Accolades

Motilal Oswal Financial Services has received many accolades in the year gone by. Some
of them are:

16

Rated Best Overall Country Research for a Local Brokerage in the 2007
AsiaMoney Brokers poll

Rated Indias top broking house in terms of total number of trading terminals by
the Dun & Bradstreet survey

Rated Outstanding Commodity Broking House-2007 by Globoil India

Ranked second best for Customer Responsiveness in the Financial Sector at the
Avaya GlobalConnect Customer Responsiveness awards.

Strong Management Team

The organization finds its strength in its team of young, talented and confident
individuals. Qualified professionals carry out different functions under the able leadership
of its promoters, Mr. Motilal Oswal and Mr. Raamdeo Agrawal. Our talented pool of
people

comprises qualified and experienced professionals with an established track record.

We believe that our management's entrepreneurial spirit, strong technical expertise,

leadership skills, insight into market/customer needs provide us with a competitive
strength which will help us implement our business strategies.

16

16

PORTFOLIO MAMANGEMENT SERVICE

16

MOTILAL OSWAL SECURITIES LIMITED

The results of the 2009 general elections are a defining event in Indian politics and the
progress of the Indian economy. As the Congress-led United Progressive Alliance (UPA)
moves towards absolute majority, the election results are better than even the most
optimistic expectations. This paves the way for a stable government for the next five
years, with namesake support required from non-UPA partners. This in turn would give a
free hand to the original architect (Dr Manmohan Singh) of the Indian reform story to
finish the job he began.

In our view, these election results would enable the government to focus on growth and
development, pursue reforms to attract large foreign capital flows, invest heavily in

16

infrastructure and continue to invest in the rural economy. All of this, in turn, would boost
the confidence of the corporate sector to invest and the consumers to spend.

However, the challenges are many provide stimulus to growth, correct fiscal imbalances
and create means to raise resources to meet the first two challenges. We expect Indian
equities to witness re-rating, driven by the outcome of the elections. We expect FY11
earnings to get upgraded on the back of reforms to attract higher foreign investments,
greater corporate and consumer confidence, and increased investments in infrastructure.

Five key trends for investors to watch in this new political scenario

1. Positive impact on currency and interest rates:

This would have a positive impact on Banks, Autos, Bharti Airtel. Sectors that would be
negatively impacted are Metals, IT and Energy.

2. Opening up of sectors where FDI restrictions have constrained foreign investment

Consolidation of state-owned banks could be a structural re-rating catalyst for them.

Moreover, reforms relating to pension, labor, etc would also be viewed positively.

16

3. Insurance, Aviation, Retail, etc:

The government's focus on rural India has paid rich dividends and we expect this thrust to
continue, going forward.

4. Continued thrust on rural India:

While privatization results in a re-rating of the company, mere divestment of stake creates
additional supply of the stock. This could have a negative impact on the stock prices of
companies being divested; however, the divestment exercise would be viewed positively
as fiscal prudence.

5. Disinvestment of state-owned enterprises to raise resources:

A stable government would boost consumer confidence to spend and corporate

confidence to invest. (A fractured mandate would have adversely impacted confidence).
This should boost demand for various products and services. The Real Estate sector
would benefit, driven by higher consumer confidence and easing liquidity.

The risks to the markets would be from any negative global developments, significant
increase in capital rising by the corporate sector due to higher valuations and the need to
correct fiscal imbalance by raising taxes or cutting back government expenditure.

16

Boosting of investor/consumer confidence:

The stock markets responded favorably to the election outcome by posting a 2800 points
rally in BSE Sensex index (highest % gain in 17 years) immediately after the elections.
Intact, rally witnessed by the Indian stock markets was not an isolated event as it was a
part of globally synchronized stock market rally driven by massive government
intervention in money markets coupled with re-pricing of risk in general. Stable
government for 5 years would result in stable sovereign rating for India from the
perspective of global rating agencies. Further, it would also result in influx of foreign
capital both foreign direct investments as well as foreign portfolio investments. With the
above development firmly in place and within the definition of BRIC countries now
India and China stand out clearly in terms of GDP growth, resulting in conductive
environment for foreign investments.
This hypothesis is clearly visible from frenzied investment by FII in India crossing
$4.1bn during the month of May 2009.

TYPES OF PORTFOLIO MANAGEMENT SERVICES:

16

1. Value Strategy

2. Bulls Eye Strategy

3. Next Trillion Dollar Opportunity Strategy

4. Focused Strategy Series I

5. Focused Series II

6. Optima Strategy

16

1. Value Strategy

The Strategy aims to deliver superior wealth creation by way of long term compounding
effect, with investments in good businesses run by great business managers.

Investment Strategy

1. Value based stock selection

2. Investment Approach : Buy & Hold
3. Investments with Long term perspective
4. Maximize post tax return due to Low Churn
5. Focused strategy construction
6. Consistency of returns

16

7. Capital preservation consciousness

Other Details

1. Portfolio Manager: Mr. Raamdeo Agarwal

2. Benchmarks: & P CNX Nifty
3. Investment Horizon: Medium to Long Term (3 Years +)

Portfolio Managers commentary

During the month, there was no transaction in Value Strategy.

Brief snapshot of results declared by some of the major companies invested in the
strategy are

Larsen & Toubro:

L&T - reported revenues of Rs105b (+23.6%YoY) while EBITDA stood at

Rs14.8b. the adjusted EBITDA is lower at Rs13.7b (EBITDA margin of 13.1%).
Net profits for the quarter are at Rs10.6b.

For FY09, L&T reported revenues at Rs337b (+35.4% YoY), and EBIDTA of
Rs36b (up 27.1% YoY). Adjusted for forex and gratuity provisions, EBITDA

16

margins stand at 11.0% in FY09 (down 60bpYoY). Adjusted net profit stands at
Rs27b in FY09 (up 28.4%YoY).

L&T has guidance for 15-20%YoY revenue growth in FY10, with stable E&C
EBITDA margins. The company's order book stands at Rs703b (+33%YoY) and
has also maintained its new order intake guidance at 25-35%YoY

We expect L&T to report standalone EPS of Rs48.8/sh in FY10 and Rs53.5/sh in

FY11. For consolidated entity, we estimate EPS of Rs58.5/sh for FY10
(unchanged) and Rs65/sh for FY11

Indian Oil Corporation:

IOC reported EBITDA of Rs86b for 4QFY09. Reported PAT was Rs66b. Quarterly
numbers are not comparable as Bongaigaon Refinery (BRPL) has been incorporated in
4QFY09 results.

Fully compensated for under-recoveries in FY09: Led by positive margins in

petrol and diesel, IOC reported gross over-recovery of Rs11.7b in 4QFY09. It
received oil bonds worth Rs62b and upstream discounts of Rs1.5b, resulting in net
over-recovery of Rs75.4b. For the full year, IOC's under-recovery of Rs586b was
fully compensated by oil bonds of Rs404b and upstream discounts of
Rs182b.

16

Reported GRM of US$4.5/bbl: IOC's reported GRM for 4QFY09 was US$4.5/bbl
as against US$9.02/bbl in 4QFY08 and negative US$2.1/bbl in 3QFY09.
Throughput in 4QFY09 was 14.8mmt, up 20% YoY and 23% QoQ.

The key issue to watch in the near term would be likely freeing of retail prices
(the Petroleum Minister has indicated that the proposal to free retail prices will be
submitted to the Cabinet Committee in 6-8 weeks). The stock trades at 11.2x
FY10E EPS of Rs54.2 and 1.4x FY10E BV of Rs419.
Performance Track Record

As on 31st May 2009

Strategy Inception Date: 18th Feb 2003. Please Note: The Above strategy returns are of
Model Client. Returns of individual clients may differ depending on time of entry in the
strategy. The Above returns are calculated on NAV basis. Past performance may or may
not be sustained in future. # since inception returns are of First Customer. Returns above
1 year are annualized.

16

2. Bulls Eye Strategy

The Strategy aims to deliver returns in the short to medium term by investing in
fundamentally sound stocks coupled with active profit booking.

Investment Strategy

1. Active Management
2. Multi Cap Strategy
3. Market Timing
4. Regular Profit Booking

Other Details

1. Portfolio Manager: Mr. Sachin Abhyankar

2. Benchmarks: BSE 200
3. Investment Horizon: 1Year

Portfolio Managers commentary

The month of May offered excellent trading opportunities. We bought JSW steel due to
extremely cheap valuations. However, due to steep price appreciation we booked profits.

16

During the month we also traded in IRB Infrastructure due to change in fundamentals
arising from lower interest rate as IRB's fortune and profitability is leveraged to interest
rates for its projects. We booked good profits in IRB coupled with some of our earlier
stock picks such as LIC Housing finance, SUN TV, Lupin, Piramal Healthcare etc.We
also made good profits in some of our trading calls such as Ceat, Dishman
Pharmaceuticals, Andhra Bank and Allahabad Bank etc. We have introduced South India
Bank in our portfolio due to attractive valuations as it is quoting at 0.6 times its book
value. In Bulls eye fund, we have increased the exposure of Banking& finance sector to
30%.

Brief snapshot of results declared by some of the major companies invested in the
strategy are

State Bank of India:

Deposit growth of 38% outpaced loan growth of 30% and domestic C-D ratio reduced
from 70% in FY08 to 64% in FY09. Gross NPA increase was a mere Rs6.2b (5%) during
4QFY09. Restructured loans of just Rs83b or 1.5% of the book is a significant positive
surprise.
Credit cost in FY09 declined to 60bp vs. 76bp in FY08 and provision coverage
fell to 38% (excluding Dabhol it would be 43%).
Other highlights of the results are:

16

Trading gain was high - Rs15.2b during 4QFY09 (32% of the other income and
30% of operating profit),
CASA growth was stronger than peers at 23%; CASA ratio stood at 39% and
Investments grew 46% YoY and SLR investments stood at 31% of domestic
deposits. CAR remains strong with Tier I at 9.4%.
Deposits increased by 38% YoY to Rs7.4t. Loan growth was 30% YoY to Rs5.5t. Margins
declined from 3.15% in 9MFY09 to 2.93% in FY09. Margins pressure is evident as mgmt
highlighted that cut in PLR would not happen unless cost of funds fall. Cost of deposits
increased to 6.3% in FY09 vs. 5.6% in FY08. Yield on loans improved by 25bp YoY to
10.15%. Yield on resources deployed improved to 7.7% in FY09 from 6.92% in FY08.
For FY09, Consolidated PAT grew 22% vs. SBI Standalone PAT growth of 36%.

16

Performance Track Record

Data as on 31st May 2009

Please Note: The Above strategy returns are of Model Client. Returns of individual
clients may differ depending on time of entry in the strategy. The Above returns are
calculated on NAV basis. Past performance may or may not be sustained in future.
Inception Date 15th Dec 2003. Returns above 1 year are annualized. Mutual Fund
Data Source: Mutual Fund India

16

3. Next Trillion Dollar Opportunity Strategy

The strategy aims to deliver superior returns by investing in focused themes which are
part of the next Trillion Dollar GDP growth opportunity.

Investment Strategy

1. Stock High Growth Story

2. Stock Reasonable Valuation
3. Concentration on Emerging Themes
4. Buy & Hold Strategy

Other Details

1. Portfolio Manager: Mr. Sachin Abhyankar

2. Benchmarks: CNX MidCap
3. Investment Horizon: 3-4 Years

Portfolio Managers commentary

In TDOP fund, during the month we exited Shree cements and switched to IRB
infrastructure in the same theme, while booked profits in MRF and Bank of Baroda. In

16

LIC Housing Finance we have booked profits to the extent of 50%, thus making room for
introducing new stocks in the portfolio.

During the month, we have introduced Federal bank and IRB Infrastructure in the
portfolio due to change in fundamentals arising from lower interest rate as IRB's fortune
and profitability is leveraged to interest rates for its projects. IRB has successfully
completed the financial closure of Surat Dahisar project and it has started construction of
road for converting 4 lane to 6 lane highway. The company has also started collecting toll
on 4 lane highway that will help boost revenue and profits in FY10. IRB has an NPV of
Rs.145/share.

Brief snapshot of results declared by some of the major companies invested in the
strategy are

Federal Bank:

4QFY09 results were below our estimates due to lower NII growth and higher tax rate.
Key highlights:
Margins declined ~110bp due to excess liquidity in the balance sheet

16

NII grew 18% YoY. Margins declined from 5.0% in 3QFY09 to 3.9% in 4QFY09
and remained stable YoY.
Loans grew by 18%YoY to Rs224b and deposits grew 24% YoY to Rs322b.
During 4QFY09, deposits increased by Rs49b and loans increased by just Rs8.4b
and investments increased by Rs24b. Management has consciously moderated
loan growth in this uncertain environment. Incremental CD ratio in 4QFY09 was
just 18%.
Share of CASA deposits declined from 26% to 25% however, NRI deposits share
increased from 20% in 3QFY09 to 25% in 4QFY09.
Retail loans grew 28% YoY to Rs72b and the share has increased to 32% of the
loan book vs 29.6% in 4QFY08
Currently,we expect bank to report EPS of Rs32 in FY10 and Rs36 in FY11.We estimate
RoA to remain strong at 1.3% over FY09-11. However, excess capital will keep ROE in
FY10-11 lower at ~13%.

16

Performance Track Record

Data as on 31st May 2009

Strategy Inception Date: 11th Dec 2007. Please Note: The Above strategy returns are of
Model Client. Returns of individual clients may differ depending on time of entry in the
strategy. The Above returns are calculated on NAV basis. Past performance may or may not
be sustained in future. Returns above 1 year are annualized. Mutual Fund Data Source:
Mutual Fund India

4. Focused Strategy Series I

Strategy Objective

The strategy will aim to invest in fundamentally sound companies that can benefit from a
re-rating. To increase the prospects for outperformance, the strategy will exhibit a
preference for companies that may have been overlooked or are out of favour.

16

Investment Strategy

1. Bottom-up stock selection approach

2. Stocks with re-rating horizon of two years
3. Preference for out of favour stocks
4. Concentrated strategy structure: 5-7 stocks
5. Exist stocks when rerating target achieved

Other Details

1. Portfolio Manager: Mr. Sachin Abhyankar

2. Benchmarks: BSE200
3. Investment Horizon: 2Years

Portfolio Managers commentary

We have booked 50% profits in LIC Housing finance as the stock has rallied towards its
fair price.
Brief snapshot of results declared by some of the major companies invested in the
strategy are

16

LIC Housing Finance:

Profits grew 33%YoY in 4QFY09 to Rs1.58b led by 26% YoY loan book growth
and significant improvement in margins. Margin expansion could partly be
attributable to increasing exposure to builder segment (26% of incremental loan
book in 4QFY09) apart from the benefit of downwards re-pricing of wholesale
funding. Asset quality has improved with net NPAs at 0.2% and provision
coverage of 81%.
For FY09, sanctions are up 26% and disbursements are up 24% to Rs 109b and
Rs87.6b respectively. Loan book increased by 26% YoY to Rs277b driven by 22%
growth in individual loans and 84% growth in project loans.
Gross NPAs were down to 1.1% from 1.7% a year ago. Net NPA reduced to 0.2%
in 4QFY09 from 0.7% a quarter and year ago.
Yield on funds decreased from 11.7% in 9MFY09 to 11.2% in FY09 (10.5% in
FY08) while cost of funds decreased to 9.2% from 9.7% in 9MFY09 and 8.9% in
FY08. Spreads improved by 45bp YoY to 2.1%. Improvement in spread is also
attributable to increasing exposure to high-yielding project finance segment apart
from a benefit of lower borrowing costs. LICHF has declared dividend of
Rs13/share, translating into a dividend yield of ~4%.

Management is confident of achieving 25% growth in FY10 as well. LICHF is expected

to report EPS of Rs70 and BV of Rs315 in FY10 and EPS of Rs80 and BV of Rs374 in
FY11. RoA and RoE would remain at ~1.8% and23%+respectively over FY10-11

16

3i Infotech Ltd:

For the year ended FY09, 3i Infotech reported revenue of Rs.527crs compared to
Rs.447cr over same period last year displaying a growth of 18%. Ebitda margins for the
year stood at 40% vis--vis 34% in FY08. Net profits for the period witnessed excellent
growth rising fromRs.100cr in FY08 to Rs.185cr in FY09.
Performance Track Record
Data as on 31st May 2009

Strategy Inception Date: 12th April 2008. . Please Note: The Above strategy returns are
of Model Client. Returns of individual clients may differ depending on time of entry in
the strategy. The Above returns are calculated on NAV basis. Past performance may or
may not be sustained in future. Returns above 1 year are annualized. Mutual Fund Data
Source: Mutual Fund India

16

5. Focused Series II

Strategy Objective

The strategy will aim to invest in fundamentally sound business with a view to capitalize
on the difference in price between market value of a company and the intrinsic value of
the business.

Investment Strategy

1. Under Valued Stock Selection

2. Bottom Up stock selection approach
3. Concentrated strategy structure: 5-7 stocks
4. Exist stocks when profit target achieved

Other Details

1. Portfolio Manager: Mr. Manish Sonthalia

2. Benchmarks: BSE 200

16

3. Investment Horizon: 2Years

Portfolio Managers commentary

We have bought Mysore Cement in the fund due to attractive valuations. The stock is
quoting at a P/E multiple of 4x on CY09 EPS of Rs.10. Its book value stands at Rs.25 and
has an installed capacity of 4mn ton. Further, the company has cash in hand worth Rs.15
per share.

Brief snapshot of results declared by some of the major companies invested in the
strategy are

Great Eastern Shipping The Baltic dry index representing freight rates for the shipping
sector has recovered quite sharply thus indicating improved earnings prospects for the
shipping sector. GE shipping is quoting at attractive valuations of 0.6x its price to book
ratio for FY10 as well as less than 4x P/E on FY10 EPS of Rs.75 per share.

BPCL reported 4QFY09 ebitda at Rs41.5b, up 383% YoY and 173% QoQ. Lower than
estimated ebitda is primarily due to lower issue of Oil bonds at Rs21b (our estimate of
Rs33.3b factored in recovery of a part of the forex and inventory losses) and higher other
expenditure, party compensated by higher GRM and throughput. Key issue to watch in
the near term would be likely freeing of retail prices. Petroleum minister has indicated
that proposal to free retail prices will be submitted to Cabinet committee in 6-8 weeks.

16

For FY09, BPCLs under-recovery of Rs238b was fully compensated by Oil bonds of
Rs162b and upstream discounts of Rs76b.

Financial Highlights:

Interest expenses stood atRs6b vs estimate of Rs5.1b. Gross Debt as on March 31,
2009 is Rs210b.
Other Income was higher than estimate at Rs6b (estimate of Rs3.5b).
Capex in FY09 was ~Rs40b. Oil bonds on the books as on March 31, 2009 were
Rs155b and BPCL is yet to receive Oil bonds worth Rs21b from the government
Reported blended GRM of $4.9/bbl. Throughput in 4QFY09 was at 5.3mmt, up 6% YoY
and 10% QoQ

16

Performance Track Record

Data as on 31st May 2009

Strategy Inception Date: 22nd Feb 2009. . Please Note: The Above strategy returns are
of Model Client. Returns of individual clients may differ depending on time of entry in
the strategy. The Above returns are calculated on NAV basis. Past performance may or
may not be sustained in future. Returns above 1 year are annualized. Mutual Fund Data
Source: Mutual Fund India

16

6. Optima Strategy

Strategy Objective

The Strategy will aim to generate superior returns over a long period by investing in
companies with growth potential and which are available at reasonable market price.

Investment Strategy

1. Growth At Reasonable Price (GARP)

2. Investment Horizon of 2 Years +
3. Active Portfolio Rebalancing
4. Market Timing
5. Concentrated strategy structure: 5-7 stocks
6. Situation based Multi Cap Approach

Other Details

1. Portfolio Manager: Mr. Sachin Abhyankar

2. Benchmarks: BSE 200
3. Investment Horizon: 2Years

16

Portfolio Managers commentary

We bought JSW steel as well as Tata steel in the Optima fund due to extremely cheap
valuations. However, due to steep price appreciation we booked profits in these stocks.
During the month we also traded in IRB Infrastructure due to change in fundamentals
arising from lower interest rate as IRB's fortune and profitability is leveraged to interest
rates for its projects. We booked profits in IRB coupled with some of our earlier stock
picks such as SUN TV, Piramal Healthcare etc. We also made good profits in some of our
trading calls such as Ceat, MRF Ltd, Allahabad Bank and Bharti Airtel. During the
month, we have added shipping sector to our portfolio through GE Shipping and SCI.
Good demand from the Chinese iron ore has pumped up the Baltic index from 2000
levels to 3700 levels.

Brief snapshot of results declared by some of the major companies invested in the
strategy are

South India Bank:

After the UPA government coming in power the focus would shift to pending economic
reforms like increasing FDI limit in banking sector which will be beneficial for private
sector banks like South India Bank. Amongst midsize private banks, SIB is the cheapest
available at 0.6x FY10e book value.

16

For the year ended FY09, SIB reported total income of Rs.1686crs compared to
Rs.1291crs in FY08. Net profits for the current year stood at Rs.195crs vis--vis
Rs.151crs witnessing a jump of 28% year over year. SIB's EPS for FY09 stands at
Rs.17.23.

Performance Track Record

Data as on 31st May 2009

Strategy Inception Date: 30th Dec 2008. Please Note: The Above strategy returns are of
Model Client. Returns of individual clients may differ depending on time of entry in the
strategy. The Above returns are calculated on NAV basis. Past performance may or may
not be sustained in future.

16

Portfolio Management Services

You get recessions. You have stock market declines. If you don't understand that's going
to happen, then you're not ready; you won't do well in the markets. No need to worry.
India Infoline would take care of all issues related to managing your hard earned money.

Portfolio Management Service is a product wherein an equity investment portfolio is

created to suit the investment objectives of a client. India Infoline invests your resources
into stocks from different sectors, depending on your risk-return profile. This service is
particularly advisable for investors who cannot afford to give time or don't have that
expertise for day-to-day management of their equity portfolio.

16

It is all about your money, being managed by the experts, while you continue with your
routine life. Isn't it simple and totally hassle free.

What's more, you can keep track of your dividends / bonus / rights issues with paperless
tracking. So you always know how fast your investment is growing. It basically means
assigning the right job to the right person.

Salient Features of India Infoline PMS:

Expert team of Research Analysts

Stock Picking done by the Investment Committee

Dedicated Relationship Manager

Technology and service driven back-office.

Schemes:

RUBICON Taking decisive steps

Rubicon is a closed ended scheme investments in stocks where the current spate of
bad macroeconomic news : High crude oil prices, Rising interest rates and inflation
worries have lead to large falls in prices and stocks are trading at a significant
discount to their fair values. Rubicon will have a concentrated portfolio of 10 -15
companies with holdings across large, mid and small cap companies. The allocation

16

would be around 20%-30% each in Banking and Capital Goods & Infrastructure and
the balance in individual stock plays. The tenure of this scheme is from September08
March10 (extendable by 6 months at the discretion of the Fund Manager).
Growth Portfolio
This is for those who would rather run a marathon than a sprint. They are not
concerned with day-to-day price movements. The portfolio comprises the choicest of
fundamentally sound companies. The focus is on medium to large capitalization blue
chip companies, considered to be undervalued from the point of view of their longterm growth prospect and well placed to deliver extra-ordinary capital appreciation
over the long term.
Momentum Portfolio
This is for those who want to live life in the fast lane. The main objective of this
portfolio is to generate capital appreciation through short to medium term investments
in equities and equity related instruments. The investment choice is primarily
influenced by technical factors like price and volume indicators, RSI, MACD, and
other studies. Secondary factors will be reasonable levels of market capitalization,
good liquidity, competitive position in the industry, sectors with good growth
prospects, etc.

NRI Portfolio

16

The main objective of the scheme is to generate capital appreciation through

investments in equities with a long-term perspective. The scheme will invest in all
equity and equity related instruments with emphasis on fundamentally sound, wellresearched blue chip companies perceived to be undervalued from the point of view
of their long term growth prospects. The focus will be on medium to large
capitalization companies which have a proven track record or earning capability,
quality management, leadership status in sectors or potential to achieve such status,
etc and that have the potential to deliver growth over the long term. The scheme is
aimed at medium risk taking investors willing to invest in companies over a longterm period.
Performance

For the period since inception (2nd August, 2004) to 30th June, 2008

16

Frequently Asked Questions:

What is the safety of clients' portfolios with India Infoline?
India Infoline currently has net worth of over Rs. 8 bn. Further; the company does not
indulge in proprietary trading. The company is professionally managed by a team with an
impeccable track record and is a profit making entity thereby lending safety to the
customers' money. In addition, as a precautionary measure, we keep the custody of shares
with a reputed bank (currently with HDFC Bank). In any case (as per advice from our
legal counsel), the beneficiary ownership of shares remains with the customers and is not
affected by company's performance or solvency.
Do you guarantee the initial corpus and any 'return' thereon?
As per SEBI regulations governing Portfolio Management Services in India, neither
capital nor returns can be guaranteed. We shall endeavor to outperform the benchmark
indices like Nifty but there can be no guarantee or certainty of the same. We believe, over
long term, equities' performance will track corporate performance. We expect India's
GDP to grow at 8-9% p.a. in real terms or 13-14% p.a. in nominal terms. The industrial
and services sector should grow at a faster pace. Therefore historical trends indicate that
well managed portfolios in Indian equities can yield up to 20-25% p.a. returns.

What is the difference between a discretionary and a non-discretionary Portfolio

Management Services?

16

The discretionary portfolio manager independently manages the funds of each client in
accordance with the needs of the client. The client cannot make decisions for the
management of his/ her portfolio. On the other hand, in non-discretionary portfolio
management, the client is actively involved in decision making for the management of
the portfolio. We offer both types of services.
What is the minimum and maximum limit for investing in Portfolio Management
Services?
The minimum ticket size of the portfolio we offer for resident Indians is INR 10 lacs and
INR 25 lacs for Non Resident Indians. There is no upper limit on the amount you can
invest.
How can I introduce my initial corpus?
Initial corpus can be brought in by way of Cash and/ or securities/ shares. The initial
portfolio of securities/ shares will be re-aligned as per the model portfolio by selling
those shares.
Why should I pay performance fees?
The base management fee being charged is much lower than that charged by others. We
have consciously kept our fee more performance linked, as we strongly believe that it
will align the interests of the firm and the client. It also incentives the Portfolio Manager
since they have a stake in the profitability of the portfolio.

16

Will India Infoline share the losses?

Portfolio Manager is any person who pursuant to a contract or arrangement with a client,
advises or directs or undertakes on behalf of the client (whether as a discretionary
portfolio manager or otherwise) the management or administration of a portfolio of
securities or the funds of the client, as the case may be. It is only the service, which he
gives to the client, for which he charges a fee, and it is not any partnership that he gets
into with the client. As per SEBI regulations, no portfolio manager can legally share
losses.

Do you indulge in day trading under the Portfolio Management Service?

Our Portfolio Management Schemes are designed from a long-term perspective and we
will invest in accordance with the objectives of each Scheme. It is advisable to keep any
equity portfolio invested over a longer term because in the long run, equities outperform
most other asset classes. Therefore, we will not indulge in any day trading activities
under the Portfolio Management Service. Moreover, SEBI guidelines forbid any day
trading activity by Portfolio Managers.

How and when can I see my Portfolio Value, Transactions and Reports?

16

All clients can access entire information related to their portfolios through:

Log on to the web and then view and/or download the reports in excel. These
reports and transaction information is updated on the website every week. The
reports include Performance Summary of Portfolios, Transaction Statement,
Holdings statement, and Realized gain/ loss statement.

There is an e-mail sent to the client regarding the same fortnightly.

The client also gets the hard copy of all the reports and statements every quarter.

Can I partly withdraw my money from PMS account?

Yes, you can withdraw. You just have to give a request for the same in writing. But the
minimum investment has to remain intact.

Do I need to have Permanent Account Number?

A Permanent Account Number (PAN) has to be provided for investment in the PMS
scheme.

Can an NRI avail of the Portfolio Management Service?

16

The Portfolio Management Scheme is open for all Indian nationals, resident or otherwise.
NRIs will have to open a PIS Account as required under RBI guidelines in order to invest
in the PMS scheme, which facility we will provide to all NRIs.

16

RELIANCE PORTFOLIO MANAGEMENT SERVICES

Reliance Portfolio Management Services is a premium financial service,

offering innovative & exclusive products through discretionary & advisory
services. Our expertise has earned the trust of thousands of high net-worth
individual/ institutional investors and created a family that is constantly growing.
Reliance Portfolio Management Services can conduct your investments with true
finesse coupled with passion and innovation.

Reliance Portfolio Management Services is a part of Reliance Capital

Asset Management Ltd., a wholly owned subsidiary of Reliance Capital Ltd.

Reliance Capital Ltd. is one of India's leading and fastest growing private
sector financial services companies, and ranks among the top 3 private sector
financial services and banking companies, in terms of net worth.@@Reliance

16

Capital Ltd. has interests in asset management, life and general insurance, private
equity and proprietary investments, stock broking and other financial services.

Our Vision
"To be a globally respected wealth creator with an emphasis on customer care and a
culture of good corporate governance"
Our Mission
"To be a multi-asset class player with a significant presence in domestic market & expand
horizons in International markets through Advisory services."

When it comes to managing investments what one needs is the fine harmony and the
scale of an orchestra. Essentially, this translates to a special kind of skill that understands
the finer nuances and appreciates the subtle notes. Only then can the instrumentation
deliver a consistently enhanced performance.
Now, you can get that kind of superior orchestration for your investment portfolio.
Introducing Reliance Portfolio Management Services (Reliance PMS), a premium
financial offering for select investors.

16

An exclusive service, where a diligent team of talented professionals with diverse skill
sets orchestrate your investments to deliver optimum returns. And a consistently laudable
performance.

At Reliance PMS you can expect a multitude of innovative investment options to serve
varying investment objectives.
The spectrum of asset classes traverses from the traditional asset classes, such as equities,
fixed income or gold, to emerging ones, such as structured products or realty.
Our aim To traverse the journey of your "wealth creation" with you by leveraging these
asset options.
We constantly Endeavour to deliver competitive returns through a conservative and a
diligent fund management framework that is supported by rigorous analysis and a proven
investment methodology.

The keynotes to perfection "Minimizing Risks, Optimizing Gains"

16

All great scores being with a plan. To make beautiful music and surpass all expectations.
Our strategy is quite similar.
An increasing investor base is a reflection of the trust that investors repose in us, which
we respect. Hence the safety of our investors assets is of utmost priority and this is the
foundation of our investment philosophy.
At Reliance PMS, we view every portfolio with the diligence of a musician composing a
new score. Fine-tuning. Enhancing. Improving. Constantly working towards superior
orchestration of your portfolio. Naturally, this is only possible if the foundation is sound.

Reliance PMS - advantage: YOU

As a Reliance PMS customer, you get a lot more than just superior portfolio
management. You get the advantage of a solid and reputable track record backed by the
expertise of a sound and stable investment team.
Our philosophy lays considerable emphasis on an intensive research based, bottom-up,
and stock picking approach with a bias towards customizing the product offerings for our
investors and business associates.
We strongly believe that your investments should be adaptable enough to succeed in any
market situation. This is why our investment philosophy revolves around a solid bottomup approach.

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So it's true, when you invest with Reliance PMS, it's certain that you will have all your
investments in perfect sync.

The legacy continues...

The Reliance Group started its journey towards excellence with humble beginnings in
Gujarat.
Today it has grown to become India's largest and most respected business houses. The
group has redefined the way businesses are conducted in the country and across the
world, inspired by its illustrious founder, Shri Dhirubhai H Ambani (1932 - 2002) and
its corporate philosophy of Think bigger. Think better.
"Reliance PMS is a part of one of India's largest asset managers, Reliance Capital
Asset Management Limited, a wholly owned subsidiary of Reliance Capital Limited
and a part of Reliance Anil Dhirubhai Ambani Group.
Reliance Capital Limited is one of India's leading and fastest growing private sector
financial services companies, with a net worth in excess of US $ 1.4 billion*.
Consistently ranked among the top 3 private sector financial services and banking
companies, Reliance Capital Limited has interests in Mutual Funds, Insurance,

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Private

Equity, Stock

Broking,

Portfolio

Management

Services,

amongst

others.Reliance Anil Dhirubhai Ambani Group has diversified interest and presence in
Communications, Power, Natural Resources & Energy, Financial Services, Media &
Entertainment and Infrastructure Sectors with group market capitalization of US $ 64
billion* and group net worth of US $ 13 billion*.
* Figures as on March 31, 2008

EQUITY SOLUTIONS

This investment option is a highly flexible one with a very direct focus. To make the
most of investment openings across a wide gamut of large cap, mid cap and small cap
stocks.

The aim of this product is to deliver positive absolute returns. It plans to do this by
focusing on research based value investing to cover potentially investment-worthy
companies.

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Investment Time Horizon: 3 years & more

Minimum Investment Amount:
Resident Indian: INR 1 Crore
Non Resident Indian: INR 2 Crores

This portfolio model Endeavours to generate capital appreciation by investing in

companies drawn primarily from the Top 250 companies. These companies are
ranked on the basis of market capitalization.
The focus over here is on companies with a proven track record and a favorable
medium to long-term outlook.
Investment Time Horizon: 3 years & more
Minimum Investment Amount:
Resident Indian: INR 1 Crore
Non Resident Indian: INR 2 Crores

Capital appreciation through bottom up stock picking is of priority here with a special
emphasis on the small and mid-cap space. Incisive and keen research is the backbone

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of this product.
A dedicated research team will initiate portfolio building by discovering businesses
that are relatively new and less tracked.
Investment Time Horizon: 3 years & more
Minimum Investment Amount:
Resident Indian: INR 1 Crore
Non Resident Indian: INR 2 Crores

The investment objective of concentrated option is to achieve long term capital

appreciation from equity and equity related investments.
This investment option endeavors to invest disproportionate corpus in large and mid
cap high growth companies that would be able to compound wealth over medium to
long term.
Investment Time Horizon: 3 years & more
Minimum Investment Amount:
Resident Indian:

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Resident Indian: INR 1 Crore

Tranche 1: INR 50 Lacs
Tranche 2: INR 25 Lacs*
Tranche 3: INR 25 Lacs*
Non Resident Indian: INR 1 Crores

The Trinity Option which is a part of Emerging Sector Opportunity Option shall invest in
a combination of sectors in order to cater to specific investor requirements and market
conditions.
The Trinity Series will look at investment opportunities in Natural Resources,
Infrastructure & Capital Goods and Financial Services.The "Trinity Series" offer the
investors an opportunity to be part of the emerging sectors which would be the engines of
growth and key drivers of the Indian economy.
Investment Time Horizon: 3 years & more
Minimum Investment Amount:
Resident Indian: INR 1 Crore
Non Resident Indian: INR 1 Crores

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We at Reliance - PMS believe in delivering more than what the customer expects,
customized solutions are just a step towards it.
Customized solutions are investments specially created to meet needs that cannot be
met from the standardized financial instruments available in the market.
Customized solutions capture the characteristics of traditional and non traditional
investments with financial instruments. The strategic combination of these
components provides control and flexibility to address those investors whose
investment objective is not met through traditional investments available.

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We at Reliance - PMS seek high service standards through a full fledged service desk
for addressing client and investment related queries and providing sound resolution
with an endeavor to achieve complete customer satisfaction.
Although in our ongoing post sales activity we attempt to build and maintain
customer confidence by keeping our investors abreast of the latest updates on the
growth of their investment.

Fixed Income & Structured Solution

Aggressive Returns Option

A highly flexible investment option, which offers a diversified investment portfolio
across ratings and the yield curve.
Fixed Maturity Option

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A relatively protective investment option with investments predominantly locked for the
duration of the scheme. In certain scenarios, there might be partial redemption allowed,
without a significant impact on the portfolio returns.
Liquidity Option
The underlying tone of this investment option is to essentially provide the investors with
superior returns as compared to traditional open-ended money market schemes.

Structured Products are Investment instruments that combine at least one derivative with
assets such as equity and fixed income securities. Such products are fast emerging as an
alternate asset class among HNI/ Institutional investors providing opportunities that
capture potential upsides of the equity universe with capital protection.
Hybrid Option
This investment option will essentially cater to the investor group who would like to
capture potential upsides in the debt as well as equity universe. In the usual
circumstances, a majority of the assets in this portfolio will be in index linked, privately
placed non-convertible debentures, high yielding bonds, which can be liquidated within a
reasonable period of time.

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We at Reliance - PMS believe in delivering more than what the customer expects,
customized solutions are just a step towards it.
Customized solutions are investments specially created to meet needs that cannot be met
from the standardized financial instruments available in the market.
Customized solutions capture the characteristics of traditional and non traditional
investments with financial instruments. The strategic combination of these components
provides control and flexibility to address those investors whose investment objective is
not met through traditional investments available.

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Chapter 8

FREQUENTLY ASKED QUESTIONS

(FAQ)

What is Portfolio Management Services (PMS)?

Who can offer PMS?
Who is an ideal PMS investor?
Does one necessarily have to invest in cash to open a PMS
account?
What is the tax liability for the PMS investor?
What are the benefits of PMS?
What can you expect from PMS?
What one pays for PMS?

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FREQUENTLY ASKED QUESTIONS(FAQ)

What is Portfolio Management Services (PMS)?

Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed income,

debt, cash, structured products and other individual securities, managed by a professional
money manager that can potentially be tailored to meet specific investment objectives.
When you invest in PMS, you own individual securities unlike a mutual fund investor,
who owns units of the entire fund. You have the freedom and flexibility to tailor your
portfolio to address personal preferences and financial goals. Although portfolio

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managers may oversee hundreds of portfolios, your account may be unique.

Investment Management Solutions in PMS can be provided in the following ways:

Discretionary

Non Discretionary

Advisory

Discretionary: Under these services, the choice as well as the timings of the investment
decisions rest solely with the Portfolio Manager.

Non Discretionary: Under these services, the portfolio manager only suggests the
investment ideas. The choice as well as the timings of the investment decisions rest solely
with the Investor.
However the execution of trade is done by the portfolio manager.

Advisory: Under these services, the portfolio manager only suggests the investment
ideas.
The choice as well as the execution of the investment decisions rest solely with the
Investor.
Note: In India majority of PMS providers offer Discretionary Services.

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Who can offer PMS?

PMS can be offered only by entities having specific SEBI registration for rendering
portfolio management services. Currently in India PMS is offered primarily by asset
management companies (AMCs) and brokerage houses.

Who is an ideal PMS investor?

The Investment solutions provided by PMS cater to a niche segment of clients. The
clients can be Individuals or Institutions entities with high net worth.
The offerings are usually ideal for investors:

who are looking to invest in asset classes like equity, fixed income, structured
products etc

who desire personalized investment solutions

who desire long-term wealth creation

Who appreciate a high level of service?

Does one necessarily have to invest in cash to open a PMS account?

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Apart from cash, the client can also hand over an existing portfolio of stocks, bonds or
mutual funds to a PMS that could be revamped to suit his profile. However the portfolio
manager may at his own sole discretion sell the said existing securities in favors of fresh
investments.

What is the tax liability for the PMS investor?

The portfolio manager is a trustee acting in a fiduciary capacity on behalf of the investor.
Therefore, the tax liability for a PMS investor would remain the same as if the investor is
accessing the capital market directly. However the investor should consult his tax advisor
for the same. The portfolio manager ideally provides audited statement of accounts at the
end of the financial year to aid the investor in assessing his/ her tax liabilities.

What are the benefits of PMS?

1.

Professional Management - The service provides professional management of

portfolios with the objective of delivering consistent long-term performance while
controlling risk.

2.

Continuous Monitoring - It is important to recognize that portfolios need to be

constant monitored and periodic changes made to optimize the results.

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3.

Risk Control - A research team responsible for establishing the client's

investment strategy and providing the PMS provider real time information to
support it backs any firm's portfolio managers.

4.

Hassle Free Operation - Portfolio Management Service provider gives the client
a customized service. The company takes care of all the administrative aspects of
the client's portfolio with a periodic reporting (usually daily) on the overall status
of the portfolio and performance.

5.

Flexibility - The Portfolio Manager has fair amount of flexibility in terms of

holding cash (can go up to 100% also depending on the market conditions). He
can create a reasonable concentration in the investor portfolios by investing
disproportionate amounts in favor of compelling opportunities.

6.

Transparency - PMS provide comprehensive communications and performance

reporting. Investors will get regular statements and updates from the firm. Webenabled access will ensure that client is just a click away from all information
relating to his investment. Your account statements will give you a complete
picture of which individual securities you hold, as well as the number of shares
you own. It will also usually provide:

a.

the current value of the securities you own;

b.

the cost basis of each security;

c.

details of account activity (such as purchases, sales and dividends paid out or
reinvested);

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d.

your portfolio's asset allocation;

e.

your portfolio's performance in comparison to a benchmark;

f.

market commentary from your Portfolio Manager

7.

Customized Advice - PMS give select clients the benefit of tailor made
investment advice designed to achieve his financial objectives. It can be
structured to automatically exclude investments you may own in another account
or investments you would prefer not to own. For example, if you are a long-term
employee in a company and you have acquired concentrated stock positions over
the years and have become over exposed to few companiess stock, a separately
managed account provides you with the ability to exclude that stock from your
portfolio.

8.

Personalized Approach - Some Portfolio Managers may provide a personal

investment management service to achieve the client's investment objective. In
PMS, you may gain direct personalized access to the professional money
managers who actively manage your portfolio. This interaction may come in
various different ways including in-person meetings, conference calls, written
commentary, etc with the fund management team.

What can you expect from PMS?

When one has entrusted his money to a PMS, one can expect:

16

Handholding from his portfolio manager than he has been accustomed to from his mutual
fund. One can expect to have a relationship manager/ financial advisor through whom he
can interact with the fund manager at any time of his choice. One can also expect
frequent (maybe monthly) interaction with the portfolio manager to discuss any concerns
that he might have. To be updated on any major changes in asset allocation or in the
investment strategy relating to his portfolio. All administrative matters, including
operating a bank account and dealing with settlement and depository transactions, will be
handled by the PMS.
On handing over one's money, he will receive a user-ID and password from the PMS,
which will grant him online access to his portfolio details. He can use these to check back
on his portfolio as often as he likes.
Keeping track of capital gains (and losses) for the taxman can be a depressing chore,
when one has furiously churned his investments through the year. Opting for PMS will
free him of this chore, as a detailed statement of the transactions on his portfolio for tax
purposes comes as a part of the package.

What one pays for PMS?

Most Portfolio Managers allow one to choose between a fixed and a performance-linked
management fee or a combination. If one opts for the fixed fee, he may pay between
2.50-3.50 per cent of portfolio value; this is usually calculated on a weighted average
basis. This fee is apart from the actual expenses like custodian expenses, audit fee,

16

brokerage on transactions etc, which may be charged on actual. The structure for the
performance-linked fee differs across players; usually, apart from a performance-linked
fee usually it may include a flat fee.

The portfolio manager also gets to share a percentage of your profit - usually 15-20
percent - earned over and above a threshold level, which may range between 8 per cent
and 15 per cent.

Apart from management fees, separate charges will be levied towards brokerage,
custodial services and towards meeting tax payments. Usually the fixed fee component is
charged on a monthly basis and the variable component is charged on a yearly basis.
When one opts for a performance-based fee, the profits are reckoned usually on the basis
of "high watermarking". That is, one pays the fee only on the positive returns on his
portfolio.

For instance, if one invests Rs. 100 in a PMS and its value appreciates to Rs. 150 at the
end of the year, he pays a fee on the profit of Rs. 50. Subsequently, a fee will be levied
only on gains over and above the Rs. 150 mark. If the value of his portfolio slumps to Rs.
70, and climbs back to Rs. 110, the Rs. 40 you earn will not be reckoned as profit.

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Chapter 9

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BIBLIOGRAPHY

Bibliography:

BOOKS:

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

- PRASANNA CHANDRA.

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

-N.G. KALE.
- P.K. BANGAR.

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WEBSITE:

www.reliancepms.com/

www.motilaloswal.com

www.indiainfoline.com

www.google.com

www.yahoo.com

www.wikipedia.com