Investment In Portfolio Management

SUMMER TRAINING PROJECT REPORT

(KMBN 308)
Submitted by
Srashti Brizawar
Roll No. 2200670700080
3rd Semester
In the partial fulfillment of the requirement for the award of the degree
of
MASTER OF BUSINESS ADMINISTRATION
SESSION: 2023- 2024

Under the supervision of:

Rahul Khandelwal
Assistant Professor
Dept. of Business Administration, HIMCS

HINDUSTAN COLEEGE OF SCIENCE & TECHNOLOGY

(Affiliated to Dr. APJ Abdul Kalam Technical University, Lucknow)
Agra-Delhi Highway, NH-2, Farah, Mathura- 281122; www.himcs.edu.in

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 HINDUSTAN INSTITUTE OF MANAGEMENT & COMPUTER
STUDIES

Department of Business Administration

CERTIFICATE

This is to certify that Ms Srashti Brizawar Roll. No. 2200670700080 is a

bonafide student of MBA (III Semester) of Hindustan College of Science
and Technology. She has undergone Summer Training Project Report &
the accompanying project report on Investment in Portfolio Management
has been prepared &submitted by the above named student in partial
fulfillment of the Master of Business Administration Degree programme as
per the requirement of Dr.A.P.J. Abdul Kalam Technical University,
Lucknow.

Rahul Khandelwal

Project Guide

Date:

Place: Farah

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 ACKNOWLEDGEMENT

I would like to express my gratitude to my Faculty mentor Rahul

Khandelwal as well as my company mentor Mr. Amol Panad for their
exemplary guidance, monitoring and constant encouragement throughout
the training period. The blessing help and guidance given by them from
time to time shall carry me a long way in the journey of life on which I am
about to embark.

Lastly, I thank almighty, my parents and friends for their constant

encouragement without which this internship would not be possible.

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 TABLE OF CONTENTS
Introduction of the company…………………………………………………… 7

Introduction of the study………………………………………………………... 8

Objective of the study…………………………………………………………... 9

Corporate Finance

What is finance ………………………………………………………………....12

What is corporate finance…………………………………………………….. 13

How does corporate finance work…………………………………………….14

Corporate finance principles……..……………………………………………15

Central elements………………………………………………………………..16

Ratio analysis

Meaning of ratio analysis………………………………………………………20

Utility of ratio analysis…………………………………………………………..20

Classification of ratios………………………………………………………….21

Portfolio management

What is Portfolio management………………………………………………38

Objectives .……………………………………………………………….........39

Strategies ….……………………………………………………………………40

Assests Allocation Strategy..………….………………..……………………..41

Phases of Portfolio Management ...………………………………………….42

Risk in Portfolio Management ………………………………………………...45

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Risk Measurement ……………………………………………………………..47

Standard Deviation……………………………………………………………..48

Portfolio Return ………………………………………………………………...51

Expected Rate of Return ………………………………………………………53

Mutual Fund

Meaning of mutual fund……………………………………………………......54

History of mutual fund………………………………………………………….55

How mutual fund works………………………………………………………...56

Trustees………………………………………………………………………….58

Asset Management Company………………………………………………...59

Classification of mutual fund…………………………………………………..62

How to invest in mutual fund………………………………………………......63

What is NAV……………………………………………………………………..63

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 INTRODUCTION OF COMPANY
 Founded on December 20, 2022, Internselite Edutech Private
Limited is a privately held firm that is not publicly traded.
 It is situated in Haryana and is categorized as a private limited
corporation. Its entire paid-up capital is INR 1.00 lac, and its
authorized share capital is INR 1.00 lac.
 Internselite Edutech Private Limited is currently in an active state.
 There are no details available regarding Internselite Edutech Private
Limited's most recent annual general meeting. The registrar has not
yet received the company's first set of full-year financial accounts.
 Bhawna, Dheeraj Kumawat, and other people are the three directors
of Internselite Edutech Private Limited.
 Internselite Edutech Private Limited's registered office is located at
C/o Mr. Balraj, Ward No. 3, Vishwakarma Colony, Sohna Gurgaon,
Haryana.
 Three directors make up the corporation, although there are no
known key management employees.
 Having been appointed on December 20, 2022, Bhawna, Dheeraj
Kumawat, and Suman Kumar are now the directors with the longest
service on the board. They've spent eleven months on the board.
 With a seat at a total of 1 company, Bhawna holds the most
additional directorships.
 Through its directors, the company has a total of 0 connections to
other companies.

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 INTRODUCTION OF THE STUDY
Finance is the lifeblood of an organization. Finance is a broad term that describes
activities associated with banking, leverage or debt, credit, capital markets,
money, and investments.

Essentially, finance represents money management and the process of acquiring

needed funds. Finance also encompasses the oversight, creation, and study of
money, banking, credit, investments, assets, and liabilities that make up financial
systems.

One of the most fundamental theories is the time value of money, which states
that a dollar today is worth more than a dollar in the future. Finance is also
concerned with the allocation of resources, particularly in the context of
investment. Investors seek to allocate their funds in a way that maximizes returns
while managing risk. This involves analyzing various investment options,
understanding market trends, and assessing the performance of different assets.

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 OBJECTIVE OF THE STUDY

To evaluate the financial ranking:

The fiscal positioning of an enterprise is influenced by the fiscal reserves it

possess, its monetary arrangement, its liquidity and its competence to get
used transformations in the market in which it operates.

To evaluate the firm's performance:

Performance is the aptitude of the enterprise to accrue revenues that have

been endowed in it. Knowledge about the capacity and inconsistency of
revenues as the firm in predicting the anticipated monetary flows from the
firm's current reserves and in predicting possible additional fund influx from
extra resources can be endowed in the enterprise.

To evaluate the alterations in Fiscal Ranking:

Users of fiscal report look for information about the endowments,

subsidizing i functional activities that the enterprise embark on while
treatment period. This assists in evaluating how effectively the enterprise is
able to generate fund and money and how the firm uses the cash influx.

Utility of Finance Project Report

Investors provide risk capital to the enterprise; hence every fiscal project
report must satisfy their requirements.

Project report on finance describes the fiscal effects of the past

occurrences, deals that most information seekers need to associate with
the future events, Finance project report offer only constrained amount of
non-fiscal data required by the seekers of fiscal statements.

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CORPORATE FINANCE

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 WHAT IS FINANCE?

Finance is defined as the management of money and includes activities

such as investing, borrowing, lending, budgeting, saving, and forecasting.

There are three main types of finance:

(1)Personal.
(2)Public / Government.
(3)Corporate

FINANCE

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What is Corporate Finance?

 Corporate finance refers toplanning, developing and controlling the

capital structure of a business.
 It aims to increase organizational value and profit through optimal
decisions on investments, finances as well as dividends.
 It focusses on capital investments aimed at meeting the funding
requirements of a business to attain a favorable capital structure.

Importance of Corporate Finance

 Decision Making –Profitability

 Raising Capital for Project.
 Research & Development.
 Promotes expansion & Diversification.
 Managing Risk.
 Dividend Distribution / Retain earning
 Payment of Taxes.

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How does Corporate Finance work?

Corporate Finance Principles

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 1. INVESTMENT DECISION

 Decide what projects/acquisitions to invest in.

 Actual Returns should > Expected returns.
 Working Capital management

2. CAPITAL FINANCING

 Determine how to raise fund for investment.

 Optimize the firm’s capital structure
 Cost of Capital

3. DIVIDEND POLICY

 Decide how and when to return the capital to investors.(Dividend /

Reinvestment/ Buybacks)

4. CORPORATE GOVERNANCE

 Shareholders
 Management
 Board of Directors
 BoD’s Committee
 Audit
 Nomination
 Compensation

CENTRAL ELEMENTS

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Capital budgeting

 The capital budgeting process discloses the viability of investment

proposals and helps invest in profitable projects.
 The goal is to maximize the growth andprofitabilityof the business.

Eg-Cost of Capital, IRR, TVM, NPV and PI etc.

Capital Structure

 The capital structure tells us the method of financing used by the

entity. Eg.Debts, Equity and Retained Earnings.
 The proper financial decision produces an optimum mix of various
types of funding and enhances the company’s value.
 More debts = More Aggressive / Risky.
 Only Equity = Dilute Ownership.

Working capital
 Working capitalrefers to the capital for day-to-daybusiness
operations.
 Efficient financial management can ensure an adequatecash flowin
line with business policies
 Maintaining theliquidityof the organization can save them from going
bankrupt.

Dividend Distribution

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  Public companieshold answerability to their shareholders.
 How much of business profit they should distribute as dividend..?
 Dividend distribution / Reinvestment..?

Credit Assessment (credit check)

 It is numerical representation of your credit report.

 Credit Score –300 to 900
 Credit assessment is an evaluation of a debtor's ability to repay a
loan before a transaction is concluded.
 Creditorsand Companiesperform credit assessments to protect
themselves against payment defaults.
 Credit agencies calculate the probability values (credit scores)
 The more data a credit agency has on the consumer, the more
accurate and reliable it can make statements about the risk of
default by that consumer.

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Role of Credit Score in Financial Decision
Making

 Obtaining Loan.
 Opportunities for employment.
 Creditorsand Companiesperform credit assessments to protect
themselves against payment defaults.
 Renting and Leasing.
 Insurance Rates
 Starting Business.

What lenders look for?

5 Cs of Credit check.

 Credit History.
 Capacity.
 Collateral(When applying for secured loan)
 Capital.
 Condition.

How to check score?

You can request a free copy of your credit report from each of four major
credit reporting agencies
 CIBIL
 EQUIFAX
 EXPERIAN
 TRANS-UNION

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RATIO ANALYSIS

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 Meaning of Ratio Analysis
Is a method process by which the relationship of items or groups of items in
the financial statements are computed, and presented. It is an important
tool of financial analysis.

It is used to interpret the financial statements so that the strengths and

weaknesses of a firm, its historical performance and current financial
condition can be determined.

A mathematical yardstick that measures the relationship between two

figures or groups of figures which are related to each other and are
mutually inter- dependent'.It can be expressed as a pure ratio, percentage,
or as a rate.

A ratio is not an end in itself. They are only a means to get to know the
financial position of an enterprise.

Computing ratios does not add any information to the available figures.

It only reveals the relationship in a more meaningful way so as to enable us

to draw conclusions there from.

UTILITY OF RATIOS

Accounting ratios are very useful in assessing the financial position

profitability of an enterprise.

However its utility lies in comparison of the ratios.

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Comparison may be in any one of the following forms:

 For the same enterprise over a number of years

 For two enterprises in the same industry
 For one enterprise against the industry as a whole
 For one enterprise against a pre-determined standard
 For inter-segment comparison within the organisation same

CLASSIFICATION OF RATIOS

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 LIQUIDITY RATIOS

These ratios analyse the short-term financial position of a firm and indicate

the ability of the firm to meet its short-term commitments (current liabilities)
out of its short-term resources (current assets).

These are also known as 'solvency ratios'. ratios which indicate the liquidity
of a firm are:

 Current ratio
 Liquidity ratio or Quick ratio or acid test ratio

CURRENT RATIO

It is calculated by dividing current assets by current liabilities.

Current ratio = Current assets ÷Current liabilities

Conventionally a current ratio of 2:1 is considered satisfactory

CURRENT ASSETS

include-

 Inventories of raw material, WIP, finished goods,

 stores and spares,
 sundry debtors/receivables,
 short term loans deposits and advances,
 cash in hand and bank.
 incomes receivables
 marketable investments and short term securities.

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  prepaid expenses,

CURRENT LIABILITIES
include

 sundry creditors/bills payable,

 outstanding expenses.
 unclaimed dividend
 advances received.
 incomes received in advance. provision for taxation
 proposed dividend,
 instalments of loans payable within 12 months.
 bank overdraft and cash credit

QUICK / ACID TEST RATIO

This is a ratio between quick current assets and current liabilities

(alternatively quick liabilities).

It is calculated by dividing quick current assets by current liabilities (quick

current liabilities)

Quick ratio= quick assets÷Current liabilities/(quick liabilities)

Conventionally a quick ratio of 1:1 is considered satisfactory.

QUICK ASSETS & QUICK LIABILITIES

QUICK ASSETS are current assets (as stated earlier)less prepaid

expenses and inventories.

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QUICK LIABILITIES are current liabilities (as stated earlier)less bank
overdraft and incomes received in advance.

Capital structure/ leverage ratios

These ratios indicate the long term solvency of a firm and indicate the
ability of the firm to meet its long-term commitment with respect to

(ii) repayment of principal on maturity or in predetermined instalments at

due dates and

(ii) periodic payment of interest during the period of the loan.

The different ratios are:

 Debt equity ratio

 Proprietary ratio
 Debt to total capital ratio
 Interest coverage ratio
 Debt service coverage ratio

Debt equity ratio

This ratio indicates the relative proportion of debt and equity in financing
the assets of the firm. It is calculated by dividing long-term debt by
shareholder's funds.

Debt equity ratio= long-term debts÷Shareholders funds

Generally, financial institutions favour a ratio of 2:1.

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However this standard should be applied having regard to size and type
and nature of business and the degree of risk involved.

LONG-TERM FUNDS are long-term loans whether secured or unsecured

like debentures, bonds, loans from financial institutions etc.

SHAREHOLDER'S FUNDS are equity share capital plus preference share

capital plus reserves and surplus minus fictitious assets (eg. Preliminary
expenses, past accumulated losses, discount on issue of shares etc.)

PROPRIETARY RATIO

This ratio indicates the general financial strength of the firm and the long
term solvency of the business.This ratio is calculated by dividing
proprietor's funds by total funds.

Proprietary ratio= proprietor's funds ÷Total funds/assets

As a rough guide a 65% to 75% proprietary ratio is advisable

PROPRIETOR'S FUNDS are same as explained in shareholder's funds

TOTAL FUNDS are all fixed assets and all current assets.

Alternatively it can be calculated as proprietor's funds plus long-term funds

plus current liabilities.

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 Debt to total capital ratio

In this ratio the outside liabilities are related to the total capitalisation of the
firm. It indicates what proportion of the permanent capital of the firm is in
the form of long-term debt.

Debt to total capital ratio= long-term debt÷ Shareholder's funds + long-term

debt

Conventionally a ratio of 2/3 is considered satisfactory.

Interest coverage ratio

This ratio measures the debt servicing capacity of a firm in so far as the
fixed interest on long-term loan is concerned. It shows how many times the
interest charges are covered by EBIT out of which they will be paid.

Interest coverage ratio= EBIT÷ Interest

A ratio of 6 to 7 times is considered satisfactory.

Higher the ratio greater the ability of the firm to pay interest out of its
profits. But too high a ratio may imply lesser use of debt and/or very
efficient operations

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 Debt service coverage ratio

This is a more comprehensive measure to compute the debt servicing

capacity of a firm. It shows how many times the total debt service
obligations consisting of interest and repayment of principal in instalments
are covered by the total operating funds after payment of tax.

Debt service coverage ratio = (EAT+ interest depreciation + other non-cash

exp) ÷ ( Interest + principal instalment)

EAT is earnings after tax.

Generally financial institutions consider 2:1 as a satisfactory ratio.

Profitability ratios

These ratios measure the operating efficiency of the firm and its ability to
ensure adequate returns to its shareholders.

The profitability of a firm can be measured by its profitability ratios.

Further the profitability ratios can be determined

(i) in relation to sales and

(ii) in relation to investments

Profitability ratios in relation to sales:

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  gross profit margin
 Net profit margin
 Expenses ratio

Profitability ratios in relation to investments

 Return on assets (ROA)

 Return on capital employed (ROCE)
 Return on shareholder's equity (ROE)
 Earnings per share (EPS)
 Dividend per share (DPS)
 Dividend payout ratio (D/P)
 Price earning ratio (P/E)

Gross profit margin

This ratio is calculated by dividing gross profit by sales. It is

expressed as a percentage.
Gross profit is the result of relationship between prices, sales
volume and costs.

Gross profit margin = (gross profit x 100)÷Net sales

Gross profit margin

A firm should have a reasonable gross profit margin to ensure

coverage of its operating expenses and ensure adequate return to
the owners of the business ie. the shareholders.

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 To judge whether the ratio is satisfactory or not, it should be
compared with the firm's past ratios or with the ratio of similar firms
in the same industry or with the industry average.

Net profit margin

This ratio is calculated by dividing net profit by sales. It is expressed as a

percentage.

This ratio is indicative of the firm's ability to leave a margin of reasonable

compensation to the owners for providing capital, after meeting the cost of
production, operating charges and the cost of borrowed funds.

Net profit margin = (Net profit after interest and tax x 100)÷ Net sales

Another variant of net profit margin is operating profit margin which is

calculated as:

Operating profit margin = (net profit before interest and tax x 100) ÷Net
sales

Higher the ratio, greater is the capacity of the firm to withstand adverse
economic conditions and vice versa

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 EXPENSES RATIO

These ratios are calculated by dividing the various expenses by sales. The
variants of expenses ratios are:

Material consumed ratio =( Material consumed x 100) ÷ Net sales

Manufacturing expenses ratio= ( manufacturing expenses× 100) ÷ net

sales

Administration expenses ratio= (Administrative expenses × 100) ÷ Net

sales

Selling expenses ratio= (Selling expenses x 100) ÷ Net sales

Operating ratio= ( cost of goods sold plus operating expenses x 100) ÷

Net sales

Financial expense ratio= (financial expenses x 100) ÷ Net sales

Expenses ratio

The expenses ratios should be compared over a period of time with the
industry average as well as with the ratios of firms of similar type. A low
expenses ratio is favourable.

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The implication of a high ratio is that only a small percentage share of sales
is available for meeting financial liabilities like interest, tax, dividend etc.

Return on assets (ROA)

This ratio measures the profitability of the total funds of a firm. It measures
the relationship between net profits and total assets. The objective is to find
out how efficiently the total assets have been used by the management.

Return on assets = (net profit after taxes plus interest x 100)÷Total assets

Total assets exclude fictitious assets. As the total assets at the beginning
of the year and end of the year may not be the same, average total assets
may be used as the denominator.

Return on capital employed (ROCE)

This ratio measures the relationship between net profit and capital
employed. It indicates how efficiently the long-term funds of owners and
creditors are being used.

Return on capital employed = (net profit after taxes plus interest x 100) ÷
Capital employed

CAPITAL EMPLOYED denotes shareholders funds and long-term

borrowings.

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To have a fair representation of the capital employed, average capital
employed may be used as the denominator.

Return on shareholders equity

This ratio measures the relationship of profits to owner's funds.

Shareholders fall into two groups der preference shareholders and equity
i.e. So the of return shareholders equity are

Return on total shareholder's equity = (net profits after taxes x 100) ÷ Total
shareholders equity

TOTAL SHAREHOLDER'S EQUITY

Includes preference share capital plus equity share capital plus reserves
and surplus less accumulated losses and fictitious assets. To have a fair
representation of the total shareholders funds, average total shareholders
funds may be used as the denominator.

Return on ordinary shareholders equity =(net profit after taxes - pref.

dividend x 100) ÷ Ordinary shareholders equity or net worth

ORDINARY SHAREHOLDERS EQUITY OR NET WORTH includes equity

share capital plus reserves and surplus minus fictitious assets.

Earnings per share (EPS)

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This ratio measures the profit available to the equity shareholders on a per
share basis. This ratio is calculated by dividing net profit available to equity
shareholders by the number of equity shares.

Earnings per share = (net profit after tax - preference dividend) ÷ Number
of equity shares

Dividend per share (DPS)

This ratio shows the dividend paid to the shareholder on a per share basis.
This is a better indicator than the EPS as it shows the amount of dividend
received by the ordinary shareholders, while EPS merely shows
theoretically how much belongs to the ordinary shareholders

Dividend per share = Dividend paid to ordinary shareholders ÷ Number of

equity shares

Dividend payout ratio (D/P)

This ratio measures the relationship between the earnings belonging to the
ordinary shareholders and the dividend paid to them.

Dividend pay out ratio = (total dividend paid to ordinary shareholders x

100) ÷ (Net profit after tax- preference dividend)

OR

Dividend pay out ratio = (Dividend per share x 100) ÷ Earnings per share

Price earning ratio (P/E)

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This ratio is computed by dividing the market price of the shares by the
earnings per share. It measures the expectations of the investors and
market appraisal of the performance of the firm.

Price earning ratio= market price per share ÷ Earnings per share

Activity ratios

These ratios are also called efficiency ratios/asset utilization ratios or

turnover ratios. These ratios show the relationship between sales and
various assets of a firm. The various ratios under this group are:

 Inventory/stock turnover ratio

 Debtors turnover ratio and average collection period
 Asset turnover ratio
 Creditors turnover ratio and average credit period

Inventory /stock turnover ratio

This ratio indicates the number of times inventory is replaced during the
year. It measures the relationship between cost of goods sold and the
inventory level. There are two approaches for calculating this ratio. namely:

Inventory turnover ratio = cost of goods sold÷ Average stock

AVERAGE STOCK can be calculated as

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 ( Opening stock + closing stock ) ÷ 2

Alternatively

Inventory turnover ratio= sales ÷ Closing inventory

Inventory /stock turnover ratio

A firm should have neither too high nor too low inventory turnover ratio.
Too high a ratio may indicate very low level of inventory and a danger of
being out of stock and incurring high 'stock out cost. On the contrary too
low a ratio is indicative of excessive inventory entailing excessive carrying
cost.

Debtors turnover ratio and average collection period

This ratio is a test of the liquidity of the debtors of a firm. It shows the
relationship between credit sales and debtors.

Debtors turnover ratio= Credit sales ÷ Average Debtors and bills

receivables

Average collection period =Months/days in a year ÷ Debtors turnover

These ratios are indicative of the efficiency of the trade credit management.
A high turnover ratio and shorter collection period indicate prompt payment
by the debtor. On the contrary low turnover ratio and longer collection

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period indicates delayed payments by the debtor. In general a high debtor
turnover ratio and short collection period is preferable.

Asset turnover ratio

Depending on the different concepts of assets employed, there are many

variants of this ratio. These ratios measure the efficiency of a firm in
managing and utilising its assets.

Total asset turnover ratio= sales/cost of goods sold ÷ Average total

assets

Fixed asset turnover ratio= sales/cost of goods sold ÷ Average fixed

assets

Capital turnover ratio = sales/cost of goods sold ÷ Average capital

employed

Working capital turnover ratio = sales/cost of goods sold÷ Net working

capital

Asset turnover ratio

Higher ratios are indicative of efficient management and utilisation of

resources while low ratios are indicative of under-utilisation of resources
and presence of idle capacity.

Creditors turnover ratio and average credit period

This ratio shows the speed with which payments are made to the suppliers
for purchases made from them. It shows the relationship between credit
purchases and average creditors.

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Creditors turnover ratio =credit purchases ÷ Average creditors & bills
payables

Average credit period = months/days in a year ÷ Creditors turnover ratio

Creditors turnover ratio and average credit period

Higher creditors turnover ratio and short credit period signifies that the
creditors are being paid promptly and it enhances the creditworthiness of
the firm.

PORTFOLIO MANAGEMENT

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 What is PORTFOLIO MANAGEMENT ?

Refers to a collection of investment tools such as stocks, mutual funds, bonds,

cash etc. depending on the investor's income, budget & convenient time frame.

The art of selecting the right investment policy for the individuals in terms of
minimum risk & maximum return is called as portfolio management.

TYPES OF PORTFOLIO :

1. Market Portfolio
A theoretical bundle of investments that includes every type of asset available in
the world financial market, with each asset weighted in proportion to its total
presence in the market.

2. Zero Investment Portfolio

A group of investments which when combined, create zero net value. Such
portfolios can be achieved by simultaneously purchasing securities & selling
equivalent securities.

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Needs Of Portfolio Management

1).Reduces the risk without affecting returns.

2) Helps investors in rational decision making.

3) Helps to select best investment portfolio by-

a) Identifying the asset class that the investor should invest in.

b) Deciding the proportion of each asset class in the entire portfolio.

c) Deciding the proportion of each security in the asset classes.

Objectives of Portfolio Management

1. Risk
Management

Objectives Of
4. Liquisity 2. Return
Management Portfolio Maximisation
Management

3. Capital
Preservation

1. Risk Management: One of the primary objectives of portfolio

management is to manage risk effectively. By diversifying investments
across different asset classes and securities, portfolio managers aim to
reduce the impact of market volatility, idiosyncratic risks, and unforeseen
events on portfolio performance.

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2. Return Maximization: Portfolio management also aims to maximize
returns within the constraints of risk tolerance and investment objectives.
Through strategic asset allocation, security selection, and active
management, portfolio managers endeavor to generate consistent,
competitive returns over the long term.
3. Capital Preservation: Preservation of capital is a fundamental
consideration in portfolio management, especially for investors with low-
risk tolerance or specific liquidity needs. By incorporating conservative
investments, such as fixed-income securities and cash equivalents, portfolio
managers seek to safeguard principal and maintain stability during market
downturns.
4. Liquidity Management: Portfolio managers must balance the need for
liquidity with investment objectives and time horizons.

Strategies of Portfolio Management

1. Asset Allocation: Asset allocation is a key determinant of portfolio

performance, accounting for the majority of investment returns over time.
Portfolio managers strategically allocate assets across different asset
classes, such as equities, fixed income, and alternative investments, based
on risk-return expectations, market conditions, and investor preferences.
2. Diversification: Diversification is a cornerstone of effective portfolio
management, spreading investment risk across a range of assets and
sectors. By diversifying investments, portfolio managers reduce the impact
of individual security or sector-specific risks, enhancing portfolio resilience
and stability.
3. Active vs. Passive Management: Portfolio management strategies may
adopt either active or passive management approaches. Active management
involves ongoing monitoring, analysis, and adjustment of portfolio

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 holdings to capitalize on market opportunities and outperform benchmarks.
Passive management, on the other hand, seeks to replicate the performance
of a benchmark index or asset class through low-cost index funds or
exchange-traded funds (ETFs).
4. Risk Management Techniques: Portfolio managers employ various risk
management techniques to mitigate downside risk and protect portfolio
value. Techniques such as hedging, derivatives, stop-loss orders, and
portfolio rebalancing help to manage market volatility, limit losses, and
preserve capital during adverse market conditions.

ASSET ALLOCATION STRATEGY

Establishing an appropriate asset mix 15 a dynamic process. and it plays a key

role in determining your portfolio's overall risk and return. As such, your
portfolio's asset mix should reflect your goals at any point in time Following are
the different strategies of asset allocation-

Strategic asset allocation- the returns, risk and co-variances associated with a
portfolio are assessed and adjusted periodically.

Integrated asset allocation- capital market conditions and the investor's

objectives and their limitations are evaluated and analyzed.

Tactical asset allocation the investor's risk tolerance factor is taken as a constant,
and assets are allocated with respect to the expectations from the capital market.

Insured asset allocation. The risk exposure is adjusted for changing portfolio
values. The higher the value, the higher the risk-taking capacity.

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Constant weighting asset allocation. There are no hard and fast rules for timing
portfolio rebalancing under strategic or constant weighting asset allocation.
Common rule of thumb is that the portfolio should be rebalanced to its original
mix when any given asset class moves more than 5% from its original value

Dynamic asset allocation With dynamic asset allocation, one can constantly
adjust the mix of assets as marke rise and fall, and as the economy strengthens
and weakens.

Phases Of Portfolio Management

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In the vast and dynamic world of investments, the role of a portfolio manager is
akin to that of a seasoned captain charting a course through tumultuous seas. To
successfully navigate the treacherous waters of financial markets, one must possess
a profound understanding of the five crucial phases of portfolio management. Each
of these phases is akin to a crucial navigational tool, steering your financial vessel
toward the shores of prosperity and security.
As the legendary investor Benjamin Graham wisely noted, “The stock market is
filled with individuals who know the price of everything, but the value of nothing.”
This adage underscores the foundational importance of the first phase of portfolio
management: Security Analysis.

Phase 1: Security Analysis – Peering Beneath the Surface

 This is the first phase of portfolio management

 A detailed evaluation and analysis of the various types of securities, such
as equity shares, preference shares, debentures, global depository receipts,
and euro currency bonds, is performed
 The risk-return characteristics of each security chosen by an investor in a
portfolio are examined.

Phase 2: Portfolio Analysis – The Art of Diversification

Each security identified as part of a portfolio is analyzed for risks and

returns, separately and as part of a group.

A number of portfolios are reviewed to determine the best possible

option.

The risks and returns of selected securities are assessed in:

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➤ Various permutations and combinations.

➤ With varying numbers and proportions of each security.

Phase 3: Portfolio Selection – Crafting Your Investment

Symphony

 Securities for building each portfolio are selected with the goal of
providing greater returns at the given level of risk.

 Portfolio selection helps in selecting one or more optimal portfolios from a

set of efficient portfolios.

Phase 4: Portfolio Revision – Navigating Changing Tides

 Continuous monitoring of the portfolio is required so that it does not

deviate from the optimal combination.
 Portfolio revision may be required because of changes in the global
economic and financial markets, which might cause:

➤ Some securities to become less attractive.

➤ New securities with higher returns and low risk to emerge.

Phase 5: Portfolio Evaluation – Constant Course Correction

 This is the last phase in portfolio management.

 Portfolio evaluation is a process that involves assessing the performance of
the portfolio in terms of :

➤ RISK-The risk borne by the portfolio over a period is assessed.

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➤ RETURNS- The actual return earned by the portfolio is measured
quantitatively

Risk in Portfolio Management

Portfolio risk management is the process of identifying, assessing, and mitigating

the various risks associated with an investment portfolio. It involves implementing
strategies to optimize the balance between risk and return, ensuring that the
portfolio aligns with the investor's financial goals and risk tolerance.

There are two main categories of risk: systematic and unsystematic. Systematic
risk is the market uncertainty of an investment, meaning that it represents external

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factors that impact all (or many) companies in an industry or group. Unsystematic
risk represents the asset-specific uncertainties that can affect the performance of an
investment

 Systematic Risk – The overall impact of the market

 Unsystematic Risk – Asset-specific or company-specific uncertainty

Interest Rate Risk – The impact of changing interest rates

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Financial Risk – The capital structure of a company (degree of

financial leverage or debt burden)

RISK MEASUREMENT

BETA

Beta is a numeric value that measures the fluctuations of a stock to

changes in the overall stock market.

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• We can not reduce market risks or systematic risks but we can have
measure of these risks with help of Beta.

• With the help of Beta we can approximately tell how much particular will
move if we know the how much the whole stock market is going to move.

• Thus, Beta tells us what the volatility is in a particular stock with respect
to movement in the stock market.

Eg - if abc stock's beta value is 1.3, it means, theoretically this stock is 30%
more volatile than the market.

if the market is expected to move up by 10%, then the stock should move
up by 13% (1.3 x 10) and vice versa.

Standard Deviation

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• Standard deviation is the statistical measure of market volatility,
measuring how widely prices are dispersed from the average price.

• when there is a narrow spread between trading ranges, the standard

deviation is low, meaning volatility is low.

Solution- (SD for stock A)

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 Solution (SD for stock B)

SOLUTION

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 STOCK A STOCK B

Expected Return 15 Rs 15 Rs

Standard Deviation 1.41 Rs. 5.66 Rs

We see that both 5.66 rupees Comparing the two 1.41 rupees stocks have the
same expected returns. But the SD or risk is different. The S.D of stock B > S.D of
stock A We can say that the return of stock B is prone to higher fluctuation as

compared to stock.

Portfolio Return
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It is the monetary return experienced by a holder of a portfolio.

➤ It can be calculated on a daily basis to serve as a method of

assessing a particular investment strategy.

► Main components of portfolio return are-

* Dividends

*Capital appreciation

FORMULA-

R = Dt+(Pt-Pt-1) / Pt-1

Where,

R = return

D = income received

Pt- Pt-1 = change in market price

P-1 = market price in the beginning/ initial market price

EXAMPLE-

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One year ago, the stock price for stock A was 10 per share. The stock is currently
trading at ₹9.50 per share and shareholders just received a 1 dividend. What return
was earned over the past year?

SOLUTION-

R = Dt+(Pt-Pt-1) / Pt-1

R = 1 + (9.50 – 10 ) / 10

R = 0.05 or 5%

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 Expected Rate Of Return
The amount one would anticipate receiving on an investment that has various
known or expected rates of return.

➤ It is usually based on historical data and is not guaranteed.

➤ It is a tool to determine whether or not an investment has a positive or negative

average net outcome.

EXAMPLE -

• A portfolio of two shares X and Y

• X:Y=70:30

• Expected returns from X=15\%

• Expected returns from Y=12\%

• Expected portfolio return =

(0.7*15%)+(0.3*12%)= 14.1 %

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MUTUAL FUND

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 What is Mutual Fund?

A mutual fund is a fund that pools money from many investors and
invests the money in securities such as stocks, bonds, money market
etc.

Each Shareholder in Mutual fund participate professionally (based upon

number of shares owned) in the gain or loss of the fund.

History of mutual fund

Phase I 1964 – 86

•The mutual fund industry in India began in 1963 with the formation of Unit
Trust of India

•(UTI) as an initiative of Govt of India and the Reserve Bank of India. •The
First Equity fund was launched in 1986.

Phase II 1987 - 93

Non-UTI Public Sector mutual fund:

•Much later, in 1987, SBI Mutual fund became the first non-UTI mutual
fund in India.

Like :

Canara bank MF, LIC MF, GIC MF, PNB MF, Indian bank MF etc.

Phase III 1993 – 96

Introducing private sector funds as well as open-ended fund.

•Subsequently, the year 1993 heralded a new era in the mutual fund
industry. This was marked by the entry of private companies in the sector.

•After the Securities and Exchange Board of India (SEBI) was passed in
1992, the SEBI Mutual Fund Regulation came into being in 1996.

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Phase IV 1996 onwards

Investor friendly regulatory measures action taken by SEBI to protect the

investor, and to enhance investor’s returns through tax benefits.

 As the expnded, a non- profit organization, the Association of Mutual

Fund in India (AMFI), was established in 1995.
 Its objective is to promote healthy and ethical marketing practices in
the Indian mutual fund industry.
 SEBI has made AMFI certification mandatory for all those engaged
in selling or marketing mutual fund product.

How mutual fund work?

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 How does one earn returns in mutual fund?

•After investing your money in a mutual fund, you can earn returns in
two forms:
•Dividend Income : in the form of dividend declared by the scheme,
fund will earn interest income from bonds it hold or will have
dividend income from the shares.
•Capital Appreciation : meaning an increase in the value of your
investments.
All the value of securities in the fund increases, the fund’s unit price
will also increase. You can make a profit by selling the units at a
price higher than at which you bought.

Fund Sponsor

•Who first thinks to launch Mutual fund.

•Any person or corporate body that establishes the Fund and
registers it with SEBI.
•Expected to have sound track record and experience in financial
services for minimum 5 years and should ensure various
formalities required in establishing a mutual fund.
•Form a Trust and appoint a Board of Trustees.
•Appoints Custodian and Asset Management Company either
directly or through Trust, in accordance with SEBI regulations.
SEBI regulations also define that a sponsor must contribute at
least 40% to net worth of the AMC.

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 Trustees
•Created through the document called Trust Deed that is executed
by fund sponsor and registered with SEBI.
•The Trust - the mutual fund may be managed by a Board of
Trustees- a body of individuals or a Trust Company - A Corporate
body.
•Trustees hold the property of MF and are protector of unit holders
interest.
2/3 of trustees shall be independent persons and shall not be
associated with the sponsors.

Rights of Trustees

•Trustees appoint the AMC to manage investor’s money.

•Approve each of the schemes floated by AMC.
•The right to request any necessary information from the AMC.
•May take corrective action if they believe that the conduct of
fund’s
business is not in accordance with SEBI regulations.
•Trustees may be seen as the internal regulators of mutual fund.
•Have the right to dismiss the AMC.
•Ensure that any shortfall in the net worth of the AMC is made
up.

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 Obligations of Trustees

•Enter into an investment agreement with the AMC.

•Ensure that fund’s transactions are in accordance with the Trust
Deed.
•Furnish to SEBI on a half-yearly basis, a report on the fund’s
activities.
•Ensure that no change in the fundamental attributes of any
scheme or the trust or any other changes which would affect of
interest of unit holders is happens without informing the unit holders.
•Review the investors complaints received and redressal of the
same by AMC.

Asset Management Company

•Trustees appoint AMC to manage investor’s money under the

Board supervision and direction of Trustees.
•In returns charges management fee which borne by investors.
•Has to be approved and registered with SEBI.
•AMC will float and manage the different investment schemes in
the name of Trust and in accordance with SEBI regulations.
•Acts in interest of unit-holders and reports to the trustees.
At least 50% of Directors on board are independent of the
sponsor or the trustees.

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 Obligation of AMC

•AMC can’t act as trustee of any other Mutual Fund.

•Responsibility of preparing OD (Offer Documents).
•Appointments of intermediaries like, Independent Financial
Advisor (IFAs), national and regional distributers, bank etc also
done by AMC.
•Finally, it is the AMC which is responsible for the act of its
employees and service providers.
•Make the required disclosures to the investors in areas such as
calculation of NAV and repurchase price.
•Must maintain a net worth of at least Rs.10 Cr at all times.
•Can not deal with a single broker beyond the certain limit of
transactions. (which is average of 5% or more of the aggregate
purchases and sale of securities made by the mutual fund in all its
schemes).
•AMC can’t act as trustee of any other Mutual Fund.

Custodian
•Responsibility of physical handling and safe-keeping of the
securities and also keeping a tab on the corporate action declare
by company in which the fund has invested.
•Should be Independent of the sponsors and registered with
SEBI.
•Make the required disclosures to the investors in areas such as
calculation of NAV and repurchase price.
•Participate clearing & settlement system.

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 Depository

•Indian Capital markets are moving away from physical certificates

for securities to ‘Dematerialised’ form with a Depository.
•Will hold the dematerialised security holdings of the Mutual
Fund. •Custodian are depository participants with Depository.

Registrar and Transfer Agent

•RTA appointed by AMC. Compensation pay to these agent for their

services.
RTAs Function :
•Receiving and processing the application forms of investors.
•Issuing Unit certificates.
•Sending refund orders.
•Giving approval for all transfers of units and maintaining records.
•Repurchasing of units and redemption of units.
•Issuing dividend or income warrants.

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CLASSIFICATION OF MUTUAL FUND

62
 How to invest in Mutual Fund?

What is NAV?

• Net Asset Value of a fund is that figure which is arrived at after deducting
all fund liabilities from its asset. NAV is calculated by dividing the value of
Net Assets by the outstanding number of Units.

• Disclose on every end of the day.

NAV= (Fund Asset – Fund Liabilities )/Number of Outstanding Units

NAV per unit is the market value of securities of a scheme divided by the
total number of units of the scheme on a given date.

For example, if the market value of securities of a mutual fund scheme is

Rs. 200 lakh and the mutual fund has issued 10 lakh units of Rs 10 each
to the investors, then the NAV per unit of the fund is ₹ 20 (i.e., Rs 200
lakh/10 lakh).

Advantage

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 Affordability (Small Investment)
 Portfolio Diversification.
 Professional Management.
 Liquidity.
 Variety & Freedom of Choice
 Transparency

Disadvantage

 Cash Drag.(10 -15 percent)

 High Cost. (Entry/Exit Load)
 No Control on fund manager by investors.
 No Guaranteed Return.
 End of Day Trading Only.
 Delay in redemption (7 working days)

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