Professional Documents
Culture Documents
Overview of Portfolio Management in India
Overview of Portfolio Management in India
PROJECT ON
Submitted
By
ANIL. C. CHAVAN.
PROJECT GUIDE
SEMESTER V
(2010-2011)
1
Declaration
Signature
2
ACKNOWLEDGEMENT
For giving valuable information about the various books related to this
project.
With all the heartiest thanks; I hope my final project report will be a great
success and a good source of learning and information.
3
INDEX
CHAPTER-7 42
Risk –Return analysis
CHAPTER-8 49
Assest allocation
CHAPTER-9 53
Primary survey
CHAPTER-10 58
Findings
CHAPTER-11 62
conclusion
CHAPTER-12 63
Bibliography/Webliography
CHAPTER-13 64
4
NEED FOR SELECTING THE PROJECT
portfolio manager.
allocation.
5
EXECUTIVE SUMMARY
Investing in equities requires time, knowledge and constant monitoring of the market.
For those who need an expert to help to manage their investments, portfolio
management service (PMS) comes as an answer.
The business of portfolio management has never been an easy one. Juggling the
limited choices at hand with the twin requirements of adequate safety and sizeable
returns is a task fraught with complexities.
Given the unpredictable nature of the market it requires solid experience and strong
research to make the right decision. In the end it boils down to make the right move in
the right direction at the right time. That’s where the expert comes in.
A portfolio manager by the virtue of his knowledge, background and experience helps
his clients to make investment in profitable avenues. A portfolio manager has to comply
with the provisions of the SEBI (portfolio managers) rules and regulations, 1993.
This project also includes the different services rendered by the portfolio manager. It
includes the functions to be performed by the portfolio manager.
What is the difference between the value of time and money? In other words, learn to
separate time from money.
6
When it comes to the importance of time, how many of us believe that time is money.
We all know that the work done by us is calculated by units of time. Have you ever
considered the difference between an employee who is working on an hourly rate and
the other who is working on salary basis? The only difference between them is of the unit
of time. No matter whether you get your pay by the hour, bi-weekly, or annually; one
thing common in all is that the amount is paid to you according to amount of time you
spent on working.
In other words, time is precious and holds much more importance than money. That
is the reason the time is considered as an important factor in wealth creation.
The project also shows the factors that one considers for making an investment
decision and briefs about the information related to asset allocation.
7
CHAPTER: 1
PORTFOLIO MANAGEMENT
INTRODUCTION
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 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.
Investors choose to hold groups of securities rather than single security that offer the
greater expected returns. They believe that a combination of securities held together will
give a beneficial result if they are grouped in a manner to secure higher return after
taking into consideration the risk element. That is why professional investment advice
through portfolio management service can help the investors to make an intelligent and
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informed choice between alternative investments opportunities without the worry of post
trading hassles.
From The Rational Edge: The first in a new series of articles on portfolio
management, this introduction expresses IBM’s viewpoint about the foundations and
essentials of portfolio management, and discusses ideas and assets that support and
enable effective portfolio management practices.
A good way to begin understanding what portfolio management is (and is not) may be to
define the term portfolio. In a business context, we can look to the mutual fund industry
to explain the term's origins. Morgan Stanley's Dictionary of Financial Terms offers the
following explanation:
If you own more than one security, you have an investment portfolio. You build the
portfolio by buying additional stocks, bonds, mutual funds, or other investments. Your
goal is to increase the portfolio's value by selecting investments that you believe will go
up in price
According to modern portfolio theory, you can reduce your investment risk by creating a
diversified portfolio that includes enough different types, or classes, of securities so that
at least some of them may produce strong returns in any economic climate.
9
CHAPTER2
Kotak Securities Limited, a strategic joint venture between Kotak Mahindra Bank
and Goldman Sachs (holding 25% one of the world’s leading investment banks
and brokerage firms) is India’s leading stock broking house with a market share
of 7 - 8 %.
10
Kotak Securities Limited is also a depository participant with National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL)
providing dual benefit services wherein the investors can use the brokerage
services of the Company for executing the transactions and the depository
services for settling them.
Kotak Securities has 122 branches servicing more than 1, 70,000 customer and
Coverage of 18 cities. Kotaksecurities.com, the online division of Kotak
Securities Limited offers Internet Broking services and also online IPO and
Mutual Fund Investments. Kotak Securities Limited manages assets over 2500
cores of Assets under Management (AUM).
Kotak securities provide portfolio Management Services, catering to the high end
of the market. Portfolio Management from Kotak Securities comes as an answer
to those who would like to grow exponentially on the crest of the stock market,
with the backing of an expert.
Kotak Securities Limited manages assets over Rs. 1700crores through its
Portfolio Management Services (PMS) servicing high net worth clients with a
large investible surplus through its preferred client services in the mass affluent
and wealth management segments.
11
KOTAK SECURITIES RESEARCH CENTER
b. Special Reports
c. Market Mornings
e. Sectoral Report
f. Stock Ideas
g. Derivatives Reports
h. Portfolio Advices
Depending on what kind of investor you are, Kotak Securities Ltd. (KSL) brings
customers from fundamental or basic research and technical research. As an
investor with Kotak Securities, Customers get access to these research reports
exclusively. Customers get access to the following reports. Research process is
given below.
12
PRODUCTS OFFERED BY KOTAK SECURITIES LIMITED
1. Portfolio Management Services [PMS]: KOTAK Securities is among the
Largest private client asset managers in the Country today with an equity
asset base of around 1700crores (US$ 400 million). Kotak clients include
some of the most affluent families and high net worth individuals in the
Country and customer assets under management rival some of the larger
mutual funds in India.
4) IPOs
5) Mutual Funds
13
CHAPTER3
MEANING OF PORTFOLIO MANAGEMENT
14
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.
15
Portfolio management can be having institutional, for example, Unit Trust, Mutual
Funds, Pension Provident and Insurance Funds, Investment Companies and non-
Investment Companies.
Over time, other industry sectors have adapted and applied these ideas to
other types of "investments," including the following:
Product portfolio management: Businesses group major products that they develop
and sell into (logical) portfolios, organized by major line-of-business or business
segment. Such portfolios require ongoing management decisions about what new
products to develop (to diversify investments and investment risk) and what existing
products to transform or retire (i.e., spin off or divest). Project or initiative portfolio
management, an initiative, in the simplest sense, is a body of work with:
Managers can group a number of initiatives into a portfolio that supports a business
segment, product, or product line. These efforts are goal-driven; that is, they support
major goals and/or components of the enterprise's business strategy. Managers must
continually choose among competing initiatives (i.e., manage the organization's
investments), selecting those that best support and enable diverse business goals (i.e.,
16
they diversify investment risk). They must also manage their investments by providing
continuing oversight and decision-making about which initiatives to undertake, which to
continue, and which to reject or discontinue.
Chennai, January 25, 2006: Indian Bank is enlarging its activities to deliver value-
added services to its customers. The Bank is presently selling the Insurance products,
both Life and Non-life as a Corporate Agent. The Bank is concentrating on optimizing
the 3 Ps, People, Process and Products to give maximum advantage to its customers
and to face the market competition by exploiting the emerging opportunities.
Indian Bank today announced a strategic alliance with Pnb Principal Insurance Advisory
Co., Pvt. Ltd. in the insurance advisory business and Pnb Principal Financial Planners
Pvt. Ltd. in the financial planning business. As the alliance will enable access to the
financial products of 30 Insurance companies both life and non-life and an equal
number of Investment solutions to the Bank’s Customers under one roof, the Bank’s
emphasis would be to serve as an “agent to its customers”.
As per the scope of the alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd.,
Indian Bank has taken an equity stake in the Company. This partnership will also deliver
risk management solutions to Indian Bank customers through the Insurance advisory
route. The solutions offered will include risk assessment, insurance portfolio analysis &
placement, insurance portfolio administration, and claims management.
As per Indian Bank’s strategic alliance with Pnb Principal Financial Planners Pvt. Ltd.,
the Bank will distribute the investment solutions offered by Pnb Principal Financial
Planners through its extensive branch network. Pnb Principal Financial Planners will
provide support in the area of financial planning, investment advisory, research,
systems and business development to Indian Bank. The strategic alliance will enable
customers of Indian Bank to access a wide range of superior investment solutions.
Announcing the partnership with Indian Bank, Sanjay Sachdev, Country Manager-India,
and Principal International said, “Banks have currently emerged as the largest
distribution channel for financial investment options. We are pleased to associate
ourselves with Indian Bank. This partnership with Indian Bank will make a range of
investment solutions more accessible to retail investors of Indian Bank.”
Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said,” The alliance
with Pnb Principal in the areas of Risk Management, Insurance and Investment will help
in providing a One-stop solution to the 15 million strong customers of Indian Bank
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throughout the country. The Tie-up will help realize our cherished goal of making our
Bank, “the best people to bank with”.
CHPTER4
METHODOLOGY
Portfolio Management is used to select a portfolio of new product development projects
to achieve the following goals:
The weighting of the goals in making decisions about products varies from company.
But organizations must balance these goals: risk vs. profitability, new products vs.
improvements, strategy fit vs. reward, market vs. product line, long-term vs. short-term.
Several types of techniques have been used to support the portfolio management
process:
18
• Heuristic models
• Scoring techniques
• Visual or mapping techniques
The recommended approach is to start with the overall business plan that should define
the planned level of R&D investment, resources (e.g., headcount, etc.), and related
sales expected from new products. With multiple business units, product lines or types
of development, we recommend a strategic allocation process based on the business
plan. This strategic allocation should apportion the planned R&D investment into
business units, product lines, markets, geographic areas, etc. It may also breakdown
the R&D investment into types of development, e.g., technology development, platform
development, new products, and upgrades/enhancements/line extensions, etc.
Once this is done, then a portfolio listing can be developed including the relevant
portfolio data. We favor use of the development productivity index (DPI) or scores from
the scoring method. The development productivity index is calculated as follows: (Net
Present Value x Probability of Success) / Development Cost Remaining. It factors the
NPV by the probability of both technical and commercial success. By dividing this result
by the development cost remaining, it places more weight on projects nearer completion
and with lower uncommitted costs. The scoring method uses a set of criteria (potentially
different for each stage of the project) as a basis for scoring or evaluating each project.
19
An example of this scoring method is shown with the worksheet below. Weighting
factors can be set for each criterion. The evaluators on a Product Committee score
projects (1 to 10, where 10 are best). The worksheet computes the average scores and
applies the weighting factors to compute the overall score. The maximum weighted
score for a project is 100.This portfolio list can then be ranked by either the
development priority index or the score. An example of the portfolio list is shown below
and the second illustration shows the category summary for the scoring method.
Once the organization has its prioritized list of projects, it then needs to determine
where the cutoff is based on the business plan and the planned level of investment of
the resources available. This subset of the high priority projects then needs to be further
20
analyzed and checked. The first step is to check that the prioritized list reflects the
planned breakdown of projects based on the strategic allocation of the business plan.
Pie charts such as the one below can be used for this purpose.
Other factors can also be checked using bubble charts. For example, the risk-reward
balance is commonly checked using the bubble chart shown earlier. A final check is to
analyze product and technology roadmaps for project relationships. For example, if a
lower priority platform project was omitted from the protfolio priority list, the subsequent
higher priority projects that depend on that platform or platform technology would be
impossible to execute unless that platform project were included in the portfolio priority
list.
Finally, this balanced portfolio that has been developed is checked against the business
plan as shown below to see if the plan goals have been achieved - projects within the
planned R&D investment and resource levels and sales that have met the goals.
21
With the significant investments required to develop new products and the risks
involved, Portfolio Management is becoming an increasingly important tool to make
strategic decisions about product development and the investment of company
resources. In many companies, current year revenues are increasingly based on new
products developed in the last one to three years.
Markowitz described how to combine assets into efficiently diversified portfolios. It was
his position that a portfolio's risk could be reduced and the expected rate of return could
be improved if investments having dissimilar price movements were combined. In other
words, Markowitz explained how to best assemble a diversified portfolio and proved that
such a portfolio would likely do well.
A strategy that involves minimal expectation input, and instead relies on diversification
to match the performance of some market index.
A strategy that uses available information and forecasting techniques to seek a better
performance than a portfolio that is simply diversified broadly
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CHAPTER5
BASIC CONCEPTS AND COMPONENTS FOR
PORTFOLIO MANAGEMENT
Now that we understand some of the basic dynamics and inherent challenges
organizations face in executing a business strategy via supporting initiatives, let's look
at some basic concepts and components of portfolio management practices.
1. The Portfolio
First, we can now introduce a definition of portfolio that relates more directly to the
context of our preceding discussion. In the IBM view, a portfolio is: One of a number of
mechanisms, constructed to actualize significant elements in the Enterprise Business
Strategy.
It contains a selected, approved, and continuously evolving, collection of Initiatives
which are aligned with the organizing element of the Portfolio, and, which contribute to
the achievement of goals or goal components identified in the Enterprise Business
Strategy. The basis for constructing a portfolio should reflect the enterprise's particular
needs. For example, you might choose to build a portfolio around initiatives for a
specific product, business segment, or separate business unit within a multinational
organization.
23
results boundaries, and with business components. If you have a product-oriented
portfolio structure, for example, then you would have a separate portfolio for each major
product or product group. Each portfolio would contain all the initiatives that help that
particular product or product group contribute to the success of the enterprise business
A significant aspect of oversight is setting multiple decision points for each initiative, so
that managers can periodically evaluate data and decide whether to continue the work.
24
These "continue/change/discontinue" decisions should be driven by an understanding
(developed via the periodic reviews) of a given initiative's continuing value, expected
benefits, and strategic contribution, Making these decisions at multiple points in the
initiative's lifecycle helps to ensure that managers will continually examine and assess
changing internal and external circumstances, needs, and performance.
5. Governance
Implementing portfolio management practices in an organization is a transformation
effort that typically involves developing new capabilities to address new work efforts,
defining (and filling) new roles to identify portfolios (collections of work to be done), and
delineating boundaries among work efforts and collections. Implementing portfolio
management also requires creating a structure to provide planning, continuing direction,
and oversight and control for all portfolios and the initiatives they encompass. That is
where the notion of governance comes into play. The IBM view of governance is:
An abstract, collective term that defines and contains a framework for organization,
exercise of control and oversight, and decision-making authority, and within which
actions and activities are legitimately and properly executed; together with the definition
of the functions, the roles, and the responsibilities of those who exercise this oversight
and decision-making.
Portfolio management governance involves multiple dimensions, including:
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Each of these dimensions requires an owner -- either an individual or a collective -- to
develop and approve plans, continuously adjust direction, and exercise control through
periodic assessment and review of conformance to expectations.
A good governance structure decomposes both the types of work and the authority to
plan and oversee work. It defines individual and collective roles, and links them to an
authority scheme. Policies that are collectively developed and agreed upon provide a
framework for the exercise of governance. The complexities of governance structures
extend well beyond the scope of this article. Many organizations turn to experts for help
in this area because it is so critical to the success of any business transformation effort
that encompasses portfolio management. For now, suffice it to say that it is worth
investing time and effort to create a sound and flexible governance structure before you
attempt to implement portfolio management practices.
For example, in Roman times, engineers discovered that if the upstream supports of a
bridge were shaped to offer little resistance to the current of a stream or river, they
would last longer. They applied this principle all across the Roman Empire. Then, in the
middle Ages, engineers discovered that such supports would last even longer if their
downstream side was also shaped to offer little resistance to the current. So that
became the new standard for bridge construction.
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as a collection of "essentials" that are, in turn, grouped around a small collection of
portfolio management themes.
The basic objective of Portfolio Management is to maximize yield and minimize risk.
The other objectives are as follows:
27
e) Tax Incentives: Investors try to minimize 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
It provides a set of portfolio management tools to help achieve these goals. With
multiple business units, product lines or types of development, we recommend a
strategic allocation process based on the business plan. The Master Project
Schedule provides a summary of all-active as well as proposed projects and
classifies them by status (active, proposed, on-hold) and by business
unit/product line to align projects with the strategic allocation. The Master Project
Schedule also provides additional portfolio information to prioritize projects using
either a scorecard method or the development productivity index (DPI *). In
addition to this prioritization, PD-Trek provides a Risk-Reward Bubble Chart and
a Project Type Pie Chart to assure balance. A Product or Technology Roadmap
28
template is provided to help visualize platform and technology relationships to
assure critical project relationships are not overlooked with this prioritization. This
will allow management to develop a balanced approach to selecting and
continuing with the appropriate mix of projects to satisfy the three goals.
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FUNCTIONS OF PORTFOLIO MANAGEMENT
The basic purpose of portfolio management is to maximize yield and minimize risk.
Every investor is risk averse. In order to diversify the risk by investing into various
securities following functions are required to be performed.
1. To frame the investment strategy and select an investment mix to achieve the
desired investment objective;
2. To provide a balanced portfolio which not only can hedge against the inflation but
can also optimize returns with the associated degree of risk;
30
Finally the evaluation of the portfolio.
⇒ At present, there are a very few agencies which render this type of services in
an organized and professional way.
⇒ It is conservatively estimated that during the eighth plan resources to the tune
of over Rs.50000crore will be mobilized through the stock market.
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STEPS IN PORTFOLIO MANAGEMENT
Performance Portfolio
Evaluation Revision
Portfolio
Execution
STEPS
Selection of
Asset Mix
Identification Portfolio
Of Strategy
Objectives
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These objectives may be tangible such as buying a car, house etc. and
intangible objectives such as social status, security etc.
Similarly, these objectives may be classified as financial or personal
objectives.
Financial objectives are safety, profitability and liquidity.
Personal or individual objectives may be related to personal
characteristics of individuals such as family commitments, status,
depends, educational requirements, income, consumption and provision
for retirement etc.
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3) SELECTION OF ASSET MIX
The most important decision in portfolio management is selection of asset
mix.
It means spreading out portfolio investment into different asset classes
like bonds, stocks, mutual funds etc.
In other words selection of asset mix means investing in different kinds of
assets and reduces risk and volatility and maximizes returns in investment
portfolio.
Selection of asset mix refers to the percentage to the invested in various
security classes.
The security classes are simply the type of securities as under:
Once the objective of the portfolio is determined the securities to be
included in the portfolio must be selected.
Normally the portfolio is selected from a list of high-quality bonds that the
portfolio manager has at hand.
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.
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Once the goal has been selected, the portfolio manager can select the
common stocks.
3) PORTFOLIO EXECUTION:
The process of portfolio management involves a logical set of steps
common to any decision, plan, implementation and monitor.
Applying this process to actual portfolios can be complex.
Therefore, in the execution stage, three decisions need to be made, if the
percentage holdings of various asset classes are currently different from
desired holdings.
The portfolio than, should be rebalanced. If the statement of investment
policy requires pure investment strategy, this is only thing, which is done
in the execution stage.
However, many portfolio managers engage in the speculative transactions
in the belief that such transactions will generate excess risk-adjusted
returns.
Such speculative transactions are usually classified as timing or selection
decisions.
Timing decisions over or under weight various asset classes, industries or
economic sectors from the strategic asset allocation.
Such timing decisions are known as tactical asset allocation and selection
decision deals with securities within a given asset class, industry group or
economic sector.
The investor has to begin with periodically adjusting the asset mix to the
desired mix, which is known as strategic asset allocation.
Then the investor or portfolio manager can make any tactical asset
allocation or security selection decision.
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5) PORTFOLIO REVISION
Portfolio management would be an incomplete exercise without periodic
review.
The portfolio, which is once selected, has to be continuously reviewed
over a period of time and if necessary revised depending on the objectives
of investor.
Thus, portfolio revision means changing the asset allocation of a portfolio.
Investment portfolio management involves maintaining proper
combination of securities, which comprise the investor’s portfolio in a
manner that they give maximum return with minimum risk.
For this purpose, investor should have continuous review and scrutiny of
his investment portfolio.
Whenever adverse conditions develop, he can dispose of the securities,
which are not worth.
However, the frequency of review depends upon the size of the portfolio,
the sum involved, the kind of securities held and the time available to the
investor.
The review should include a careful examination of investment objectives,
targets for portfolio performance, actual results obtained and analysis of
reason for variations.
The review should be followed by suitable and timely action.
There are techniques of portfolio revision.
Investors buy stock according to their objectives and return-risk
framework.
These fluctuations may be related to economic activity or due to other
factors.
Ideally investors should buy when prices are low and sell when prices rise
to levels higher than their normal fluctuations.
36
The investor should decide how often the portfolio should be revised.
If revision occurs to often, transaction and analysis costs may be high.
6) PORTFOLIO PERFORMANCE EVALUATION:
37
The performance of an individual stock should be compared with the
overall performance of the market.
CHAPTER6
TYPES OF PORTFOLIO MANAGEMENT:
The two types of portfolio management services are available o the investors:
In this type of services, the client parts with his money in favor of manager,
who in return, handles all the paper work, makes all the decisions and
gives a good return on the investment and for this he charges a certain
fees.
In this discretionary PMS, to maximize the yield, almost all portfolio
managers parks the funds in the money market securities such as
overnight market, 182 days treasury bills and 90 days commercial bills.
Normally, return on such investment varies from 14 to 18 per cent,
depending on the call money rates prevailing at the time of investment.
38
The manager function as a counselor, but the investor is free to accept or
reject the manager’s advice; the manager for a services charge also
undertakes the paper work.
The manager concentrates on stock market instruments with a portfolio tailor
made to the risk taking ability of the investor.
Technical analysis assumes that the price of a stock depends on supply and
demand in the stock market.
All financial and market information of given security is already reflected in the
market price.
These charts enable the investors to predict the future movement of the price
of security.
Equity portfolio is a risky portfolio, but at the same time the return is also
higher.
39
An efficient portfolio manager can obviously give more weight age to
fundamental analysis than the technical analysis.
The fundamental analysis includes the study of ratio analysis, past and
present track record of the company, quality of management, government
policies etc.
Some bonds are tax saving which help the investor to reduce his tax
liability.
40
However, it is suitable for normal investors for getting average return over
their investment.
Bond portfolio includes different types of bond, tax free bonds and taxable
bonds.
The tax free bonds means the interest income on these bonds is not
Individuals will benefits immensely by taking portfolio management services for the
following reason: -
a) Whatever may be the status of the capital market; over the long period capital
markets have given an excellent return when compared to other forms of
investment. The return from bank deposits, units etc., is much less than from
stock market.
b) The Indian stock markets are very complicated. Though there are thousands of
companies that are listed only a few hundred, which have the necessary
liquidity. It is impossible for any individual whishing to invest and sit down and
analyses all these intricacies of the market unless he does nothing else.
41
c) Even if an investor is able to visualize the market, it is difficult to investor to trade
in all the major exchanges of India, look after his deliveries and payments.
This is further complicated by the volatile nature of our markets, which
demands constant reshuffling of port
42
IMPORTANCE OF PORTFOLIO MANAGEMENT
⇒
In the past one-decade, significant changes have taken place in the investment
climate in India.
⇒
Portfolio management is becoming a rapidly growing area serving a broad array
of investors- both individual and institutional-with investment portfolios
ranging in asset size from thousands to cores of rupees.
⇒
It is becoming important because of:
vi. Larger direct and indirect costs of errors or shortfalls in meeting portfolio
objectives- increased competition and greater scrutiny by investors.
43
CHAPTER7
44
Portfolio management is not a substitute to the inherent risks associated with
equity investment.
In the stock market every new piece of information affects the value
of the securities of different industries in a different way.
2. Analytical Ability:
He must have his own theory to arrive at the value of the security.
45
The analyst can know the strengths, weakness, opportunities of the
economy, industry and the company.
46
3. Marketing skills:
4. Experience:
47
FACTORS AFFECTING THE INVESTOR
There may be many reasons why the portfolio of an investor may have to be changed.
The portfolio manager always remains alert and sensitive to the changes in the
requirements of the investor. The following are the some factors affecting the investor,
which make it necessary to change the portfolio composition.
1) Change in Wealth
According to the utility theory, the risk taking ability of the investor increases with
increase in wealth.
It says that people can afford to take more risk as they grow rich and benefit from its
reward.
But, in practice, while they can afford, they may not be willing.
As people get rich, they become more concerned about losing the newly got riches
than getting richer.
The fund manager should observe the changes in the attitude of the investor
towards risk and try to understand them in proper perspective.
If the investor turns to be conservative after making huge gains, the portfolio
manager should modify the portfolio accordingly.
48
2) Change in the Time Horizon
As time passes, some events take place that may have an impact on the
time horizon of the investor.
Births, deaths, marriages, and divorces – all have their own impact on the
investment horizon.
There are, of course, many other important events in the person’s life that
may force a change in the investment horizon.
The happening or the non-happening of the events will naturally have its
effect.
But, after turning 55 years of age, if his health improves, he may not take
retirement.
Investors very often ask the portfolio manager to keep enough scope in
the portfolio to get some cash as and they want.
49
Due to this, the amounts available for investment in the fixed income or
growth securities that actually help in achieving the goal of the investor get
reduced.
That is, the money taken out today from the portfolio means that the
amount and the return that would have been earned on it are no longer
available for achievement of the investor’s goals.
4) Changes in Taxes
It is said that there are only two things certain in this world- death and
taxes.
The only uncertainties regarding them relate to the date, time, place and
mode.
Portfolio manager have to constantly look out for changes in the tax
structure and make suitable changes in the portfolio composition.
The rate of tax under long- term capital gains is usually lower than the rate
applicable for income. If there is a change in the minimum holding period
for long-term capital gains, it may lead to revision. The specifics of the
planning depend on the nature of the investments
5) Others
There can be many of other reasons for which clients may ask for a
change in the asset mix in the portfolio.
50
This may call for a change in the return required from the other
investments.
51
CHAPTER 8
The expected returns from individual securities carry some degree of risk. Risk
on the portfolio is different from the risk on individual securities. The risk is
reflected in the variability of the returns from zero to infinity. Risk of the individual
assets or a portfolio is measured by the variance of its return. The expected return
depends on the probability of the returns and their weighted contribution to the
risk of the portfolio. These are two measures of risk in this context one is the
absolute deviation and other standard deviation.
Most investors invest in a portfolio of assets, because as to spread risk by not
putting all eggs in one basket. Hence, what really matters to them is not the risk
and return of stocks in isolation, but the risk and return of the portfolio as a whole.
Risk is mainly reduced by Diversification.
52
2) Purchasing Power Risk: It is also known as inflation risk also emanates
from the very fact that inflation affects the purchasing power adversely.
Nominal return contains both the real return component and an inflation
premium in a transaction involving risk of the above type to compensate for
inflation over an investment holding period. Inflation rates vary over time
and investors are caught unaware when rate of inflation changes
unexpectedly causing erosion in the value of realized rate of return and
expected return.
53
company’s earnings per share are more but dependence on borrowings
exposes it to risk of winding up for its inability to honor its commitments
towards lender or creditors. The risk is known as leveraged or financial risk
of which investors should be aware and portfolio managers should be very
careful.
54
Normally, the higher the risk that the investor takes, the higher is the return.
There is, however, a risk less return on capital of about 12% which is the bank,
rate charged by the R.B.I or long term, yielded on government securities at
around 13% to 14%. This risk less return refers to lack of variability of return and
no uncertainty in the repayment or capital. But other risks such as loss of liquidity
due to parting with money etc., may however remain, but are rewarded by the
total return on the capital.
Risk-return is subject to variation and the objectives of the portfolio manager
are to reduce that variability and thus reduce the risk by choosing an appropriate
portfolio.
Traditional approach advocates that one security holds the better, it is
according to the modern approach diversification should not be quantity that
should be related to the quality of scripts which leads to quality of portfolio.
Experience has shown that beyond the certain securities by adding more
securities expensive.
RETURNS ON PORTFOLIO:
55
The answer to this questions lie in the investor’s perception of risk attached to
investments, his objectives of income, safety, appreciation, liquidity and hedge
against loss of value of money etc. this pattern of investment in different asset
categories, types of investment, etc., would all be described under the caption of
diversification, which aims at the reduction or even elimination of non-systematic
risks and achieve the specific objectives of investors
CHAPTER9
ASSEST ALLOCATION
INTRODUCTION
The portfolio manager has to invest in these securities that form the optimal
portfolio. Once a portfolio is selected the next step is the selection of the specific
assets to be included in the portfolio. Assets in this respect means group of
security or type of investment. While selecting the assets the portfolio manager
has to make asset allocation. It is the process of dividing the funds among
different asset class portfolios.
ASSET ALLOCATION
The different asset class definitions are widely debated, but four common
divisions are stocks, bonds, real-estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within
each asset class) is what investment management firms are paid for.
56
Asset classes exhibit different market dynamics, and different interaction
effects; thus, the allocation of monies among asset classes will have a significant
effect on the performance of the fund. Some research suggests that allocation
among asset classes has more predictive power than the choice of individual
holdings in determining portfolio return. Arguably, the skill of a successful
investment manager resides in constructing the asset allocation, and separately
the individual holdings, so as to outperform certain benchmarks (e.g., the peer
group of competing funds, bond and stock indices).
The basic long term objective of any investor should be to maximize his real
overall return on initial investment after investment. To achieve this objective, the
investor should look where the best bargains lie.
57
Asset allocation means different things to different people. The portfolio
manager has to complete the following stages before making asset allocation.
c) Tax Saving
d) Maximization of return
e) Minimization of return
58
(b) BASIS OF SELECTION OF EQUITY PORTFOLIO:
DIVERSIFICATION
(a) Earnings per share (b) Growth potential (c) Dividend and bonus
records (d) Business, financial and market risks (e) Behavior of price-
earnings ratio (f) High and low prices of the stock (g) Trend of share prices
over the few months or weeks.
Y C
--------------------------------------- B HIGH RISK (SHARES)
A (DEBENT) MEDIUM
RISK
O X
Risk free (Bank Deposits)
We can observe from the above diagram that the strategy of an investor
should be at A, B or C respectively, depending upon his preferences and
income requirements. If he takes some risk at B or C, the risk can be
reduced if it is concerned with a specific company risk, but the market risk
is outside his control. The risk can be reduced by a proper diversification of
scripts in the portfolio. There may be a combination of A, B and C positions
in his portfolio so that he can have a diversified risk-return pattern. This
diversification can help to minimize risk and maximum the returns.
CHAPTER10
PRIMARY SURVEY
Name:
Age:
Occupation:
Yes No
Management of Equities
Others
Yes No
» If yes, for what type of services?
» If No why?
Other investment
(If other please specify)
» Do you think there will be growth in portfolio management in future?
If Yes why?
If No, why?
» What type of services would you want from portfolio manager in future?
» Suggestions if any:
____________
Signature
CHAPTER11
FINDINGS
This case study has been conducted on various age groups of individual
investors on portfolio management. These consist of age group ranging from 18-
30, 30-45, 45-60 and 60 & above. Following interpretation has been made on the
basis of the information collected from individual investor’s of various age groups
through questionnaire:
Due to lack of experience and market knowledge, the age group of 45-60
is more interested to hire portfolio manager at present in order to manage
their portfolio. The age group ranging from 18-30 is more interested in
making investment in equities whereas group ranging from 60 & above are
more interested in making investment in mutual fund. On the other hand,
age group of 30-45 and 45-60 are least interested in any of the services
provided by portfolio management institution. Reasons specified for the
presence of disinterest in any of these services were that the investors are
having good hold on their investment. Also they possess good knowledge
with regards to market fluctuations, investment portfolio’s and other factors
relating to portfolio management.
CHAPTER12
CONCLUSION
“I believe the future is only the past again, entered through another
gate” –Sir Arthur wing Pinero. 1893.
If price are based on investors’ expectations, then knowing what a
security should sell for become less important than knowing what other
investors expect it to sell for. “There are two times of a man’s life when he
should not speculate; when he can’t afford it and when he can” – Mark
Twin, 1897.
A Casino make money on a roulette wheel, not by knowing what
number will come up next, but by slightly improving their odds with the
addition of a “0” and “00”. Yet many investors buy securities without
attempting to control the odds. If we believe that this dealings is not a
‘Gambling” we have to start up it with intelligent way.
CHAPTER13
BIBLIOGRAPHY
REFERENCE BOOKS:
WEBLIOGRAPHY
SOURCES:
www.google.com
www.yahoo.com
www.wikipedia.com
www.Kotaksecurities.com