PORTFOLIO MANAGEMENTINTRODUCTION

Portfolio management refers to the management or administration of a portfolio of securities to protect and
enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc.)
and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to
reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and
sell. It involves proper money management. It is also known as Investment 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 return from portfolios of different asset
bundles is compared. The unique goals and circumstances of the investor must also be considered. Some
investors are more risk averse than others. Mutual funds have developed particular techniques to optimize their
portfolio holdings. The art and science of making decisions about investment mix and policy, matching
investments to objectives, asset allocation for individuals and institutions, and balancing risk against
performance. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice
of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the
attempt to maximize return at a given appetite for risk.

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. This requires framing of proper
investment policy. Investment policy means formation of guidelines for allocation of available funds among the
various types of securities including variation in such proportion under changing environment. This requires
proper mix between different securities in a manner that it can maximize the return with minimum risk to the
investor. Broadly speaking investors are those individuals who save money and invest in the market in order to
get return over it. They are not much educated, expert and they do not have time to carry out detailed study.
They have their business life, family life as well as social life and the time left out is very much limited to study
for investment purpose. On the other hand institutional investors are companies, mutual funds, banks and
insurance company who have surplus fund which needs to be invested profitably. These investors have time and
resources to carry out detailed research for the purpose of investing.
Stock exchange operations are peculiar in nature and most of the Investors feel insecure in managing
their investment on the stock market because it is difficult for an individual to identify companies which have
growth prospects for investment. Further due to volatile nature of the markets, it requires constant reshuffling of
portfolios to capitalize on the growth opportunities. Even after identifying the growth oriented companies

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and their securities, the trading practices are also complicated, making it a difficult task for investors to trade in
all the exchange and follow up on post trading formalities.
They believe that a combination of securities held together will give a beneficial resultgrouped in a manner to
secure higher return after taking into consideration the risk element. That is why professional investment advice
through portfolio management service can help the investors to make an intelligent and informed choice
between alternative investments opportunities without the worry of post trading hassles.

MEANING OF PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities and their continuous shifting in
the portfolio to optimize returns to suit the objectives of an investor. This however requires financial
expertise in selecting the right mix of securities in changing market conditions to get the best out of the stock
market. In India, as well as in a number of western countries, portfolio management service has assumed the
role of a specialized service now a days and a number of professional merchant bankers compete aggressively
to provide the best to high net worth clients, who have little time to manage their investments. The idea is
catching on with the boom in the capital market and an increasing number of people are inclined to make
profits out of their hard-earned savings.

Portfolio management service is one of the merchant banking activities recognized bySecurities and Exchange
Board of India (SEBI). The service can be rendered either by merchant bankers or portfolio managers or
discretionary portfolio manager as define in clause (e) and (f) of Rule 2 of Securities and Exchange Board of
India(Portfolio Managers)Rules, 1993 and their functioning are guided by the SEBI.
According to the definitions as contained in the above clauses, a portfolio manager means any person
who is pursuant to 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. A merchant banker acting as a Portfolio Manager shall
also be bound by the rules and regulations as applicable to the portfolio manager. Realizing the importance of
portfolio management services, the SEBI has laid down certain guidelines for the proper and professional
conduct of portfolio management services. As per guidelines only recognized merchant bankers registered with
SEBI are authorized to offer these services. Portfolio management or investment helps investors in effective
and efficient management of their investment to achieve this goal. The rapid growth of capital markets in India
has opened up new investment avenues for investors.
The stock markets have become attractive investment options for the common man. But the need is to be able to
effectively and efficiently manage investments in order to keep maximum returns with minimum risk. Hence
this is the study on PORTFOLIO MANAGEMENT&INVESTMENT DECISION so as to examine the
role, process and merits of effective investment management and decision.
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 DEFINITIONS OF PORTFOLIO
InvestorsWords.com

A collection of investments (all) owned by the same individual or organization. These investments often
include stocks, which are investments in individual businesses bonds, which are investments in debt that are
designed to earn interest and mutual funds which are essentially pools of money from many investors that are
invested by professionals or according to indices.

A collection of variouscompany shares,fixed interest securitiesor money-marketinstruments. People may talk

grandly of 'running a portfolio' when they own a couple of shares but the characteristic of a serious investment
portfolio is diversity. It should show a spread of investments to minimize risk - brokers and investment advisers
warn against' putting all your eggs in one basket'.

a) All the securities held for investment as by an individual, bank, investment company, etc.

b) A list of such securities.

DEFINITIONS OF PORTFOLIO MANAGEMENT

1)Investorswords.com

The process of managing the assets of a mutual fund, including choosing and monitoring appropriate
investments and allocating funds accordingly.

2)Investor Glossary

Determining the mix of assets to hold in a portfolio is referred to as portfolio management.

A fundamental aspect of portfolio management is choosing assets which are consistent with the portfolio
holder's investment objectives and risk tolerance. The ultimate goal of portfolio management is to achieve the
optimum return for a given level of risk. Investors must balance risk and performance in making portfolio
management decisions.
Portfolio management strategies may be either active or passive. An investor who prefers active portfolio
management will choose managed funds which have the potential to outperform the market. Investors are
generally charged higher initial fees and annual management fees for active portfolio management.

3)Financial Dictionary

Managing a large single portfolio or being employed by its owner to do so. Portfolio managers have the
knowledge and skill which encourage people to put their investment decisions in the hands of a professional
(for a fee).

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

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 GOALS OF PORTFOLIO MANAGEMENT

1. Value Maximization
Allocate resources to maximize the value of the portfolio via a number of key objectives such as profitability,
ROI, and acceptable risk. A variety of methods are used to achieve this maximization goal, ranging from
financial methods to scoring models.

2. Balance
Achieve a desired balance of projects via a number of parameters: risk versus return; short-term versus long-
term; and across various markets, business arenas and technologies. Typical methods used to reveal balance
include bubble diagrams, histograms and pie charts.

3. Business Strategy Alignment

Ensure that the portfolio of projects reflects the companys product innovation strategy and that the breakdown
of spending aligns with the companys strategic priorities. The three main approaches are: top-down (strategic
buckets); bottom-up (effective gate keeping and decision criteria) and top-down and bottom-up (strategic
check).

4. Pipeline Balance
Obtain the right number of projects to achieve the best balance between the pipeline resource demands and the
resources available. The goal is to avoid pipeline gridlock (too many projects with too few resources) at any
given time. A typical approach is to use a rank ordered priority list or a resource supply and demand
assessment.

5. Sufficiency
Ensure the revenue (or profit) goals set out in the product innovation strategy are achievable given the projects
currently underway. Typically this is conducted via a financial analysis of the pipelines potential future value.

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 NEED FOR PORTFOLIO MANAGEMENT:
Portfolio management is a process encompassing many activities of investment in assets and securities. It is a
dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective
of this service is to help the unknown and investors with the expertise of professionals in investment
portfolio management. It involves construction of a portfolio based upon the investors objectives, constraints,
preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in
tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and
returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction
refers to the allocation of surplus funds in hand among a variety of financial assets open for investment.
Portfolio theory concerns itself with the principles governing such allocation.

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

OBJECTIVES OF PORTFOLIO MANAGEMENT:

1. Security of Principal Investment: Investment safety or minimization of risks is one of the most
important objectives of portfolio management. Portfolio management not only involves keeping the investment
intact but also contributes towards the growth of its purchasing power over the period. The motive of a financial
portfolio management is to ensure that the investment is absolutely safe. Other factors such as income, growth,
etc., are considered only after the safety of investment is ensured.

2. Consistency of Returns: Portfolio management also ensures to provide the stability of returns by
reinvesting the same earned returns in profitable and good portfolios. The portfolio helps to yield steady
returns. The earned returns should compensate the opportunity cost of the funds invested.

3. Capital Growth: Portfolio management guarantees the growth of capital by reinvesting in growth
securities or by the purchase of the growth securities. A portfolio shall appreciate in value, in order to safeguard
the investor from any erosion in purchasing power due to inflation and other economic factors. A portfolio must
consist of those investments, which tend to appreciate in real value after adjusting for inflation.

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4. Marketability: Portfolio management ensures the flexibility to the investment portfolio. A portfolio
consists of such investment, which can be marketed and traded. Suppose, if your portfolio contains too many
unlisted or inactive shares, then there would be problems to do trading like switching from one investment to
another. It is always recommended to invest only in those shares and securities which are listed on major stock
exchanges, and also, which are actively traded.

5. Liquidity: Portfolio management is planned in such a way that it facilitates to take maximum advantage of
various good opportunities upcoming in the market. The portfolio should always ensure that there are enough
funds available at short notice to take care of the investors liquidity requirements.

6. Diversification of Portfolio: Portfolio management is purposely designed to reduce the risk of loss of
capital and/or income by investing in different types of securities available in a wide range of industries. The
investors shall be aware of the fact that there is no such thing as a zero risk investment. More over relatively
low risk investment give correspondingly a lower return to their financial portfolio.

7. Favorable Tax Status: Portfolio management is planned in such a way to increase the effective yield an
investor gets from his surplus invested funds. By minimizing the tax burden, yield can be effectively improved.
A good portfolio should give a favorable tax shelter to the investors. The portfolio should be evaluated after
considering income tax, capital gains tax, and other taxes.

The objectives of portfolio management are applicable to all financial portfolios. These objectives, if
considered, results in a proper analytical approach towards the growth of the portfolio. Furthermore, overall risk
needs to be maintained at the acceptable level by developing a balanced and efficient portfolio. Finally, a good
portfolio of growth stocks often satisfies all objectives of portfolio management.

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 ASPECTS OF PORTFOLIO MANAGEMENT

Basically, portfolio management involves:

1. A proper investment decision-making of what to buy and sell

2. Proper money management in terms of investment in a basket of assets to satisfy the asset preferences
of the investors.

3. Reduce the risk and increase the returns.

4. Balancing fixed interest securities against equities.

5. Balancing high dividend payment companies against high earning growth companies as required.

6. Finding the income or growth portfolio as required.

7. Balancing transaction costs against capital gains from rapid switching.

8. Balancing income tax payable against capital gains tax.

9. Retaining some liquidity to seize upon bargains.

10. A proper investment decision-making of what to buy and sell

11. Proper money management in terms of investment in a basket of assets to satisfy the asset preferences
of the investors.

12. Reduce the risk and increase the returns.

13. Balancing fixed interest securities against equities.

14. Balancing high dividend payment companies against high earning growth companies as required.

15. Finding the income or growth portfolio as required.

16. Balancing transaction costs against capital gains from rapid switching.

17. Balancing income tax payable against capital gains tax.

18. Retaining some liquidity to seize upon bargains.

COORDINATION WITH RELATING AUTHORITIES:

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The portfolio manager shall designate a senior officer as compliance offer.

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

TYPES OF PORTFOLIO MANAGEMENT

There are various types of portfolio management:

Investment Management
It Portfolio Management
Project Portfolio Management

1.INVESMENT MANAGEMENT:
Investment management is the professional management of various securities (shares, bonds etc.) and assets
(e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be
institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via
investment contracts and more commonly via collective investment schemes e.g. mutual funds or Exchange
Traded Funds).The term asset management is often used to refer to the investment management of collective
investments,(not necessarily) whilst the more generic fund management may refer to all forms of institutional
investment as well as investment management for private investors. Investment managers who specialize in
Advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to
their services as wealth management or portfolio management often within the context of so-called "private
banking". Fund manager (or investment adviser in the U.S.) refers to both a firm that provides investment
management services and an individual who directs fund management decisions.

2. IT PORTFOLIO MANAGEMENT:
IT portfolio management is the application of systematic management to large classes
of items managed by enterprise Information Technology (IT) capabilities. Examples of IT portfolios would be
planned initiatives, projects, and ongoing IT services (such as application support). The promise of IT portfolio

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management is the quantification of previously my serious IT efforts, enabling measurement and
objective evaluation of investment scenarios.
The concept is analogous to financial portfolio management, but there are significant differences.
IT investments are not liquid, like stocks and bonds (although investment
portfoliosmay also include illiquid assets), and are measured using both financial and non-financialyardsticks
(for example, a balanced scorecard approach); a purely financial view is not sufficient. At its most mature, IT
Portfolio management is accomplished through the creation of two portfolios:
(i) Application Portfolio -Management of this portfolio focuses on comparing spending one stablished
systems based upon their relative value to the organization. The comparison
can be based upon the level of contribution in terms of IT investments profitability.Additionally,
this comparison can also be based upon the non-tangible factors such as organizations level of
experience with a certain technology, users familiarity with the applications and infrastructure, and
external forces such as emergence of new technologies and obsolesce of old ones.

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

3.PROJECT PORTFOLIO MANAGEMENT:

Project portfolio management organizes a series of projects into a single portfolio consisting of reports that
capture project objectives, costs, timelines, accomplishments, resources, risks and other critical factors.
Executives can then regularly review entire portfolios, spread resources appropriately and adjust projects to
produce the highest departmental returns. Project management is the discipline of planning, organizing and
managing resources to bring about the successful completion of specific project goals and objectives.
A project is a finite endeavour (having specific start and completion dates) undertaken to create a
unique product or service which brings about beneficial change or added value. This
finite characteristic of projects stands in contrast to processes, or operations, which are permanent or semi-
permanent functional work to repetitively produce the same product or service. In practice, the management of
these two systems is often found to be quite different, and as such requires the development of distinct technical
skills and the adoption of separate management.

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 PORTFOLIO MANAGEMENT PROCESS:

A) THERE ARE THREE MAJOR ACTIVITIES INVOLVED INAN EFFICIENT PORTFOLIO

MANAGEMENT WHICH ARE AS FOLLOWS:-

a) Identification of assets or securities, allocation of investment and also identifying the classes of assets for the
purpose of investment.

b)They have to decide the major weights, proportion of different assets in the portfolio by taking in to
consideration the related risk factors.

c) Finally they select the security within the asset classes as

identify.The above activities are directed to achieve the sole purpose of maximizing return and minimizing risk
on investment. It is well known fact that portfolio manager balances the risk and return in a portfolio
investment. With higher risk higher return may be expected and vice versa.

(B) INVESTMENT DECISION:

Given a certain sum of funds, the investment decisions basically depend upon the following factors:-

I. Objectives of Investment Portfolio:

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

II. Selection of Investment:

Having defined the objectives of the investment, the nextdecision is to decide the kind of investment to be
selected. The decision what to buy has to be seen in the context of the following:-

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a) There is a wide variety of investments available in market i.e. Equity shares, preference share, debentures,
convertible bond, Govt. securities and bond, capital units etc. Out of these what types of securities to be
purchased.
b) What should be the proportion of investment in fixed interest dividend securities and variable dividend
bearing securities? The fixed one ensures a definite return and thus a lower risk but the return is usually not as
higher as that from the variable dividend bearing shares.

c) If the investment is decided in shares or debentures, then the industries showing a potential in growth should
be taken in first line. Industry-wise-analysis is important since various industries are not at the same level from
the investment point of view. It is important to recognize that at a particular point of time, a particular industry
may have a better growth potential than other industries. For example, there was a time when jute industry was
in great favour because of its growth potential and high profitability, the industry is no longer at this point of
time as a growth oriented industry.

d) Once industries with high growth potential have been identified, the next step is to select the particular
companies, in whose shares or securities investments are to be made

FUNDAMENTAL ANALYSIS:

(A)FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED COMPANIES:

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

a) Statistical Analysis of Past Performance:

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

b) Assessing the Intrinsic Value of an Industry/Company:

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

(B) INDUSTRY ANALYSIS

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

1. Demand and Supply Pattern for the Industries Products and Its Growth Potential:
The main important aspect is to see the likely demand of the products of the industry and the gap between
demand and supply.
This would reflect the future growth prospects of the industry. In order to know the future volume and the value
of the output in the next ten years or so, the investment manager will have to rely on the various demand
forecasts made by various agencies like the planning commission, Chambers of Commerce and institutions like
NCAER, etc. The management expert identifies fives stages in the life of an industry. These areIntroduction,
development, rapid growth, maturity and decline. If an industry has already reached the maturity or decline
stage, its future demand potential is not likely to be high.

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

3. Particular Characteristics of the Industry:

Each industry has its own characteristics, which must be studied in depth in order to understand their impact on
the working of the industry. Because the industry having a fast changing technology become obsolete at a faster

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rate. Similarly, many industries are characterized by high rate of profits and losses in alternate years. Such
fluctuations in earnings must be carefully examined.

4. Labour Management Relations in the Industry:

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

(C) COMPANY ANALYSIS:

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

1) Size and Ranking:

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

2) Growth Record:
The growth in sales, net income, net capital employed and earnings per share of the company in the past
few years must be examined. The following three growth indicators may be particularly looked in to (a) Price
earnings ratio, (b) Percentage growth rate of earnings per annum and (c) Percentage growth rate of net block
of the company. The price earnings ratio is an important indicator for the investment manager since it shows the
number the times the earnings per share are covered by the market price of a share. Theoretically, this ratio
should be same for two companies with similar features. However, this is not so in practice due to many factors.
Hence, by a comparison of this ratio pertaining to different companies the investment manager can have an idea
about the image of the company and can determine whether the share is under-priced or over-priced. An
evaluation of future growth prospects of the company should be carefully made. This requires the analysis of
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the existing capacities and their utilization, proposed expansion and diversification plans and the nature of the
companys technology.
The plans of the company, in terms of expansion or diversification, can be known from the directors reports the
chairmans statements and from the future capital commitments as shown by way of notes in the balance sheets.
The nature of technology of a company should be seen with reference to technological developments in the
concerned fields, the possibility of its product being superseded of the possibility of emergence of more
effective method of manufacturing. Growth is the single most important factor in company analysis for the
purpose of investment management. A company may have a good record of profits and performance in the past;
but if it does not have growth potential, its shares cannot be rated high from the investment point of view.

(D) FINANCIAL ANALYSIS:

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

(i) Quality of Management:

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

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that an investment manager always gives a close look to the management of the company whose shares he is to
invest. Quality of management has to be seen with reference to the experience, skill and integrity of the persons
at the helm of the affairs of the company. The policy of the management regarding relationship with the
shareholders is an important factor since certain business houses believe in generous dividend and bonus
distributions while others are rather conservative.

(ii) Location and labour management relations:

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

(iii) Pattern of Existing Stock Holding:

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

(iv) Marketability of the Shares:

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

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

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

1) Specification Of Investment Objectives And Constraints:

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

2) Choice Of The Asset Mix :

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

TECHNIQUES OF PORTFOLIO MANAGEMENT:

As of now the under noted technique of portfolio management: are in vogue in our country.

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

2)Equity Stock Analysis:

17
Under this method the probable future value of a share of a company is determined it can be done by ratios of
earning per share of the company and price earnings ratio
EARNING PER SHARE = _ PROFIT AFTER TAX__ NO. OF EQUITY SHARESPRICE EARNING
RATIO = _MARKET PRICE (PER SHARE)_ EARNING PER SHARE
One can estimate trend of earning by EPS, which reflects trends of earning quality of company, dividend policy,
and quality of management. Price Earnings ratio indicate a confidence of market about the company future, a
high rating is preferable.

TYPES OF RISK IN PORTFOLIO MANAGEMENT

Each and every investor has to face risk while investing. What is Risk? Risk is the uncertainty of income/capital
appreciation or loss of both. Risk is classified into: Systematic risk or Market related risk and Unsystematic risk
or Company related risk.

TYPES OF RISK IN PORTFOLIO MANAGEMENT

SYSTEMATIC RISK
SYSTEMATIC RISK UNSYSTEMATIC RISK
1. Market Risk 1. Business Risk
2. Interest Rate Risk 2. Internal Risk
3. Inflation Rate Risk 3. Financial Risk

SYSTEMATIC RISK
Systematic risk refers to that portion of variation in return caused by factors that affect the price of all
securities. It cannot be avoided. It relates to economic trends with effect to the whole market.
This is further divided into the following:

1. Market risks:
A variation in price sparked off due to real, social political and economical events is referred as market
risks.

2. Interest rate risks:

Uncertainties of future market values and the size of future incomes, caused by fluctuations in the
general level of interest is referred to as interest rate risk.
Here price of securities tend to move inversely with the change in rate of interest.

3. Inflation risks:
Uncertainties in purchasing power is said to be inflation risk.
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 UNSYSTEMATIC RISK

Unsystematic risk refers to that portion of risk that is caused due to factors related to a firm or industry. This
is further divided into:

1. Business risk:
Business risk arises due to changes in operating conditions caused by conditions that thrust upon the
firm which are beyond its control such as business cycles, government controls, etc.

2. Internal risk:
Internal risk is associated with the efficiency with which a firm conducts its operations within the
broader environment imposed upon it.

3. Financial risk:
Financial risk is associated with the capital structure of a firm. A firm with no debt financing has no
financial risk.

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 STEPS OF PORTFOLIO MANAGEMENT

PROCESS/STEPS
PROCESS OF PORTFOLIO
/STEPS OF PORTFOLIO MANAGEMENT

Specification of Investment objective and

Constraints

Selection
SelectionofofAsset
AssetMix
Mixes

Formulation
Formulation of of Portfolio
Portfolio Strategy
Strategy

Selection
Selection of Securities
of Securities

Portfolio
Portfolio Execution
Execution

Portfolio
Portfolio Revision
Revision

Portfolio Evaluation

1. SPECIFICATION OF INVESTMENT OBJECTIVES AND CONSTRAINTS:

The first step in the portfolio management process is to specify the investment policy that consists of
investment objectives, constraints and preferences of investor. The investment policy can be explained as

20
follows:

Specification of investment objectives can be done in following two ways:

1. Maximize the expected rate of return, subject to the risk exposure being held within a certain limit (the
risk tolerance level).
2. Minimize the risk exposure, without sacrificing a certain expected rate of return (the target rate of
return).

An investor should start by defining how much risk he can bear or how much he can afford to lose, rather than
specifying how much money he wants to make. The risk he wants to bear depends on two factors:
a) Financial situation
b) Temperament

To assess financial situation one must take into consideration position of the wealth, major expenses, earning
capacity, etc. and a careful and realistic appraisal of the assets, expenses and earnings forms a base to define the
risk tolerance.

After appraisal of the financial situation assess the temperamental tolerance of risk. Risk tolerance level is set
either by ones financial situation or financial temperament whichever is lower, so it is necessary to understand
financial temperament objectively. One must realize that risk tolerance cannot be defined too rigorously or
precisely. For practical purposes it is enough to define it as low, medium or high. This will serve as a valuable
guide in taking an investment decision.

Constraints and Preferences:

1. Liquidity:
Liquidity refers to the speed with which an asset can be sold, without suffering any loss to its actual
market price. For example, money market instruments are the most liquid assets, whereas antiques are
among the least liquid.
2. Investment horizon:
The investment horizon is the time when the investment or part of it is planned to liquidate to meet a
specific need. For example, the investment horizon for ten years to fund the childs college education.
The investment horizon has an important bearing on the choice of assets.
3. Taxes:
The post tax return from an investment matters a lot. Tax considerations therefore have an important
bearing on investment decisions. So, it is very important to review the tax shelters available and to
incorporate the same in the investment decisions.

4. Regulations:
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 While individual investors are generally not constrained much by laws and regulations, institutional
investors have to conform to various regulations. For example, mutual funds in India are not allowed to
hold more than 10 percent of equity shares of a public limited company.
5. Unique circumstances:

Almost every investor faces unique circumstances. For example, an endowment fund may be prevented
from investing in the securities of companies making alcoholic and tobacco products.

1. SELECTION OF ASSET MIXES:

Based on the objectives and constraints, selection of assets is done. Selection of assets refers to the
amount of portfolio to be invested in each of the following asset categories:

6. Cash:

The first major economic asset that an individual plan to invest in is his or her own house. Their savings
are likely to be in the form of bank deposits and money market mutual fund schemes. Referred to
broadly as cash, these instruments have appeal, as they are safe and liquid.

7. Bonds:
Bonds or debentures represent long-term debt instruments. They are generally of private sector
companies, public sector bonds, gilt-edged securities, RBI saving bonds, national saving certificates,
Kisan Vikas Patras, bank deposits, public provident fund, post office savings, etc.
8. Stocks:
Stocks include equity shares and units/shares of equity schemes of mutual funds. It includes income
shares, growth shares, blue chip shares, etc.
9. Real estate:
The most important asset for individual investors is generally a residential house. In addition to this, the
more affluent investors are likely to be interested in other types of real estate, like commercial property,
agricultural land, semi-urban land, etc.
10. Precious objects and others:

Precious objects are items that are generally small in size but highly valuable in monetary terms. It includes
gold and silver, precious stones, art objects, etc. Other assets includes like that of financial derivatives,
insurance, etc.

3. FORMULATION OF PORTFOLIO STRATEGY:

After selection of asset mix, formulation of appropriate portfolio strategy is required. There are two types of
portfolio strategies, active portfolio strategy and passive portfolio strategy.

11. ACTIVE PORTFOLIO STRATEGY:

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Most investment professionals follow an active portfolio strategy and aggressive investors who strive to
earn superior returns after adjustment for risk. The four principal vectors of an active strategy are:
1. Market Timing
2. Sector Rotation
3. Security Selection
4. Use of a specialized concept

1. Market timing:

Market timing is based on an explicit or implicit forecast of general market movements. The advocates of
market timing employ a variety of tools like business cycle analysis, advance-decline analysis, moving
average analysis, and econometric models. The forecast of the general market movement derived with the
help of one or more of these tools are tempered by the subjective judgment of the investor. Often, of course,
the investor may go largely by his market sense.

2. Sector Rotation:

The concept of sector rotation can be applied to stocks as well as bonds. It is however, used more
commonly with respect to stock component of portfolio where it essentially involves shifting the weightings
for various industrial sectors based on their assessed outlook. For example if it is assumed that cement and
pharmaceutical sectors would do well compared to other sectors in the forthcoming period, one may
overweight these sectors, relative to their position in market portfolio. With respect to bonds, sector rotation
implies a shift in the composition of the bond portfolio in terms of quality, coupon rate, term to maturity and
so on. For example, if there is a rise in the interest rates, there may be shift in long term bonds to medium
term or even short-term bonds.

3. Security Selection:

Security selection involves a search for under priced securities. If an investor resort to active stock
selection, he may employ fundamental and or technical analysis to identify stocks that seems to promise
superior returns and overweight the stock component of his portfolio on them. Likewise, stocks that are
perceived to be unattractive will be under weighted relative to their position in the market portfolio. As far
as bonds are concerned, security selection calls for choosing bonds that offer the highest yield to maturity at
a given level of risk

.
4. Use of a specialized Investment Concept:

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 A fourth possible approach to achieve superior returns is to employ a specialized concept or philosophy,
particularly with respect to investment in stocks. As Charles D. Ellis words says, a possible way to enhance
returns is to develop a profound and valid insight into the forces that drive a particular group of companies
or industries and systematically exploit that investment insight or concept

PASSIVE PORTFOLIO STRATEGY:

The passive strategy rests on the tenet that the capital market is fairly efficient with respect to the available
information. The passive strategy is implemented according to the following two guidelines:
1. Create a well-diversified portfolio at a predetermined level of risk.
2. Hold the portfolio relatively unchanged over time, unless it becomes inadequately diversified or
inconsistent with the investors risk-return preferences.

SELECTION OF SECURITIES:

The following factors should be taken into consideration while selecting the fixed income avenues:

SELECTION OF BONDS (fixed income avenues)

Yield to maturity: The yield to maturity for a fixed income avenue represents the rate of return earned by the
investors if he invests in the fixed income avenue and holds it till its maturity.

Risk of default:

To assess the risk of default on a bond, one may look at the credit rating of the bond. If no credit rating is
available, examine relevant financial ratios (like debt-to-equity ratio, times interest earned ratio, and earning
power) of the firm and assess the general prospects of the industry to which the firm belongs

Tax Shield:

In yesteryears, several fixed income avenues offered tax shield, now very few do so.

Liquidity:

If the fixed income avenue can be converted wholly or substantially into cash at a fairly short notice, it
possesses liquidity of a high order.

SELECTION OF STOCK (Equity shares)

Three board approaches are employed for the selection of equity shares:

Technical analysis looks at price behaviour and volume data to determine whether the share will
move up or down or remain trend less.

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 Fundamental analysis focuses on fundamental factors like the earnings level, growth prospects, and
risk exposure to establish the intrinsic value of a share. The recommendation to buy, hold, or sell is
based on a comparison of the intrinsic value and the prevailing market price.
Random selection approach is based on the premise that the market is efficient and securities are
properly priced.

5. PORTFOLIO EXECUTION:

The next step is to implement the portfolio plan by buying or selling specified securities in given amounts. This
is the phase of portfolio execution which is often glossed over in portfolio management literature. However, it
is an important practical step that has a significant bearing on the investment results. In the execution stage,
three decision need to be made, if the percentage holdings of various asset classes are currently different from
the desired holdings.

6. PORTFOLIO REVISION:

In the entire process of portfolio management, portfolio revision is as important stage as portfolio selection.
Portfolio revision involves changing the existing mix of securities. This may be effected either by changing the
securities currently included in the portfolio or by altering the proportion of funds invested in the securities.
New securities may be added to the portfolio or some existing securities may be removed from the portfolio.
Thus it leads to purchase and sale of securities. The objective of portfolio revision is similar to the objective of
selection i.e. maximizing the return for a given level of risk or minimizing the risk for a given level of return.
The need for portfolio revision has aroused due to changes in the financial markets since creation of portfolio. It
has aroused because of many factors like availability of additional funds for investment, change in the risk
attitude, change investment goals, the need to liquidate a part of the portfolio to provide funds for some
alternative uses. The portfolio needs to be revised to accommodate the changes in the investors position.

PORTFOLIO REVISION BASICALLY INVOLVES TWO STAGES:

Portfolio Rebalancing:

Portfolio Rebalancing involves reviewing and revising the portfolio composition (i.e. the stock- bond mix).
There are three basic policies with respect to portfolio rebalancing: buy and hold policy, constant mix policy,
25
Under a buy and hold policy, the initial portfolio is left undisturbed. It is essentially a buy and hold policy.
Irrespective of what happens to the relative values, no rebalancing is done. For example, if the initial portfolio
has a stock-bond mix of 50:50 and after six months it happens to be say 70:50 because the stock component has
appreciated and the bond component has stagnated, than in such cases no changes are made.
The constant mix policy calls for maintaining the proportions of stocks and bonds in line with their target value.
For example, if the desired mix of stocks and bonds is say 50:50, the constant mix calls for rebalancing the
portfolio when relative value of its components change, so that the target proportions are maintained.
The portfolio insurance policy calls for increasing the exposure to stocks when the portfolio appreciates in
value and decreasing the exposure to stocks when the portfolio depreciates in value. The basic idea is to ensure
that the portfolio value does not fall below a floor level.

Portfolio Upgrading:

While portfolio rebalancing involves shifting from stocks to bonds or vice versa, portfolio-upgrading calls for
re-assessing the risk return characteristics of various securities (stocks as well as bonds), selling over-priced
securities, and buying under-priced securities. It may also entail other changes the investor may consider
necessary to enhance the performance of the portfolio.

7. PORTFOLIO EVALUATION:

Portfolio evaluation is the last step in the process of portfolio management. It is the process that is concerned
with assessing the performance of the portfolio over a selected period of time in terms of return and risk.
Through portfolio evaluation the investor tries to find out how well the portfolio has performed. The portfolio
of securities held by an investor is the result of his investment decisions. Portfolio evaluation is really a study of
the impact of such decisions. This involves quantitative measurement of actual return realized and the risk born
by the portfolio over the period of investment. It provides a mechanism for identifying the weakness in the
investment process and for improving these deficient areas.

PORTFOLIO MANAGER

Portfolio Manager is a professional who manages the portfolio of an investor with the objective of profitability,
growth and risk minimization. According to SEBI, Any person who pursuant to a contract or arrangement with
a client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio

26
of securities or the funds of the client, as the case may be is 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. He tracks and monitors all your investments, cash flow and assets, through live price
updates. The manager has to balance the parameters which defines a good investment i.e. security, liquidity and
return. The goal is to obtain the highest return for the client of the managed portfolio. There are two types of
portfolio manager known as Discretionary Portfolio Manager and Non-Discretionary Portfolio Manager.
Discretionary portfolio manager is the one who individually and independently manages the funds of each
client in accordance with the needs of the client and non-discretionary portfolio manager is the one who
manages the funds in accordance with the directions of the client.

Who can be a Portfolio Manager?

Only those who are registered and pay the required licence fee to SEBI are eligible to operate as Managers. An
applicant for this purpose should have necessary infrastructure with professionally qualified person and with a
minimum of two person with experience in this business and minimum net worth of Rs.5 lack. The certificate
once granted is valid for three years. Fees payable for registration are Rs2.5 lack for two years and Rs.1 lack for
the third year. From the fourth year onwards, renewal fees per annum are Rs.75000. These are subject to change
by SEBI.

The SEBI has imposed number of obligation and code of conduct on portfolio manager. The portfolio manager
should have a high standard of integrity, honesty and should not have been convicted of any economic offence
or moral turpitude. He should not resort of rigging up of prices, insider trading or creating false market etc.
Their books of account are subjected to inspection and audited by SEBI. The observance of code of conduct and
guidelines given by SEBI are subject to inspection and penalties for violation are imposed. The Manager has to
submit periodical returns and documents as may be required by the SEBI from time-to-time.

MEANING OF PORTFOLIO MANAGERS

A non discretionary portfolio manager shall manage the funds in accordance with the directions of the client. A
portfolio manager by virtue of his knowledge, background and experience is expected to study the various
avenues available for profitable investment and advise his client to enable the latter to maximize the return on
his investment and at the same time safeguard the funds invested.
Pursuant to such arrangement he advises the client or undertakes on behalf of such client management or
administration of portfolio of securities or invests or manages the clients funds.

FUNCTIONS OF PORTFOLIO MANAGERS:

1. Advisory role:
27
Advice new investments, review the existing ones, identification of objectives, recommending high yield
securities etc.

2. Conducting market and economic service:

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

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

4. Study of stock market:

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

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

6. Decide the type of portfolio:

Keeping in mind the objectives of portfolio a portfolio manager has to decide whether the portfolio should
comprise equity preference shares, debentures, convertibles, non-convertibles or partly convertibles, money
market, securities etc. or a mix of more than one type of proper mix ensures higher safety, yield and liquidity
coupled with balanced risk techniques of portfolio management. A portfolio manager in the Indian context has
been Brokers (Big brokers) who on the basis of their experience, market trends, Insider trader, helps the limited
knowledge persons. The ones who use to manage the funds of portfolio, now being managed by the portfolio
of Merchant Banks, professionals like MBAs CAs And many financial institutions have entered the market
in a big way to manage portfolio for their clients.
Registered merchant bankers can acts as portfolio managers. Investors must look forward, for qualification
and performance and ability and research base of the portfolio managers.

ROLES AND RESPONSIBILITIES OF A PORTFOLIO MANAGER

A portfolio manager is one who helps an individual invest in the best available investment plans for guaranteed
returns in the future.
28
Let us go through some roles and responsibilities of a Portfolio manager:

A portfolio manager plays a pivotal role in deciding the best investment plan for an individual as
per his income, age as well as ability to undertake risks. Investment is essential for every earning
individual. One must keep aside some amount of his/her income for tough times. Unavoidable
circumstances might arise anytime and one needs to have sufficient funds to overcome the same.

A portfolio manager is responsible for making an individual aware of the various investment
tools available in the market and benefits associated with each plan. Make an individual realize why he
actually needs to invest and which plan would be the best for him.

A portfolio manager is responsible for designing customized investment solutions for the clients.
No two individuals can have the same financial needs. It is essential for the portfolio manager to first
analyse the background of his client. Know an individuals earnings and his capacity to invest. Sit with
your client and understand his financial needs and requirement.

A portfolio manager must keep himself abreast with the latest changes in the financial market.
Suggest the best plan for your client with minimum risks involved and maximum returns. Make him
understand the investment plans and the risks involved with each plan in a jargon free language. A
portfolio manager must be transparent with individuals. Read out the terms and conditions and never
hide anything from any of your clients. Be honest to your client for a long term relationship.

A portfolio manager ought to be unbiased and a thorough professional. Dont always look for your
commissions or money. It is your responsibility to guide your client and help him choose the best
investment plan. A portfolio manager must design tailor made investment solutions for individuals
which guarantee maximum returns and benefits within a stipulated time frame. It is the portfolio
managers duty to suggest the individual where to invest and where not to invest? Keep a check on the
market fluctuations and guide the individual accordingly.

A portfolio manager needs to be a good decision maker. He should be prompt enough to finalize the
best financial plan for an individual and invest on his behalf.

Communicate with your client on a regular basis. A portfolio manager plays a major role in setting
financial goal of an individual. Be accessible to your clients. Never ignore them. Remember you have
the responsibility of putting their hard earned money into something which would benefit them in the
long run.

29
 Be patient with your clients. You might need to meet them twice or even thrice to explain them all the
investment plans, benefits, maturity period, terms and conditions, risks involved and so on. Dont ever
get hyper with them.

Never sign any important document on your clients behalf. Never pressurize your client for any plan. It is
his money and he has all the rights to select the best plan for himself

CODE OF CONDUCT OF PORTFOLIO MANAGER

30
Every portfolio manager in India as per the regulation 13 of SEBI shall follow the following Code of Conduct:

1. A portfolio manager shall maintain a high standard of integrity fairness.

2. The clients funds should be deployed as soon as he receives.

3. A portfolio manager shall render all times high standards and unbiased service.

4. A portfolio manager shall not make any statement that is likely to be harmful to the integration of other
portfolio manager.

5. A portfolio manager shall not make any exaggerated statement.

6. A portfolio manager shall not disclose to any client or press any confidential information about his
client, which has come to his knowledge.

7. A portfolio manager shall always provide true and adequate information.

8. A portfolio manager should render the best pose advice to the client.

PORTFOLIO MANAGERS OBLIGATION:

The portfolio manager has number of obligations towards his clients, some of them are:

1. He shall transact in securities within the limit placed by the client himself with regard to dealing in securities
under the provisions of Reserve Bank of India Act, 1934.

31
2. He shall not derive any direct or indirect benefit out of the clients funds or securities.

3. He shall not pledge or give on loan securities held on behalf of his client to a third person without obtaining a
written permission from such clients.

4. While dealing with his clients funds, he shall not indulge in speculative transactions.

5. He may hold the securities in the portfolio account in his own name on behalf of his clients only if the
contract so provides. In such a case, his records and his report to his clients should clearly indicate that such
securities are held by him on behalf of his client.

6. He shall deploy the money received from his client for an investment purpose as soon as possible for that
purpose.

7. He shall pay the money due and payable to a client forthwith.

8. He shall not place his interest above those of his clients.

9. He shall not disclose to any person or any confidential information about his client,which has come to his
knowledge.

10. He shall endeavour to:

11. Ensure that the investors are provided with true and adequate information withoutmaking any misguiding or
exaggerated claims.

12. Ensure that the investors are made aware of the attendant risks before any investment decision is made by
them.

13. Render the best possible advice to his clients relating to his needs and the environment and his own
professional skills.

14. Ensure that all professional dealings are affected in a prompt, efficient and cost effective manner.

32
PORTFOLIO MANAGEMENT SERVICES

33
As per definition of SEBI Portfolio means a collection of securities owned by an investor. It represents the
total holdings of securities belonging to any person". It comprises of different types of assets and securities.
Portfolio management refers to the management or administration of a portfolio of securities to protect and
enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc.)
and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to
reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and
sell. It involves proper money management. It is also known as Investment Management.

Portfolio Management Services, called, as PMS are the advisory services provided by corporate financial
intermediaries. It enables investors to promote and protect their investments that help them to generate higher
returns. It devotes sufficient time in reshuffling the investments on hand in line with the changing dynamics. It
provides the skill and expertise to steer through these complex, volatile and dynamic times. It is a choice of
selecting and revising spectrum of securities to it with the characteristics of an investor. It prevents holding of
stocks of depreciating-value. It acts as a financial intermediary and is subject to regulatory control of SEBI.

Under PMS, the Client and the Portfolio Manager chart out specific needs of the client and the Portfolio
Manager manages the Portfolio in accordance with those needs. Sometimes the Portfolio Manager may also
have separate ready schemes for the client to choose from. As a result of this customization, client, with his
specific needs, benefits. The service level in the form of reporting transactions, holdings statements etc., also
are comparable or even better than that of a mutual fund.

BENEFITS OF PMS

1. Personalized Advice:
A client gets investment advice and strategies from expert Fund Managers. An Investment Relationship
Manager will ensure that you receive all the services related to your investment needs. The personalized
services also translates into zero paper work and all your financial statements will be e-mailed

2. Professional Management:
An experienced team of portfolio managers ensure your portfolio is tracked, monitored and optimized
at all times.

3. Continuous Monitoring:
The clients are informed about your investment decisions. A dedicated website and a customer services
desk allow you to keep a tab on portfolios performance.

4. Timing:
Portfolio managers preserve clients money on time. Portfolio management services (PMS) help in
allocating right amount money in right type of saving plan at right time. This means portfolio managers

34
 analysis the market and provides his expert advice to the client regarding the amount he should take out
at the time of big risk in stock market.

5. Professional Management:
PMS provides benefits of professional money management with the flexibility, control and potential tax
advantages of owing individual stocks or other securities. The portfolio managers take care of all the
administrative aspects of clients portfolio with a monthly or semi annual reporting on overall status of
the portfolio and performance.

6. Flexibility:
Portfolio managers plan saving of his client according to their need and preferences. But sometimes,
portfolio managers can invest clients money according to his preference because they know the market
very well than his client. It is his clients duty to provide him a level of flexibility so that he can manage
the investment with full efficiency and effectiveness.

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 SERVICES AND STRATEGIES OFFERED THROUGH PMS

1. Portfolio management services (PMS) handles all types of administrative work like opening a new bank
account or dealing with any financial settlement or depository transaction.

2. PMS also help in managing the tax of his client based on detailed statement of the transaction found on
the clients portfolio.

3. PMS also provide a Portfolio manager to the client who acts as personal relationship manager though
whom the client can interact with the fund manager at any time depending on his own preferences such
as:

i. To discuss any concern saving or money, the client can interact with portfolio manager on the monthly
basis.

ii. The client can discuss on any major changes he want in his asset allocation and investment strategies.

OBJECTIVES OF INVESTORS FOR SELECTING OF PMS

Following are the objectives:

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 1. Keep the security, safety of principles intact both in terms of money as well as its purchasing power.

2. Stability of the flow of income so as to facilities planning more accurately and systematically the
reinvestment or consumption of income.

3. To attain capital growth by re-investing in growth securities or through purchase of growth securities.

4. Marketability of the security which is essential for providing flexibility to the investment portfolio.

5. Liquidity i.e. nearness to the money which is desirable to the investors so as to take advantages of
attractive opportunities upcoming in the market.

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

7. Favourable tax status: the effectively yield a investors gets from his investments depends on tax to
which it is subject.

8. Capital growth which can be attained by reinvesting in growth securities or through purchased of
growth securities.

PAYMENT CRITERIA OF PMS

There are two types of payment criteria offered by Portfolio Manages to their clients such as:

1. Fixed- linked management fee.

2. Performance-linked management fee.

Fixed-linked management fee:

In fixed-linked management fee the clients usually pays between 2-2.5% of the portfolio value calculated on
weighted average method.

Performance-linked management fee:

In performance- linked management fees the client pays a flat ranging between 0.5-1.5percent based on the
performance of the portfolio manager. The profits are calculated on the basis of high watermarking concept.
This means that the fee is paid only on the basis of positive return on investment.

In addition to these criteria the portfolio manager also gets around 15-20% earned by the client. The portfolio
manager can also claim some separate charges gained from brokerage, custodial service and tax payments.
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 INVESTORS ALERTS

Dos:

Only intermediaries having specific SEBI registration for rendering Portfolio management services can
offer portfolio management services

Investors should make sure that they are dealing with SEBI authorized portfolio manager.

Investors must obtain a disclosure document from the portfolio manager broadly covering manner and
quantum of fee payable by the clients, portfolio risks, performance of the portfolio manager etc.

Investors must check whether the portfolio manager has a necessary infrastructure to effectively service
their requirements.

Investors must enter into an agreement with the portfolio manager.

Investors should make sure that they receive a periodical report on their portfolio as per the agreed
terms.

Investors must make sure that portfolio manager has got the respective portfolio account by an
independent charted accountant every year and that the certificate given by the charted accountant is
given to an investor by the portfolio manager.

In case of complaints, the investors must approach the authorities for redressal in a timely manner.

Donts:

Investors should not deal with unregistered portfolio managers.

They should not hesitate to approach the authorities for redressed of the grievances.

They should not invest unless they have understood the details of the scheme including risks involved.

Should not invest without verifying the background and performance of the portfolio manager.
The promise of guaranteed returns should not influence the investors.

DIFFERENCE BETWEEN PORTFOLIO MANAGEMENT SERVICES AND

MUTUAL FUNDS
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While the concept of Portfolio Management Services and Mutual Funds remains the same of collecting money
from investors, pooling them and investing the funds in various securities. There are some differences between
them described as follows:

1. In the case of portfolio management, the target investors are high net-worth investors, while in the case of
mutual funds the target investors include the retail investors.

2. In case of portfolio management, the investments of each investor are managed separately, while in the case
of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion, in
which the investors/ unit holders make the investments.

3. The investments in portfolio management are managed taking the risk profile of individuals into account. In
mutual fund, the risk is pooled depending on the objective of a scheme.

4. In case of portfolio management, the investors are offered the advantage of personalized service to try to
meet each individual clients investment objectives separately while in case of mutual funds investors are not
offered.

BENEFITS OF CHOOSING PORFTFOLIO MANAGEMENT SERVICE

INSTEAD OF MUTUAL FUNDS

Benefits of Choosing Portfolio Management service Instead of Mutual Funds

While selecting a portfolio management service over mutual fund services it is found that the portfolio manager
offer some very service which are better than standardized product services offered by the mutual fund
manager. Such as:

1. Asset Allocation :
Asset allocation plan offered by portfolio management service (PMS) helps in allocating savings of
the client in terms of stock bonds or equity funds. The plan is tailor made and is designed after a
detailed analysis of clients investment goals, saving pattern and risk taking goal.

2. Timing:
Portfolio manager preserves clients money on time. Portfolio management services helps in
allocating right amount of money in right type of saving plan at right time. This means the portfolio
manager provides their expert advice when his client should invest his money in equity or bonds or
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 when he should take his money out of particular saving plan. Portfolio manager analyses market and
provides his expert advice to the client regarding the amount of cash he should take out at the time
of big risk in stock market.

3. Flexibility:
Portfolio manager plan saving of his client according to their need and preferences. But sometime
portfolio manager can invest the clients money according to his own preferences because they know
the market very well than his client. It is his clients duty to provide him a level of flexibility so that
he can manage the investment with full efficiency and effectiveness.

4. Rules and Regulation:

In comparison to mutual funds, portfolio managers do not need to follow any rigid rules of investing
a particular amount of money in a particular mode of investment. Mutual fund managers need to
work according to the regulations set up by financial authorities of their country. Like in India, they
have to follow rules set up by SEBI

CONCLUSION

After the overall all study about each and every aspect of this topic it shows that portfolio management is a
dynamic and flexible concept which involves regular and systematic analysis, proper management, judgment,
and actions and also that the service which was not so popular earlier as other services has become a booming
sector as on today and is yet to gain more importance and popularity in future as people are slowly and steadily
coming to know about this concept and its importance.

It also helps both an individual the investor and FII to manage their portfolio by expert portfolio managers. It
protects the investors portfolio of funds very crucially. Portfolio management service is very important and
effective investment tool as on today for managing investible funds with a surety to secure it.

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