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it is concluded all the things about the portfolio managment.

it is concluded all the things about the portfolio managment.

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Portfolio project Portfolio project Document Transcript

  • Sri Sharada Institute Of Indian Management - Research (A unit of Sri Sringeri Sharada Peetham, Sringeri) Approved by AICTE Plot No. 7, Phase-II, Institutional Area, Behind the Grand Hotel, Vasant Kunj, New Delhi – 110070 Tel.: 2612409090 / 91; Fax: 26124092 E-mail: administration@srisiim.org; Website: www.srisiim.org DEVELOPMENT DAY PROJECT REPORT “Market Scenario of ITES Sector in India”A report submitted in partial fulfillment of the requirements of the two-yearfull time Post Graduate Diploma in Management. Submitted by: Name: SUMAN PARTHRIA NEERAJ HOTWANI Roll No: 20090213 20090134 Batch: 2009 – 2011
  • AcknowledgementPreservation, Inspiration and motivation have always played a key role in the success of anyventure. In the present world of competition and success, training is like a bridge betweentheoretical and practical working; willingly we prepared this particular Project.First of all we would like to thank the supreme power, the almighty God, who is the one who hasalways guided us to work on the right path of my life.This project would not have seen the light of the day without the support of our faculty mentorMr.SANDEEP S. PARMAR he has been of great help in guiding us through the various stagesof our project.Constructive criticism and feedback would be highly appreciated.ARNAB BANERJEE ARJIT JAIN20090162 20090161Sri SIIM, Vasant kunj, Sri SIIM, Vasantkunj,New Delhi New Delhi Executive Summary
  • Investing is both Arts and Science. Every Individual has their own specific financial need andexpectation based on their risk taking capabilities, whereas some needs and expectation areuniversal. Therefore, we find that the scenario of the Stock Market is changing day by day horsby hours and minute by minute. The evaluation of financial planning has been increased throughdecades, which can be best seen in customers. Now a day’s investments have become veryimportant part of income saving.In order to keep the investor safe from market fluctuation and make them profitable, PortfolioManagement Services (PMS) is fast gaining Investment Option for the High Net worthIndividual (HNI). There is growing competition between brokerage firms in post reform India.For investor it is always difficult to decide which brokerage firm to choose.The research design is analytical in nature. A questionnaire was prepared and distributed toInvestors. The investor’s profile is based on the results of a questionnaire that the Investorscompleted. The sample consists of 100 investors from various broker’s premises. The targetcustomers were Investors who are trading in the stock market.In order to identify the effectiveness of Prabhudas Lilladher PMS services this Research iscarried throughout the area of Delhi. At the time of investing money everyone looks for the Riskfactor involved in the Investment option. This report is prepared on the basis of Research workdone through the different Research Methodology the data is collected from both the Primarysources & secondary sources. .Glossary of Acronyms View slide
  • Acronym Full FormNSE National Stock ExchangeBSE Bombay Stock ExchangeS&P Standard and PoorCNX Crisil NSE IndicesISO Indian standards organizationBOLT BSE Online trading systemNYSE New York stock exchangeFTSE Financial Times Stock ExchangePAT Profit After TaxNPM Net Profit MarginEPS Earnings per ShareRoNW Return On Net WorthQoQ Quarter over QuarterYoY Year over YearP/E Price Earnings ratioH/L High/LowRoI Return on InvestmentAMC Annual Maintenance ChargeMNC Multinational Corporation Introduction to Study View slide
  • The field of investment traditionally divided into security analysis and portfolio management.The heart of security analysis is valuation of financial assets. Value in turn is the function of riskand return. These two concepts are in the study of investment. Investment can be defined thecommitment of funds to one or more assets that will be held over for some future time period. In today’s fast growing world many opportunities are available, so in order to move withchanges and grab the best opportunities in the field of investments a professional fund manageris necessary.Therefore, in the present scenario the Portfolio Management Services (PMS) is fast gainingimportance as an investment alternative for the High Net worth Investors.Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed income, debt,cash, structured products and other individual securities, managed by a professional moneymanager that can potentially be tailored to meet specific investment objectives.When you invest in PMS, you own individual securities unlike a mutual fund investor, who ownsunits of the entire fund. You have the freedom and flexibility to tailor your portfolio to addresspersonal preferences and financial goals. Although portfolio managers may oversee hundreds ofportfolio, you account may be unique.Investment management solution in PMS can be provided in the following ways: 1. Discretionary 2. Non Discretionary 3. AdvisoryDiscretionary: Under these services, the choice as well as the timings of the investment decisionsrest solely with the Portfolio Manager.Non Discretionary: Under these services, the portfolio manager only suggests the investmentideas. The choice as well as the timings of the investment decisions rest solely with the Investor.However the execution of trade is done by the portfolio manager.Advisory: Under these services, the portfolio managers only suggest the Investment ideas.The choice as well as the execution of the investment decisions rest solely with the Investors.Rule 2, clause (d) of the SEBI (portfolio manager) Rules, 1993 defines the term “Portfolio” as “total holding of securities belonging to any person”.As a matter of fact, portfolio is combination of assets the outcomes of which cannot be definedwith certainty new assets could be physical assets, real estates, land, building, gold etc. orfinancial assets like stocks, equity, debenture, deposits etc.Portfolio management refers to managing efficiently the investment in the securities held byprofessional for others.Merchant banker and the portfolio management with a view to ensure maximum returns by suchinvestment with minimum risk of loss of return on the money invested in securities held by themfor their clients. The aim Portfolio management is to achieve the maximum return from aportfolio, which has been delegated to be managed by manager or financial institution.There are lots of organizations in the market on the lookout for people like you who need theirportfolios managed for them. They have trained and skilled talent will work on your money tomake it do more for you.Therefore, if any investors still insist on managing their own portfolio, then ensure you builddiscipline in to their investment. Work out their strategy and stand by it. MYTHS ABOUT PMS
  • There are two most common myths found about Portfolio Management Services (PMS) whichwe found among most of the Investors. They are as follows.Myth No. 1: “PMS and Mutual Fund are similar as the investment option”As in the Finance basket both the PMS and Mutual Fund are used for minimizing risk andmaximize the profit of the Investors. The objectives are similar as in both the product but theyare different from each other in certain aspects. They are as follows:-Management Side:In PMS, it’s ongoing personalized access to professional money management services. Whereas,in Mutual fund gives personalize access to money.Customization:In PMS, Portfolio can be tailored to address each investor’s each investor’s specific needs.Whereas in Mutual Fund Portfolio structured to meet the fund’s stated investment objectives.Ownership:In PMS, Investors directly own the individual securities in their portfolio, allowing for taxmanagement flexibility, whereas in Mutual Fund Shareholders own shares of the fund and cannotinfluence buy and sell decisions or control their exposure to incurring tax liabilities.Liquidity:In PMS, managers may hold cash; they are not required to hold cash to meet redemptions,whereas, Mutual funds generally hold some cash to meet redemptions.Minimums:PMS generally gives higher minimum investments than mutual funds. Generally, minimumranges from: Rs. 1crore + for Equity Options Rs. 5crore + for Fixed Income Options Rs. 20 lacs+ for structured Products, whereas in Mutual Fund Provide ongoing, personalized access toprofessional money management services.Flexibility:PMS is generally more flexible than mutual funds. The Portfolio Manger may move to 100%cash if it required. The Portfolio Manager may take his own time in building up the portfolio.The Portfolio Manger can also manage a portfolio with disproportionate allocation to selectcompelling opportunities whereas, in Mutual Fund comparatively less flexible.Myth No. 2: “PMS is more Risk free than other Financial Instrument”In Financial Market Risk factor is common in all the financial products, but yes it is true thatRisk Factor vary from each other due to its nature. All investments involve a certain amount ofrisk, including the possible erosion of the principal amount invested, which varies depending nthe security selected. For example, investments in small and mid-sized companies tend toinvolve more risk than investments in larger companies. Introduction to Stock Market
  • A stock market or equity market is a public market (a loose network of economic transactionsnot a physical facility or discrete entity) for the trading of company stock and derivatives at anagreed price; these are securities listed on a stock exchange as well as those only tradedprivately.The size of the world stock market was estimated at about $36.6 trillion US at the beginning ofOctober 2008. The total world derivatives market has been estimated at about $791 trillion faceor nominal value, 11 times the size of the entire world economy. The value of the derivativesmarket, because it is stated in terms of notional values, cannot be directly compared to a stock ora fixed income security, which traditionally refers to an actual value. Moreover, the vast majorityof derivatives cancel each other out (i.e., a derivative bet on an event occurring is offset by acomparable derivative bet on the event not occurring.).Participants in the stock market range from small individual stock investors to large hedge fundtraders, who can be based anywhere. Their orders usually end up with a professional at a stockexchange, who executes the order.Types of Shares: There are several types of shares, including common stock, preferred stock, treasury stock, and dual class shares. Preferred stock, sometimes called preference shares, have priority over common stock in the distribution of dividends and assets, and sometime have enhanced voting rights such as the ability to veto mergers or acquisitions or the right of first refusal when new shares are issued (i.e. the holder of the preferred stock can buy as much as they want before the stock is offered to others). A dual class equity structure has several classes of shares (for example Class A, Class B and Class C) each with its own advantages and disadvantages. Treasury stock are shares that have been bought back from the public.Primary Market: In financial markets, an Initial Public Offering (IPO) is the first sale of a company’s common Shares to public investors. The company will usually issue only primary shares, but may also sell secondary shares. Typically, a company will hire an investment banker to underwrite the offering and a corporate lawyer to assist in the drafting of the prospectus. The sale of stock is regulated by authorities of financial supervision and where relevant by a Stock exchange. It is usually a requirement that disclosure of the financial situation and
  • Prospective investors the Federal Securities and Exchange Commission (SEC) regulates the securities markets of the United States and, by extension, the legal procedures governing IPOs. The law governing IPOs in the United States includes primarily the Securities Act of 1933, the regulations issued by the SEC, and the various state “Blue Sky Laws”.Secondary Market: The secondary market (also called “aftermarket”) is the financial market for trading of Securities that have already been issued in its initial private or public offering. Stock Exchanges are example of secondary markets. Alternatively, secondary market can refer to the market for any kind of used goods.Function and purposeThe stock market is one of the most important sources for companies to raise money. This allowsbusinesses to be publicly traded, or raise additional capital for expansion by selling shares ofownership of the company in a public market. The liquidity that an exchange provides affordsinvestors the ability to quickly and easily sell securities. This is an attractive feature of investingin stocks, compared to other less liquid investments such as real estate.History has shown that the price of shares and other assets is an important part of the dynamicsof economic activity, and can influence or be an indicator of social mood. An economy wherethe stock market is on the rise is considered to be an up-and-coming economy. In fact, the stockmarket is often considered the primary indicator of a countrys economic strength anddevelopment. Rising share prices, for instance, tend to be associated with increased businessinvestment and vice versa. Share prices also affect the wealth of households and theirconsumption. Therefore, central banks tend to keep an eye on the control and behavior of thestock market and, in general, on the smooth operation of financial system functions.Relation of the stock market to the modern financial systemStatistics show that in recent decades shares have made up an increasingly large proportion ofhouseholds financial assets in many countries. In the 1970s, in Sweden, deposit accounts andother very liquid assets with little risk made up almost 60 percent of households financialwealth, compared to less than 20 percent in the 2000s. The major part of this adjustment infinancial portfolios has gone directly to shares but a good deal now takes the form of various
  • kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds,hedge funds, insurance investment of premiums, etc.The trend towards forms of saving with a higher risk has been accentuated by new rules for mostfunds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are tobe found in other industrialized countries. In all developed economic systems, such as theEuropean Union, the United States, Japan and other developed nations, the trend has been thesame: saving has moved away from traditional (government insured) bank deposits to more riskysecurities of one sort or another.Stock market IndexThe movements of the prices in a market or section of a market are captured in price indicescalled stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euro nextindices. Such indices are usually market capitalization weighted, with the weights reflecting thecontribution of the stock to the index. The constituents of the index are reviewed frequently toinclude/exclude stocks in order to reflect the changing business environment.In India the index used for capturing the price movement of market is S&P CNX Nifty. Standard& Poors (S&P) is a division of McGraw-Hill that publishes financial research and analysis onstocks and bonds. It is well known for the stock market indexes, the US-based S&P 500, theAustralian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and Indias S&P CNXNifty.Market trendA market trend is a putative tendency of a financial market to move in a particular direction overtime. These trends are classified as secular trends for long time frames, primary trends formedium time frames, and secondary trends lasting short times. Traders identify market trendsusing technical analysis, a framework which characterizes market trends as a predictable priceresponse of the market at levels of price support and price resistance, varying over time.The terms bull market and bear market describe upward and downward market trends,respectively, and can be used to describe either the market as a whole or specific sectors andsecuritiesBull marketA bull market is associated with increasing investor confidence, and increased investing inanticipation of future price increases (capital gains). A bullish trend in the stock market often
  • begins before the general economy shows clear signs of recovery. It is a win-win situation for theinvestors.ExamplesIndias Bombay Stock Exchange Index, SENSEX, was in a bull market trend for almost fiveyears from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points.Another notable bull market was in the 1990s and most of the 1980s when the U.S. and manyother stock markets rose; this time period included the dot-com bubble.Bear marketA bear market is a general decline in the stock market over a period of time. It is a transitionfrom high investor optimism to widespread investor fear and pessimism."While there’s no agreed-upon definition of a bear market, one generally accepted measure is aprice decline of 20% or more over at least a two-month period."ExamplesA bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of theDow Jones Industrial Averages market capitalization by July 1932, marking the start of theGreat Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to1942 occurred in which the market was again cut in half. Another long-term bear marketoccurred from about 1973 to 1982, encompassing the 1970s energy crisis and the highunemployment of the early 1980s. Yet another bear market occurred between March 2000 andOctober 2002. The most recent example occurred between October 2007 and March 2009.Depository:A depository holds shares and other securities of investors in electronic form. ThroughDepository Participants (DPs), it also provides services related to transaction in securities. Itsstructure and functioning are similar to the bank. Presently in India, there are two depository viz.National Securities Depository limited (NSDL) and Central Depository Services (I) Limited(CDSL). Both of them are registered with SEBI.DP is a member of a Depository who offers its services to hold securities of Investors (BeneficialOwners) in dematerialized form. DP is like a bank branch. It is an agent of the depository. DPworks as an interface between Depository and Investors. DPs are required to be registered withSEBI. If an investor wants to avail the services offered by Depository, he has to open a Demataccount with DP similar to opening of a bank account with a branch of the bank.
  • Depository is responsible for keeping stocks of investors in electronics form. There are twodepositories in India, NSDL (National Securities Depository Ltd) and CDSL (Central DepositoryServices Ltd).CDSL was promoted by Bombay Stock Exchange Limited(BSE) jointly with leading banks suchas State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank,Union Bank of India and Centurion Bank.CDSL was setup with the objective of providing convenient, dependable and secure depositoryservices at affordable cost to all market participants. Some of the important milestones of CDSLsystem are:CDSL received the certificate of commencement of business from SEBI in February, ShriYashwant Sinha flagged off the operations of CDSL on July 15, 1999. Settlement of trades in thedemat mode through BoI Shareholding Limited, the clearing house of BSE, started in July 1999.All leading stock exchanges like the national Stock Exchange, Calcutta Stock Exchange, DelhiStock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity withCDSL.As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, bonds,debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSLsystem. NSDL:Although India had a vibrant capital market which is more than century old, the paper-basedsettlement of trades caused substantial problems like bad delivery and delayed transfer of title tillrecently. The enactment of Depositories Act in August 1996, paved thee way for establishmentof National Securities Depository Limited (NSDL), the first depository in India. This depositorypromoted by institutions of National stature responsible for economic development of thecountry has since established a National infrastructure of International standards that handlesmost of the securities held and settled in dematerialised form in the Indian capital market. Usinginnovative and flexible technology systems, NSDL works to support the investors and brokers inthe capital market of the country. NSDL aims at ensuring the safety and soundness of Indianmarketplaces by developing settlement solutions that increase efficiency, minimize risk andreduce costs. At NSDL, we play a quiet but central role in developing products and services thatwill continue to nurture the growing needs of the financial services industry.In the depository system, securities are held in depository account, which is more or less similarto holding funds in bank accounts. Transfer of ownership of securities is done through simpleaccount transfers. This method does away with all the risks and hassles normally associated withpaperwork. Consequently, the cost of transacting in a depository environment is considerablylower as compared to transacting in certificates Promoters/ Shareholders NSDL is promoted byIndustrial Development Bank of India (IDBI) – the largest development bank of India, Unit Trustof India (UTI) – the largest mutual fund in India and national Stock Exchange of India Limited(NSE) – the largest stock exchange in India. Some of the prominent banks in the country havetaken a stake in NSDL. ● NSDL facts & Figures: as on December 31, 2008:
  • • Number of certificates eliminated (Approx): 550 crore • Number of companies in which more than 75% shares are dematted : 2282 • Average number of accounts opened per day since November 1996 : 3636 • Presence of demat account holders in the country : 78% of all pin codes in the countryCentral Securities Depository :A Central Securities Depository (CSD) is an organization holding securities either in certificatedor uncertificated (dematerialized) form, to enable book entry transfer of securities. In some casesthese organizations also carry out centralized comparison, and transaction processing such asclearing and settlement of securities. These physical securities may be immobilized by thedepository, or securities may be dematerialized (so that they exist only as electronic records).International Central Securities Depository (ICSD) is a central securities depository that settlestrades in international securities and in various domestic securities, usually through direct orindirect (through local agents) links to local CSDs. ClearStream International (earlier Cedel),Euro clear and SIX SIS are considered ICSDs. While some view The Depository Trust Company(DTC) as a National CSD rather than an ICSD, in fact DTC – the largest depository in the world– hold over $2 trillion in non-US securities and in American Depository Receipts from over 100nations.Functions:  Safekeeping Securities may be in dematerialized form, book-entry only from (with one or more “global” certificate), or in physical form immobilized within the CSD.  Deposit and Withdrawal supporting deposits and withdrawals involves the relationship between the transfer agent and/or issuers and the CSD. It also covers the CSD’s role with in the underwriting process or listing of new issues in a market.  Dividend, interest, and principal processing, as well as corporate actions including proxy voting paying and transfer agent, as well as issuers are involved in these processes, as welll as issuers are involved in these processes, depending on the level of services provided by the CSD and its relationship with these entities.  Other services CSDs offer additional services aside from those considered core services. These services include Securities Lending and Borrowing, matching, and Repo Settlement  Pledge – Central depositories provide pledging of share and securities. Every country require to provide legal framework to protect the interest of the pledgor and pledgee  However, there are risks and responsibilities regarding these services that must be taken into consideration in analyzing and evaluating each market on a case-by-case basis.
  • Derivatives:A financial instrument whose value is derived from the values of other, more basic underlyingassets.Underlying assets may be stock, indices, currency, bullion commodities etc. For example, valueSeptember 1 month future contract for Nifty will depend on the current value of Nifty.Basic types of Derivative: 1. Forward Contracts 2. Future Contracts 3. OptionsForward Contracts:  It is an agreement to buy or sell an asset (like stock, indices, currency etc) at a certain future time for a certain price.  The contract is usually between two parties without having any involvement of exchange  Settled at maturity, when the holder of the short position (seller) delivers the asset to the holder of the long position (Buyer) in return for a cash amount agree upon.  Risk of counter party default  Generally popular in foreign currency where different Banks and corporation enter into forward contracts for different currenciesFuture Contacts:  Like a forward contract, a future contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price.  Counter party is an exchange and future contracts are traded on exchange.  To make trading possible, the exchange specifies certain standardized feature of thee contract, like minimum size of contract, delivery time (usually in terms of month), margin requirement etc.  Daily mark to market accounting is done by the exchange  On maturity, it is not required to give actual delivery of an asset but contract is settled bas on spot price of an assetOptions:  Options name suggest is right but not an obligation of option holder
  •  Basic two types of Option: 1. Call Option 2. Put OptionA call option gives the holder right to buy a certain date for a certain price.A put option gives holder right to sell the stock by a certain date for a certain price.The price in the contract is called strike price; the date in contract is known as the expirationdate, exercise date, or maturity.  The price paid for buying an option is known as option price or option premium.  American option can be exercised at any time up to the expiration date while European option can be exercised only on the expiration date itself.  Most of the option that is traded on the exchange is AmericanEquity market reforms since 1992As part of a broad set of reforms, the Securities and Exchange Board of India (SEBI) was giventhe legal powers in 1992 to regulate and reform the capital market, including new issues. Theequity market reforms since then can be divided into two broad categories:One that increases the level of competition in the market and the other that deals with problemsof information and transaction cost. The most important initiative to enhance competitions wasthe free pricing of IPO and formulation of guidelines concerning new issues. The new regulatoryframework sought to strengthen investor protection by ensuring disclosure and transparencyrather than through direct control. Secondly, the national Stock Exchange (NSE) was set up,which competed with the Bombay Stock Exchange (BSE).The NSE introduced an automatedscreen-based trading system, known as the National Exchange for Automated Trading (NEAT)system, which allowed members from across the country to trade simultaneously with enormousease and efficiency. Faced with stiff competition, the BSE adopted similar technology.Competition was also enhanced through an increased number of participants- foreigninstitutional investors (FIIs) were permitted to trade and private sector mutual funds came on thescene. To deal with market imperfection such as information asymmetry and high transactioncosts, a number of measures were taken. AT the trading level, transparency was facilitated by thenew technology (NEAT system), which operated on a strict price/time priority. At the investorlevel, transparency was augmented by the regulation that required listed companies to increasethe frequency of their account announcements. To ensure transferability of securities with speed,accuracy and security, the Depositories Act was passed in 1996, which provided for theestablishment of securities depositories and allowed securities to be dematerialized. Followingthe legislation, National Securities Depository Limited- India’s first depository- was launched.Other measures to reduce transaction costs included:(a) A movement toward electronic trading and settlement, and(b) Streamlining of procedures with respect to clearance of new issues.Stock exchange
  • The stocks are listed and traded on stock exchanges which are entities of a corporation or mutualorganization specialized in the business of bringing buyers and sellers of the organizations to alisting of stocks and securities together.Stock Exchanges are an organized marketplace where members of the organization gather totrade company stocks and other securities. The members may act either as agents for theircustomers, or as principals for their own accounts. Stock exchanges also facilitate for the issueand redemption of securities and other financial instruments including the payment of incomeand dividends.Portfolio Management Services:Portfolio (finance) means a collection of investments held by an institution or a privateindividual. Holding a portfolio is often part of an investment and risk-limiting strategy calleddiversification. By owning several assets, certain types of risk (in particular specific risk) can bereduced. There are also portfolios which are aimed at taking high risks – these are calledconcentrated portfolios.Investment management is the professional management of various securities (shares, bonds etc)and other assets (e.g. real estate), to meet specified investment goals for the benefit of theinvestors. Investors may be institutions (Insurance companies, pension funds, corporations etc)or private investors (both directly via investment contracts and more commonly via collectiveinvestment schemes e.g. mutual funds).The term asset management is often used to refer to the investment management of collectiveinvestments, while the more generic fund management may refer to all forms of institutionalinvestment as well as investment management for private investors. Investment managers whospecialize in advisory or discretionary management on behalf of (normally wealthy) privateinvestors may often to their services as wealth management or portfolio management oftenwithin the context of so-called “private banking”.The provision of ‘investment management services’ includes element of financial analysis, assetselection, stock selection, plan implementation and ongoing monitoring of investments. Outsideof the financial industry, the term “investment management” is often applied to investmentsother than financial instruments. Investments are often meant to include projects, brands, patentsand many things other than stocks and bonds. Even in this case, the term implies that rigorousfinancial and economic analysis methods are used.Need of PMS:As in the current scenario the effectiveness of PMS is required. As the PMS gives investorsperiodically review their asset allocation across different assets as the portfolio can get skewedover a period of time. This can be largely due to appreciation / depreciation in the value of theinvestments.As the financial goals are diverse, the investment choices also need to be different to meet thoseneeds. No single investment is likely to meet all the needs, so one should keep some money inbank deposits and liquid funds to meet any urgent need for cash and keep the balance in other
  • investment products/ schemes that would maximize the return and minimize the risk. Investmentallocation can also change depending on one’s risk-return profile.Objectives of PMS:There are the following objectives which are fulfilled by Portfolio Management Services. 1. Safety of Fund: The investment should be preserved, not be lost, and should remain in the returnable position in cash or kind. 2. Marketability: The investment made in securities should be marketable that means, the securities must be listed and traded in stock exchange so as to avoid difficulty in their encashment. 3. Liquidity: The portfolio must consist of such securities, which could be en-cashed without any difficulty or involvement of time to meet urgent need for funds. Marketability ensures liquidity to the portfolio. 4. Reasonable return: The investment should earn a reasonable return to upkeep the declining value of money and be compatible with opportunity cost of the money in terms of current income in the form of interest or dividend. 5. Appreciation in Capital: The money invested in portfolio should grow and result into capital gains. 6. Tax planning: Efficient portfolio management is concerned with composite tax planning covering income tax, capital gain tax, wealth tax and gift tax. 7. Minimize risk: Risk avoidance and minimization of risk are important objective of portfolio management. Portfolio managers achieve these objectives by effective investment planning and periodical review of market, situation and economic environment affecting the financial market.Portfolio construction:The Portfolio construction of Rational investors wish to maximize the returns on their funds for agiven level of risk. All investments possess varying degrees of risk. Returns come in the form ofincome, such as interest or dividends, or through growth in capital values (i.e. capital gains).The portfolio construction process can broadly characterized as comprising the following steps: 1. Setting objectives:
  • The first step in building a portfolio is to determine the main objectives of the fund given the constraints (i.e. tax and liquidity requirements) that may apply. Each investor has different objectives, time horizons and attitude towards risk. Pension funds have long- term obligations and, as a result, invest for the long term. Their objective may be to maximize total returns in excess of the inflation rate. An individual may have certain liabilities and wish to match them at a future date. Assessing a client’s risk tolerance can be difficult. The concepts of efficient portfolios and diversification must also be considered when setting up the investment objectives.2. Defining Policy: Once the objectives have been set, a suitable investment policy must be established. The standard procedure is for the money manager to ask clients to select their preferred mix of assets, for example equities and bonds, to provide an idea of the normal mix desired. Clients are then asked to specify limits or maximum and minimum amounts they will allow to be invested in the different assets available. The main asset classes are cash, equities, gilts/bonds and other debt instruments, derivatives, property and overseas assets. Alternative investments, such as private equity, are also growing in popularity, and will be discussed later. Attaining the optimal asset mix overtime is one of the key factors of successful investing.3. Applying Portfolio Strategy: At either end of the portfolio management spectrum of strategies are active and passive strategies. An active strategy involves predicting trends and changing expectations about the likely future performance of the various asset classes and actively dealing in and out investment to seek a better performance. For example, if the manager expects interest rates to rise, bond prices are likely to fall and so bonds should be sold, unless this expectation is already factored into bond prices. AT this stage, the active fund manager should also determining the style of the portfolio. For example, will the fund invest primarily in companies with large market capitalization, in shares of companies expected to generate high growth rates, or in companies whose valuations are low? A passive strategy usually involves buying securities to match a preselected market index. Alternatively, a portfolio can be set up to match the investor’s choice of tailor-made index. Passive strategies rely on diversification to reduce risk. Outperformance versus the chosen index is not expected. This strategy requires minimum input from the portfolio manager. In practice, many active funds are managed somewhere between the active and passive extremes, the core holdings of the fund being passively managed and the balance being actively managed.4. Asset Selection: Once the strategy is decided, the fund manager must select individual assets in which to invest. Usually a systematic procedure known as an investment process is established, which sets guidelines or criteria for asset selection. Active strategies require that the fund manager apply analytical skills and judgement for asset selection in order to identify undervalued assets and to try to generate superior performance.
  • 5. Performance assessments: In order to assess the success of the fund manager, the performance of the fund is periodically measured against a pre-agreed benchmark- perhaps a suitable stock exchange index or against a group of similar portfolios (peer group comparison). The portfolio construction process is continuously iterative, reflecting changes internally and externally. For example, expected movements in exchange rates may make overseas investment more attractive, leading to changes in asset allocation. Or, if many large-scale investors simultaneously decide to switch from passive to more active strategies, pressure will be put on the fund managers to offer more active funds. Poor performance of a fund may lead to modifications in individual asset holdings or, as an extreme measure; the manager of the fund may changed altogether.Steps to selection processTypes of Assets:The structure of a portfolio will depend ultimately on the investor’s objectives and on the assetselection decision reached. The portfolio structure takes into account a range of factors,including the investor’s time horizon, attitude to risk, liquidity requirements, tax position andavailability of investments. The main asset classes are cash, bonds and other fixed incomesecurities, equities, derivatives, property and overseas assets.Cash and Cash Instruments:
  • Cash can be invested over any desired period, to generate interest income, in a range of highlyliquid or easily redeemable instruments, from simple bank deposits, negotiable certificates ofdeposits, commercial paper (short term corporate debt) and Treasury bills (short termgovernment debt) to money market funds, which actively manage cash resources across a rangeof domestic and foreign markets. Cash is normally held over the short term pending useelsewhere (perhaps for paying claims by a non-life insurance company or for paying pensions),but may be held over the longer term as well. Returns on cash are driven by the general demandfor funds in an economy, interest rates, and expected rate of inflation. A portfolio will normallymaintain at least a small proportion of its funds in cash in order to take advantage of buyingopportunities.Bonds:Bonds are debt instruments on which the issuer (the borrower) agrees to make interest paymentsat periodic intervals over the life of the bond- this can be for two to thirty years or, sometimes, inperpetuity. Interest payments can be fixed or variable, the latter being linked to prevailing levelsof interest rates. Bond markets are international and have grown rapidly over recent years. Thebond markets are highly liquid, with many issuers of similar standing, including governments(sovereigns) and state-guaranteed organizations. Corporate bonds are bonds that are issued bycompanies. To assist investors and to help in the efficient pricing of bond issues, many bondissues are given ratings by specialist agencies such as standard & Poor’s and Moody’s. Thehighest investment grade is AAA, going all the way down to D, which is graded as in default.Depending on expected movements in future interest rates, the capital values of bonds fluctuatedaily, providing investors with the potential for capital gains or losses. Future interest rates aredriven by the likely demand/supply of money in an economy, future inflation rates, politicalevents and interest rates elsewhere in world markets. Investors with short-term horizons andliquidity requirements may choose to invest in bonds because of their relatively higher returnthan cash and their prospects for possible capital appreciation. Long-term investors, such aspension funds, may acquire bonds for the higher income and may hold them until redemption –for perhaps seven or fifteen years. Because of the greater risk, long bonds (over ten years tomaturity) tend to be more volatile in price than medium- and short- term bonds, and have ahigher yield.Equities:Equities consists of shares in company representing the capital originally provided byshareholders. An ordinary shareholder owns a proportional share of the company and an ordinaryshare carries the residual risk and rewards after all liabilities and costs have been paid. Ordinaryshares carry the right to receive income in the form of dividends (once declared out ofdistributable profits) and any residual claim on the company’s assets once its liabilities have beenpaid in full. Preference shares are another type of share capital. They differ from ordinary sharesin that the dividend on a preference share is usually fixed at some amount and does not change.Also, preference shares usually do not carry voting rights and, in the event of firm failure,preference shareholders are paid before ordinary shareholders. Returns from investing in equitiesare generating in the form of dividend income and capital gain arising from the ultimate sale ofthe shares. The level of dividends may vary from year to year, reflecting the changingprofitability of a company. Similarly, the market price of a share will change from day to day toreflect all relevant available information. Although not guaranteed, equity prices generally rise
  • over time, reflecting general economic growth, and have been found over the long term togenerate growing levels of income in excess of the rate of inflation. Grated, there may be periodsof time, even years, when equity prices trend downwards – usually during recessionary times.The overall long-term prospect, however, for capital appreciation makes equities an attractiveinvestment preposition for major institutional investors.Derivatives:Derivative instruments are financial assets that are derived from existing primary assets asopposed to being issued by a company or government entity. The two most popular derivativesare futures and options. The extent to which a fund may incorporate derivative products in thefund will be specified in the fund rules and depending on the type of fund established for theclient and depending on the type of fund established for the clients and depending on the client,may not be allowable at all.A future contract is an agreement in the form of a standardized contract between twocounterparties to exchange an asset at a fixed price and date in the future. The underlying asset ofthe futures contract can be a commodity or a financial security. Each contract specifies the typeand amount of the asset to be exchanged, and where it is to be delivered (usually one of a fewapproved locations for that particular asset). Futures contracts can be set up for the delivery ofsteel, oil and coffee. Likewise, financial futures contracts can specify the delivery of foreigncurrency or a range of government bonds. The buyer of a futures contract takes a ‘long position’,and will make a profit if the value of the contract rises after the purchase. The seller of thefutures contract takes a ‘short position’ and will, in turn, make a profit if the price of the futurescontracts falls. When the futures contract expires, the seller of the contract is required to deliverthe underlying asset to the buyer of the contract. Regarding financial futures contracts, however,in the vast majority of cases no physical delivery of the underlying asset takes place as manycontracts are cash settled or closed out with the offsetting position before the expiry date.An open contract is an agreement that gives the owner the right, but not obligation, to buy or sell(depending on the type of option) a certain asset for a specified period of time. A call optiongives the holder the right to buy the asset. A put option gives the holder the right to sell the asset.European options can be exercised only on the options’ expiry date. US options can be exercisedat any time before the contract’s maturity date. Option contract on stocks or stock indices areparticularly popular. Buying an option involves paying a premium; selling an option involvesreceiving the premium. Options have the potential for large gains or losses, and are considered tobe high-risk instruments. Sometimes, however, option contracts are used to reduce risk. Forexample, fund managers can use a call option to reduce risk when they own an asset only veryspecific funds are allowed to hold options.Property:
  • Property investment can be made either directly by buying properties, or indirectly by buyingshares in listed companies. Only major institutional investors with long-term time horizons andno liquidity pressures tend to make direct property investments. These institutions purchasefreehold and leasehold properties as part of a property portfolio held for the long term, perhapstwenty or more years. Property sectors of interest would include prime, quality, well-locatedcommercial office and shop properties, modern industrial warehouses and estates, hotels,farmland and woodland. Returns are generated from annual rents and any capital gains onrealization. These investments are often highly illiquid.Portfolio Diversification: There are several different factors that cause risk or lead to variability in returns on an individual investment. Factors that may influence risk in any given investment vehicle include uncertainty of income, interest rates, inflation, exchange rates, tax rates, the state of the economy, default risk and liquidity risk (the risk of not being able to sell on the investment). In addition, an investor will assess the risk of a given investment (portfolio) within the context of other types of investments that may already be owned, i.e. stakes in pension funds, life insurance policies with saving components, and property. One way to control portfolio risk is via diversification, whereby investments are made in a wide variety of assets so that the exposure to the risk of any particular security is limited. This concept is based on the old adage ‘do not put all your eggs in one basket’. If an investor owns shares in only one company, that investment will fluctuate depending on the factors influencing that company. If that company goes bankrupt, the investor might lose 100 % of the investment. If, however, the investor owns shares in several companies in different sectors, then the likelihood of those companies going bankrupt simultaneously is greatly diminished. Thus, diversification reduces risk. Although bankruptcy risk has been considered here, the same principle applies to other forms of risk.TECHNOQUES OF PORTFOLIO MANAGEMENTVarious types of portfolio require different techniques to be adopted to achieve the desiredobjectives. Some of the techniques followed in India by portfolio managers are summarizedbelow(1). Equity portfolio –Equity portfolio is affected by internal and external factors:(a) Internal factors –
  • Pertain to the inner working of the particular company of which equity shares are held thesefactors generally include:(1) Market value of shares(2) Book value of shares(3) Price earnings ratio (P/E ratio)(4) Dividend payout ratio(b) External factors –(1) Government policies(2) Norms prescribed by institutions(3) Business environment(4) Trade cycles(2). Equity stock analysis –The basic objective behind the analysis is to determine the probable future – value of the sharesof the concerned company. It is carried out primarily fewer than two ways. :(a) Earnings per share(b) Price earnings ratio(A) Trend of earning: -➢ A higher price-earnings ratio discount expected profit growth. Conversely, a downward trendin earning results in a low price-earnings ratio to discount anticipated decrease in profits, priceand dividend. Rising EPS causes appreciation in price of shares, which benefits investors inlower tax brackets? Such investors have not pay tax or to give lower rate tax on capital gains.➢ Many institutional investors like stability and growth and support high EPS.➢ Growth of EPS is diluted when a company finances internally its expansion program andoffers new stock.➢ EPS increase rapidly and result in higher P/E ratio when a company finances its expansionprogram from internal sources and borrowings without offering new stock.(B) Quality of reported earning: -
  • Quality of reported earnings affects P/E ratio. The factors that affect the quality of reportedEarnings are as under:➢ Depreciation allowances: -Larger (Non Cash) deduction for depreciation provides more funds to company to financeprofitable expansion schemes internally. This builds up future earning power of company.➢ Research and development outlets : -There is higher P/E ratio for a company, which carries R&D programs. R&D enhances profitearning strength of the company through increased future sales.➢ Inventory and other non-recurring type of profit : -Low cost inventory may be sold at higher price due to inflationary conditions among profit butsuch profit may not always occur and hence low P/E ratio.(C) Dividend policy: -Dividend policy is significant in affecting P/E ratio. With higher dividend ratio, equity pricegoes up and thus raises P/E ratio. Dividend rates are raised to push in share prices up. Dividendcover is calculated to find out the time the dividend is protected, In terms of earnings. It iscalculated as under:Dividend Cover = EPS / Dividend per Share(D) Investors demand: -Demand from institutional investors for equity also enhances the P/E ratio.(3) Quality of management: -Investors decide about the ability and caliber of management and hold and dispose of equityacademy. P/E ratio is more where a company is managed by reputed entrepreneurs with goodpast records of management performance.Types of PortfoliosThe different types of Portfolio which is carried by any Fund Manager to maximize profit andminimize losses are different as per their objectives .They are as follows.Aggressive Portfolio:
  • Objective: Growth. This strategy might be appropriate for investors who seek high growth andwho can tolerate wide fluctuations in market values, over the short term.Growth Portfolio:Objective: Growth. This strategy might be appropriate for investors who have a preference forgrowth and who can withstand significant fluctuations in market value.
  • Balanced Portfolio:Objective: Capital appreciation and income. This strategy might be appropriate for investorswho want the potential for capital appreciation and some growth, and who can withstandmoderate fluctuations in market value.Conservative Portfolio:Objective: Income and capital appreciation. This strategy may be appropriate for investors whowant to preserve their capital and minimize fluctuations in market value.
  • IRisk and Risk Aversion:Portfolio theory also assumes that investors are basically risk averse, meaning that, given achoice between two assets with equal rates of return they will select the asset with lower level ofrisk.For example, they purchased various type of insurance including life insurance, Health insuranceand car insurance. The combination of risk preference and risk aversion can be explained by anattitude towards risk that depends on the amount of money involved.A discussion of portfolio or fund management must include some thought given to the concept ofrisk. Any portfolio that is being developed will have certain risk constraints specified in the fundrules, very often to cater to a particular segment of investor who possesses a particular level ofrisk appetite. It is, therefore, important to spend some time discussing the basic theories ofquantifying the level of risk in an investment, and to attempt to explain the way in which marketvalues of investments are determined.Definition of Risk:Although there is a difference in the specific definitions of risk and uncertainty, for our purposeand in most financial literature the two terms are used interchangeably. In fact, one way to definerisk is the uncertainty of future outcomes. An alternative definition might be the probability of anadverse outcome.Composite risks involve the different risk as explained below:- 1. Interest rate risk: It occurs due to variability cause in return by changes in level of interest rate. In long runs all interest rate move up or downwards. These changes affect the value of security. RBI, in India, is the monitoring authority which affect the change in interest rate. Any upward revision in interest rate affects fixed income security, which carry old lower rate of interest and thus declining market value. Thus it establishes an inverse relationship in the prize of security. TYPES RISK EXTENT Cash Equivalent Less vulnerable to interest rate risk Long term Bond More vulnerable to interest rate risk 2. Purchasing power risk:-
  • It is known as inflation risk also. This risk emanates from the very fact that inflation affects the purchasing power adversely. Purchasing power risk is more in inflationary times in bonds and fixed income securities. It is desirable to invest in such securities during deflationary period or a period of decelerating inflation. Purchasing power risk is less in flexible income securities like equity shares or common stuffs where rise in dividend income offset increase in the rate of inflation and provide advantage of capital gains.3. Business Risk:- Business risk emanates from sale and purchase of securities affected by business cycles, technological change etc. Business cycle affects all the type of securities viz. there is cheerful movement in boom due to bullish trend in stock prizes where as bearish trend in depression brings downfall in the prizes of all types of securities. Flexible income securities are nearly affected than fix rate securities during depression brings downfall in the prizes of all types of securities. Flexible income securities are nearly affected than fix rate securities during depression due to decline in the market prize.4. Financial Risk:- Financial risk emanates from the changes in the capital structure of the company. It is also known as leveraged risk and expressed in term of debt equity ratio. Excess of debts against equity in the capital structure indicates the company to be highly geared or highly levered. Although leveraged company’s earnings per share (EPS) are more but dependence on borrowing exposes it to the risk of winding up. For, its inability to the honor its commitments towards the creditors are most important. Here it is imperative to express the relationship between risk and return, which is depicted graphically below:- Maximize returns, minimize risks: