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A project report on overview of portfolio management in india


A project report on overview of portfolio management in india

A project report on overview of portfolio management in india

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  • 1. Projectsformba.blogspot.com UNIVERSITY OF MUMBAI PROJECT ON OVERVIEW OF PORTFOLIO MANAGEMENT IN INDIA. Submitted In Partial Fulfillment of the requirements For the Award of the Degree of Bachelor of Management By PROJECT GUIDE BACHELOR OF MANAGEMENT STUDIES SEMESTER V (2010-2011) K.V.PENDHARKAR COLLEGE OF ARTS, SCIENCE&COMMERCE 1
  • 2. Projectsformba.blogspot.com DeclarationI ……………………… student of BMS – Semester V (2010-2011) herebyDeclare that I have completed this project on “OVERVIEW OFPORTFOLIO MANAGEMENT IN INDIAThe information submitted is true & original to the best of myknowledge.The conclusions and recommendations written in this project arebased onThe data collected by me while preparing this report. Signature 2
  • 3. Projectsformba.blogspot.com ACKNOWLEDGEMENTIt gives me great pleasure to submit this project to the University ofMumbai as a part of curriculum of my BMS course. I take this opportunitywith great pleasure to present before you this project on “OVERVIEW OFPORTFOLIO MANAGEMENT IN INDIA" which is a result of co-operation,hard work and good wishes of many people. The most pleasant part of anyproject is to express the gratitude towards all those who have contributedto the success of the project.I would like to thank …………………….. who has been my mentor for thisproject. It was only through her excellence assistance and goodsuggestions that I have been able to complete this project.Library Staff:For giving valuable information about the various books related to thisproject.With all the heartiest thanks; I hope my final project report will be a greatsuccess and a good source of learning and information. 3
  • 4. Projectsformba.blogspot.com INDEXCHAPTER TABLE OF CONTENTS PAGE NO.CHATER-1 Introduction to Portfolio Management 8 Introduction to kotak securities ltd. 10CHAPTER-2 Meaning of portfolio management 14CHAPTER-3 MethodologyCHAPTER-4 18 Basic concepts & components for portfolio managementCHAPTER-5 23 Types of portfolio managementCHAPTER-6 37 Persons involved in portfolio managementCHAPTER-7 42 Risk –Return analysisCHAPTER-8 49 Assest allocationCHAPTER-9 53 Primary surveyCHAPTER-10 58 FindingsCHAPTER-11 62 ConclusionCHAPTER-12 63 Bibliography/WebliographyCHAPTER-13 64 4
  • 5. Projectsformba.blogspot.com NEED FOR SELECTING THE PROJECT  To get the overall knowledge of securities and investment.  To know how the investment made in different securities minimizes the risk and maximizes the returns.  To get the knowledge of different factors that affects the investment decision of investors.  To know how different companies are managing their portfolio i.e. when and in which sectors they are investing.  To know what is the need of appointing a Portfolio Manager and how does he meets the needs of the various investors.  To get the knowledge about the role (played) and functions of portfolio manager.  To get the knowledge of investment decision and asset allocation. 5
  • 6. Projectsformba.blogspot.com EXECUTIVE SUMMARY Investing in equities requires time, knowledge and constant monitoring of the market.For those who need an expert to help to manage their investments, portfoliomanagement service (PMS) comes as an answer. The business of portfolio management has never been an easy one. Juggling thelimited choices at hand with the twin requirements of adequate safety and sizeablereturns is a task fraught with complexities. Given the unpredictable nature of the market it requires solid experience and strongresearch to make the right decision. In the end it boils down to make the right move inthe right direction at the right time. That’s where the expert comes in. The term portfolio management in common practice refers to selection of securitiesand their continuous shifting in a way that the holder gets maximum returns at minimumpossible risk. Portfolio management services are merchant banking activities recognizedby SEBI and these activities can be rendered by SEBI authorized portfolio managers ordiscretionary portfolio managers. A portfolio manager by the virtue of his knowledge, background and experience helpshis clients to make investment in profitable avenues. A portfolio manager has to complywith the provisions of the SEBI (portfolio managers) rules and regulations, 1993. This project also includes the different services rendered by the portfolio manager. Itincludes the functions to be performed by the portfolio manager. What is the difference between the value of time and money? In other words, learn toseparate time from money. 6
  • 7. Projectsformba.blogspot.com When it comes to the importance of time, how many of us believe that time is money.We all know that the work done by us is calculated by units of time. Have you everconsidered the difference between an employee who is working on an hourly rate andthe other who is working on salary basis? The only difference between them is of the unitof time. No matter whether you get your pay by the hour, bi-weekly, or annually; onething common in all is that the amount is paid to you according to amount of time youspent on working. In other words, time is precious and holds much more importance than money. Thatis the reason the time is considered as an important factor in wealth creation. The project also shows the factors that one considers for making an investmentdecision and briefs about the information related to asset allocation. 7
  • 8. Projectsformba.blogspot.com CHAPTER: 1 PORTFOLIO MANAGEMENTINTRODUCTION Stock exchange operations are peculiar in nature and most of the Investors feelinsecure in managing their investment on the stock market because it is difficult for anindividual to identify companies which have growth prospects for investment. Furtherdue to volatile nature of the markets, it requires constant reshuffling of portfolios tocapitalize on the growth opportunities. Even after identifying the growth orientedcompanies and their securities, the trading practices are also complicated, making it adifficult task for investors to trade in all the exchange and follow up on post tradingformalities. Investors choose to hold groups of securities rather than single security that offer thegreater expected returns. They believe that a combination of securities held together willgive a beneficial result if they are grouped in a manner to secure higher return aftertaking into consideration the risk element. That is why professional investment advicethrough portfolio management service can help the investors to make an intelligent and 8
  • 9. Projectsformba.blogspot.cominformed choice between alternative investments opportunities without the worry of posttrading hassles. From The Rational Edge: The first in a new series of articles on portfoliomanagement, this introduction expresses IBM’s viewpoint about the foundations andessentials of portfolio management, and discusses ideas and assets that support andenable effective portfolio management practices.A good way to begin understanding what portfolio management is (and is not) may be todefine the term portfolio. In a business context, we can look to the mutual fund industryto explain the terms origins. Morgan Stanleys Dictionary of Financial Terms offers thefollowing explanation: If you own more than one security, you have an investment portfolio. You build theportfolio by buying additional stocks, bonds, mutual funds, or other investments. Yourgoal is to increase the portfolios value by selecting investments that you believe will goup in priceAccording to modern portfolio theory, you can reduce your investment risk by creating adiversified portfolio that includes enough different types, or classes, of securities so thatat least some of them may produce strong returns in any economic climate.Note that this explanation contains a number of important ideas: • A portfolio contains many investment vehicles. • Owning a portfolio involves making choices -- that is, deciding what additional stocks, bonds, or other financial instruments to buy; when to buy; what and when to sell; and so forth. Making such decisions is a form of management. • The management of a portfolio is goal-driven. For an investment portfolio, the specific goal is to increase the value. • Managing a portfolio involves inherent risks. 9
  • 10. Projectsformba.blogspot.com CHAPTER2 INTRODUCTON TO KOTAK SECURITIES LTD.The Kotak Mahindra Group was born in 1985 as Kotak Capital ManagementFinance Limited. Uday Kotak, Sidney A. A. Pinto and Kotak & Companypromoted this company. Industrialists Harish Mahindra and Mahindra took astake in 1986, and thats when the company changed its name to KotakMahindra Finance Limited. Since then its been a steady and confident journey togrowth and success.Kotak Securities Ltd. is one of Indias largest brokerage and securitiesdistribution house in India. Over the years Kotak Securities has been one ofthe leading investment broking houses catering to the needs of bothinstitutional and non-institutional investor categories with presence all over thecountry through franchisees and co-ordinates. Kotak Securities Ltd. offers onlineand offline services based on well-researched expertise and financial products tothe non-institutional investors.Kotak Securities Limited is t he world of Capital Markets where everythingnewsworthy exists only in the present moment and where knowing theimportance of timing, sentiments and strategic forecasting makes the differencebetween profit and loss.Kotak Securities Limited, a strategic joint venture between Kotak Mahindra Bankand Goldman Sachs (holding 25% one of the world’s leading investment banksand brokerage firms) is India’s leading stock broking house with a market shareof 7 - 8 %.Kotak Securities Limited is one of the larger players in distribution of IPOs - itwas ranked number One in 2003-04 as Book Running Lead Manager in publicequity offerings by PRIME Database. It has also won the “Best Equity House”Award from Finance Asia -April 2004.The Company has a full-fledged Research division involved in macroeconomicstudies, Sectoral research and Company specific equity research combined witha strong and well networked sales force which helps deliver current and up-to-date market information and news. 10
  • 11. Projectsformba.blogspot.comKotak Securities Limited is also a depository participant with National SecuritiesDepository Limited (NSDL) and Central Depository Services Limited (CDSL)providing dual benefit services wherein the investors can use the brokerageservices of the Company for executing the transactions and the depositoryservices for settling them.Kotak Securities has 122 branches servicing more than 1, 70,000 customer andCoverage of 18 cities. Kotaksecurities.com, the online division of KotakSecurities Limited offers Internet Broking services and also online IPO andMutual Fund Investments. Kotak Securities Limited manages assets over 2500cores of Assets under Management (AUM).Kotak securities provide portfolio Management Services, catering to the high endof the market. Portfolio Management from Kotak Securities comes as an answerto those who would like to grow exponentially on the crest of the stock market,with the backing of an expert.Kotak Securities Limited manages assets over Rs. 1700crores through itsPortfolio Management Services (PMS) servicing high net worth clients with alarge investible surplus through its preferred client services in the mass affluentand wealth management segments.The company has a full-fledged research division involved in Macro Economicstudies, Sectoral research and Company Specific Equity Research combinedwith a strong and well networked sales force which helps deliver current and upto date market information and news. 11
  • 12. Projectsformba.blogspot.com KOTAK SECURITIES RESEARCH CENTER Kotak Securities Research Center is a special research cell where some of Indias finest financial analysts bring you intensive research reports on how the stock market is faring, when is the right time to invest, when to execute your order and more. KSL provides both type of research reports.  Fundamental Research reports a. Intraday calls b. Special Reports c. Market Mornings d. Daily Market Brief e. Sectoral Report f. Stock Ideas g. Derivatives Reports h. Portfolio Advices  Technical Research reports a. Weekly Technical AnalysisDepending on what kind of investor you are, Kotak Securities Ltd. (KSL) bringscustomers from fundamental or basic research and technical research. As aninvestor with Kotak Securities, Customers get access to these research reportsexclusively. Customers get access to the following reports. Research process isgiven below. 12
  • 13. Projectsformba.blogspot.com PRODUCTS OFFERED BY KOTAK SECURITIES LIMITED 1. Portfolio Management Services [PMS]: KOTAK Securities is among the Largest private client asset managers in the Country today with an equity asset base of around 1700crores (US$ 400 million). Kotak clients include some of the most affluent families and high net worth individuals in the Country and customer assets under management rival some of the larger mutual funds in India. 2) Margin Trading Facility 3) Demat Account Facility 4) IPOs 5) Mutual FundsAWARDS GRAB BY KOTAK SECURITIES LTD. Prime Ranking Award (2003-04) - Largest Distributor of IPOs Finance Asia Award (2004)- Indias best Equity House Finance Asia Award (2005)-Best Broker in India Euromoney Award (2005)-Best Equities House in India Finance Asia Award (2006) - Best Broker in India Euromoney Award (2006) - Best Provider of Portfolio Management in Equities 13
  • 14. Projectsformba.blogspot.com CHAPTER3 MEANING OF PORTFOLIO MANAGEMENT Portfolio management in common parlance refers to the selection of securities andtheir continuous shifting in the portfolio to optimize returns to suit the objectives of aninvestor. This however requires financial expertise in selecting the right mix of securitiesin changing market conditions to get the best out of the stock market. In India, as wellas in a number of western countries, portfolio management service has assumed therole of a specialized service now a days and a number of professional merchantbankers compete aggressively to provide the best to high net worth clients, who havelittle time to manage their investments. The idea is catching on with the boom in thecapital market and an increasing number of people are inclined to make profits out oftheir hard-earned savings. Portfolio management service is one of the merchant banking activities recognizedby Securities and Exchange Board of India (SEBI). The service can be rendered eitherby merchant bankers or portfolio managers or discretionary portfolio manager as definein clause (e) and (f) of Rule 2 of Securities and Exchange Board of India(PortfolioManagers)Rules, 1993 and their functioning are guided by the SEBI. According to the definitions as contained in the above clauses, a portfolio managermeans any person who is pursuant to contract or arrangement with a client, advises ordirects or undertakes on behalf of the client (whether as a discretionary portfoliomanager or otherwise) the management or administration of a portfolio of securities orthe funds of the client, as the case may be. A merchant banker acting as a PortfolioManager shall also be bound by the rules and regulations as applicable to the portfoliomanager. 14
  • 15. Projectsformba.blogspot.com Realizing the importance of portfolio management services, the SEBI has laid downcertain guidelines for the proper and professional conduct of portfolio managementservices. As per guidelines only recognized merchant bankers registered with SEBI areauthorized to offer these services. Portfolio management or investment helps investors in effective and efficientmanagement of their investment to achieve this goal. The rapid growth of capitalmarkets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man.But the need is to be able to effectively and efficiently manage investments in order tokeep maximum returns with minimum risk.  Portfolio is a collection of asset.  The asset may be physical or financial like Shares Bonds, Debentures, and Preference Shares etc.  The individual investor or a fund manager would not like to put all his money in the shares of one company, for that would amount to great risk.  Main objective is to maximize portfolio return and at the same time minimizing the portfolio risk by diversification.  Portfolio management is the management of various financial assets, which comprise the portfolio.  According to Securities and Exchange Board of India (Portfolio manager) Rules, 1993; “ portfolio” means the total holding of securities belonging to any person;  Designing portfolios to suit investor requirement often involves making several projections regarding the future, based on the current information.  When the actual situation is at variance from the projections portfolio composition needs to be changed.  One of the key inputs in portfolio building is the risk bearing ability of the investor. 15
  • 16. Projectsformba.blogspot.com  Portfolio management can be having institutional, for example, Unit Trust, Mutual Funds, Pension Provident and Insurance Funds, Investment Companies and non-Investment Companies.Over time, other industry sectors have adapted and applied these ideas toother types of "investments," including the following:Application portfolio management: This refers to the practice of managing an entiregroup or major subset of software applications within a portfolio. Organizations regardthese applications as investments because they require development (or acquisition)costs and incur continuing maintenance costs. Also, organizations must constantlymake financial decisions about new and existing software applications, includingwhether to invest in modifying them, whether to buy additional applications, and when to"sell" -- that is, retire -- an obsolete software application.Product portfolio management: Businesses group major products that they developand sell into (logical) portfolios, organized by major line-of-business or businesssegment. Such portfolios require ongoing management decisions about what newproducts to develop (to diversify investments and investment risk) and what existingproducts to transform or retire (i.e., spin off or divest). Project or initiative portfoliomanagement, an initiative, in the simplest sense, is a body of work with: • A specific (and limited) collection of needed results or work products. • A group of people who are responsible for executing the initiative and use resources, such as funding. • A defined beginning and end.Managers can group a number of initiatives into a portfolio that supports a businesssegment, product, or product line. These efforts are goal-driven; that is, they supportmajor goals and/or components of the enterprises business strategy. Managers mustcontinually choose among competing initiatives (i.e., manage the organizationsinvestments), selecting those that best support and enable diverse business goals (i.e., 16
  • 17. Projectsformba.blogspot.comthey diversify investment risk). They must also manage their investments by providingcontinuing oversight and decision-making about which initiatives to undertake, which tocontinue, and which to reject or discontinue.Indian Bank enters into a Strategic Alliance with PnbPrincipalChennai, January 25, 2006: Indian Bank is enlarging its activities to deliver value-added services to its customers. The Bank is presently selling the Insurance products,both Life and Non-life as a Corporate Agent. The Bank is concentrating on optimizingthe 3 Ps, People, Process and Products to give maximum advantage to its customersand to face the market competition by exploiting the emerging opportunities.Indian Bank today announced a strategic alliance with Pnb Principal Insurance AdvisoryCo., Pvt. Ltd. in the insurance advisory business and Pnb Principal Financial PlannersPvt. Ltd. in the financial planning business. As the alliance will enable access to thefinancial products of 30 Insurance companies both life and non-life and an equalnumber of Investment solutions to the Bank’s Customers under one roof, the Bank’semphasis would be to serve as an “agent to its customers”.As per the scope of the alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd.,Indian Bank has taken an equity stake in the Company. This partnership will also deliverrisk management solutions to Indian Bank customers through the Insurance advisoryroute. The solutions offered will include risk assessment, insurance portfolio analysis &placement, insurance portfolio administration, and claims management.As per Indian Bank’s strategic alliance with Pnb Principal Financial Planners Pvt. Ltd.,the Bank will distribute the investment solutions offered by Pnb Principal FinancialPlanners through its extensive branch network. Pnb Principal Financial Planners willprovide support in the area of financial planning, investment advisory, research,systems and business development to Indian Bank. The strategic alliance will enablecustomers of Indian Bank to access a wide range of superior investment solutions.Announcing the partnership with Indian Bank, Sanjay Sachdev, Country Manager-India,and Principal International said, “Banks have currently emerged as the largestdistribution channel for financial investment options. We are pleased to associateourselves with Indian Bank. This partnership with Indian Bank will make a range ofinvestment solutions more accessible to retail investors of Indian Bank.”Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said,” The alliancewith Pnb Principal in the areas of Risk Management, Insurance and Investment will helpin providing a One-stop solution to the 15 million strong customers of Indian Bank 17
  • 18. Projectsformba.blogspot.comthroughout the country. The Tie-up will help realize our cherished goal of making ourBank, “the best people to bank with”. CHPTER4 METHODOLOGYPortfolio Management is used to select a portfolio of new product development projectsto achieve the following goals: • Maximize the profitability or value of the portfolio • Provide balance • Support the strategy of the enterprisePortfolio Management is the responsibility of the senior management team of anorganization or business unit. This team, which might be called the Product Committee,meets regularly to manage the product pipeline and make decisions about the productportfolio. Often, this is the same group that conducts the stage-gate reviews in theorganization.A logical starting point is to create a product strategy - markets, customers, products,strategy approach, competitive emphasis, etc. The second step is to understand thebudget or resources available to balance the portfolio against. Third, each project mustbe assessed for profitability (rewards), investment requirements (resources), risks, andother appropriate factors.The weighting of the goals in making decisions about products varies from company.But organizations must balance these goals: risk vs. profitability, new products vs.improvements, strategy fit vs. reward, market vs. product line, long-term vs. short-term.Several types of techniques have been used to support the portfolio managementprocess: 18
  • 19. Projectsformba.blogspot.com • Heuristic models • Scoring techniques • Visual or mapping techniquesThe earliest Portfolio Management techniques optimized projects profitability orfinancial returns using heuristic or mathematical models. However, this approach paidlittle attention to balance or aligning the portfolio to the organizations strategy. Scoringtechniques weight and score criteria to take into account investment requirements,profitability, risk and strategic alignment. The shortcoming with this approach can be anover emphasis on financial measures and an inability to optimize the mix of projects.Mapping techniques use graphical presentation to visualize a portfolios balance. Theseare typically presented in the form of a two-dimensional graph that shows the trade-offsor balance between two factors such as risks vs. profitability, marketplace fit vs. productline coverage, financial return vs. probability of success, etcThe recommended approach is to start with the overall business plan that should definethe planned level of R&D investment, resources (e.g., headcount, etc.), and relatedsales expected from new products. With multiple business units, product lines or typesof development, we recommend a strategic allocation process based on the businessplan. This strategic allocation should apportion the planned R&D investment intobusiness units, product lines, markets, geographic areas, etc. It may also breakdownthe R&D investment into types of development, e.g., technology development, platformdevelopment, new products, and upgrades/enhancements/line extensions, etc.Once this is done, then a portfolio listing can be developed including the relevantportfolio data. We favor use of the development productivity index (DPI) or scores fromthe scoring method. The development productivity index is calculated as follows: (NetPresent Value x Probability of Success) / Development Cost Remaining. It factors theNPV by the probability of both technical and commercial success. By dividing this resultby the development cost remaining, it places more weight on projects nearer completionand with lower uncommitted costs. The scoring method uses a set of criteria (potentiallydifferent for each stage of the project) as a basis for scoring or evaluating each project. 19
  • 20. Projectsformba.blogspot.comAn example of this scoring method is shown with the worksheet below. Weightingfactors can be set for each criterion. The evaluators on a Product Committee scoreprojects (1 to 10, where 10 are best). The worksheet computes the average scores andapplies the weighting factors to compute the overall score. The maximum weightedscore for a project is 100.This portfolio list can then be ranked by either thedevelopment priority index or the score. An example of the portfolio list is shown belowand the second illustration shows the category summary for the scoring method.Once the organization has its prioritized list of projects, it then needs to determinewhere the cutoff is based on the business plan and the planned level of investment ofthe resources available. This subset of the high priority projects then needs to be further 20
  • 21. Projectsformba.blogspot.comanalyzed and checked. The first step is to check that the prioritized list reflects theplanned breakdown of projects based on the strategic allocation of the business plan.Pie charts such as the one below can be used for this purpose.Other factors can also be checked using bubble charts. For example, the risk-rewardbalance is commonly checked using the bubble chart shown earlier. A final check is toanalyze product and technology roadmaps for project relationships. For example, if alower priority platform project was omitted from the protfolio priority list, the subsequenthigher priority projects that depend on that platform or platform technology would beimpossible to execute unless that platform project were included in the portfolio prioritylist.Finally, this balanced portfolio that has been developed is checked against the businessplan as shown below to see if the plan goals have been achieved - projects within theplanned R&D investment and resource levels and sales that have met the goals. 21
  • 22. Projectsformba.blogspot.comWith the significant investments required to develop new products and the risksinvolved, Portfolio Management is becoming an increasingly important tool to makestrategic decisions about product development and the investment of companyresources. In many companies, current year revenues are increasingly based on newproducts developed in the last one to three years.INVESTMENT PORTFOLIO MANAGEMENT AND PORTFOLIO THEORYPortfolio theory is an investment approach developed by University of Chicagoeconomist Harry M. Markowitz (1927 - ), who won a Nobel Prize in economics in 1990.Portfolio theory allows investors to estimate both the expected risks and returns, asmeasured statistically, for their investment portfolios.Markowitz described how to combine assets into efficiently diversified portfolios. It washis position that a portfolios risk could be reduced and the expected rate of return couldbe improved if investments having dissimilar price movements were combined. In otherwords, Markowitz explained how to best assemble a diversified portfolio and proved thatsuch a portfolio would likely do well.There are two types of Portfolio Strategies:A. Passive Portfolio StrategyA strategy that involves minimal expectation input, and instead relies on diversificationto match the performance of some market index.B. Active Portfolio StrategyA strategy that uses available information and forecasting techniques to seek a betterperformance than a portfolio that is simply diversified broadly 22
  • 23. Projectsformba.blogspot.com CHAPTER5 BASIC CONCEPTS AND COMPONENTS FOR PORTFOLIO MANAGEMENTNow that we understand some of the basic dynamics and inherent challengesorganizations face in executing a business strategy via supporting initiatives, lets lookat some basic concepts and components of portfolio management practices.1. The PortfolioFirst, we can now introduce a definition of portfolio that relates more directly to thecontext of our preceding discussion. In the IBM view, a portfolio is: One of a number ofmechanisms, constructed to actualize significant elements in the Enterprise BusinessStrategy.It contains a selected, approved, and continuously evolving, collection of Initiativeswhich are aligned with the organizing element of the Portfolio, and, which contribute tothe achievement of goals or goal components identified in the Enterprise BusinessStrategy. The basis for constructing a portfolio should reflect the enterprises particularneeds. For example, you might choose to build a portfolio around initiatives for aspecific product, business segment, or separate business unit within a multinationalorganization.2. The Portfolio StructureAs we noted earlier, a portfolio structure identifies and contains a number of portfolios.This structure, like the portfolios within it, should align with significant planning and 23
  • 24. Projectsformba.blogspot.comresults boundaries, and with business components. If you have a product-orientedportfolio structure, for example, then you would have a separate portfolio for each majorproduct or product group. Each portfolio would contain all the initiatives that help thatparticular product or product group contribute to the success of the enterprise business3. The Portfolio ManagerThis is a new role for organizations that embrace a portfolio management approach. Aportfolio manager is responsible for continuing oversight of the contents within aportfolio. If you have several portfolios within your portfolio structure, then you will likelyneed a portfolio manager for each one. The exact range of responsibilities (andauthority) will vary from one organization to another, but the basics are as follows: • One portfolio manager oversees one portfolio. • The portfolio manager provides day-to-day oversight. • The portfolio manager periodically reviews the performance of, and conformance to expectations for, initiatives within the portfolio. • The portfolio manager ensures that data is collected and analyzed about each of the initiatives in the portfolio. • The portfolio manager enables periodic decision making about the future direction of individual initiatives.4. Portfolio Reviews and Decision MakingAs initiatives are executed, the organization should conduct periodic reviews of actual(versus planned) performance and conformance to original expectations. Typically,organization managers specify the frequency and contents for these periodic reviews,and individual portfolio managers oversee their planning and execution. The reviewsshould be multi-dimensional, including both tactical elements (e.g., adherence to plan,budget, and resource allocation) and strategic elements (e.g., support for businessstrategy goals and delivery of expected organizational benefits).A significant aspect of oversight is setting multiple decision points for each initiative, sothat managers can periodically evaluate data and decide whether to continue the work. 24
  • 25. Projectsformba.blogspot.comThese "continue/change/discontinue" decisions should be driven by an understanding(developed via the periodic reviews) of a given initiatives continuing value, expectedbenefits, and strategic contribution, Making these decisions at multiple points in theinitiatives lifecycle helps to ensure that managers will continually examine and assesschanging internal and external circumstances, needs, and performance.5. GovernanceImplementing portfolio management practices in an organization is a transformationeffort that typically involves developing new capabilities to address new work efforts,defining (and filling) new roles to identify portfolios (collections of work to be done), anddelineating boundaries among work efforts and collections. Implementing portfoliomanagement also requires creating a structure to provide planning, continuing direction,and oversight and control for all portfolios and the initiatives they encompass. That iswhere the notion of governance comes into play. The IBM view of governance is:An abstract, collective term that defines and contains a framework for organization,exercise of control and oversight, and decision-making authority, and within whichactions and activities are legitimately and properly executed; together with the definitionof the functions, the roles, and the responsibilities of those who exercise this oversightand decision-making.Portfolio management governance involves multiple dimensions, including: • Defining and maintaining an enterprise business strategy. • Defining and maintaining a portfolio structure containing all of the organizations initiatives (programs, projects, etc.). • Reviewing and approving business cases that propose the creation of new initiatives. • Providing oversight, control, and decision-making for all ongoing initiatives. • Ownership of portfolios and their contents. 25
  • 26. Projectsformba.blogspot.comEach of these dimensions requires an owner -- either an individual or a collective -- todevelop and approve plans, continuously adjust direction, and exercise control throughperiodic assessment and review of conformance to expectations.A good governance structure decomposes both the types of work and the authority toplan and oversee work. It defines individual and collective roles, and links them to anauthority scheme. Policies that are collectively developed and agreed upon provide aframework for the exercise of governance. The complexities of governance structuresextend well beyond the scope of this article. Many organizations turn to experts for helpin this area because it is so critical to the success of any business transformation effortthat encompasses portfolio management. For now, suffice it to say that it is worthinvesting time and effort to create a sound and flexible governance structure before youattempt to implement portfolio management practices.6. Portfolio management essentialsEvery practical discipline is based on a collection of fundamental concepts that peoplehave identified and proven (and sometimes refined or discarded) through continuousapplication. These concepts are useful until they become obsolete, supplanted bynewer and more effective ideas.For example, in Roman times, engineers discovered that if the upstream supports of abridge were shaped to offer little resistance to the current of a stream or river, theywould last longer. They applied this principle all across the Roman Empire. Then, in themiddle Ages, engineers discovered that such supports would last even longer if theirdownstream side was also shaped to offer little resistance to the current. So thatbecame the new standard for bridge construction.Portfolio management, like bridge-building, is a discipline, and a number of authors andpractitioners have documented fundamental ideas about its exercise. Recently, basedon our experiences with clients who have implemented portfolio management practicesand on our research into the discipline, we have started to shape an IBM view offundamental ideas around portfolio management. We are beginning to express this view 26
  • 27. Projectsformba.blogspot.comas a collection of "essentials" that are, in turn, grouped around a small collection ofportfolio management themes. OBJECTIVES OF PORTFOLIO MANAGEMENT The basic objective of Portfolio Management is to maximize yield and minimize risk. The other objectives are as follows: a) Stability of Income: An investor considers stability of income from his investment. He also considers the stability of purchasing power of income. b) Capital Growth: Capital appreciation has become an important investment principle. Investors seek growth stocks which provide a very large capital appreciation by way of rights, bonus and appreciation in the market price of a share. c) Liquidity: An investment is a liquid asset. It can be converted into cash with the help of a stock exchange. Investment should be liquid as well as marketable. The portfolio should contain a planned proportion of high-grade and readily salable investment. d) Safety: safety means protection for investment against loss under reasonably variations. In order to provide safety, a careful review of economic and industry trends is necessary. In other words, errors in portfolio are unavoidable and it requires extensive diversification. 27
  • 28. Projectsformba.blogspot.com e) Tax Incentives: Investors try to minimize their tax liabilities from the investments. The portfolio manager has to keep a list of such investment avenues along with the return risk, profile, tax implications, yields and other returns There are three goals of portfolio management: 1. Maximize the value of the portfolio 2. Seek balance in the portfolio 3. Keep portfolio projects strategically alignedIt provides a set of portfolio management tools to help achieve these goals. Withmultiple business units, product lines or types of development, we recommend astrategic allocation process based on the business plan. The Master ProjectSchedule provides a summary of all-active as well as proposed projects andclassifies them by status (active, proposed, on-hold) and by businessunit/product line to align projects with the strategic allocation. The Master ProjectSchedule also provides additional portfolio information to prioritize projects usingeither a scorecard method or the development productivity index (DPI *). Inaddition to this prioritization, PD-Trek provides a Risk-Reward Bubble Chart anda Project Type Pie Chart to assure balance. A Product or Technology Roadmap 28
  • 29. Projectsformba.blogspot.comtemplate is provided to help visualize platform and technology relationships toassure critical project relationships are not overlooked with this prioritization. Thiswill allow management to develop a balanced approach to selecting andcontinuing with the appropriate mix of projects to satisfy the three goals. 29
  • 30. Projectsformba.blogspot.com FUNCTIONS OF PORTFOLIO MANAGEMENTThe basic purpose of portfolio management is to maximize yield and minimize risk.Every investor is risk averse. In order to diversify the risk by investing into varioussecurities following functions are required to be performed.The functions undertaken by the portfolio management are as follows: 1. To frame the investment strategy and select an investment mix to achieve the desired investment objective; 2. To provide a balanced portfolio which not only can hedge against the inflation but can also optimize returns with the associated degree of risk; 3. To make timely buying and selling of securities; 4. To maximize the after-tax return by investing in various taxes saving investment instruments. ELEMENTS OF PORTFOLIO MANAGEMENT:Portfolio management is on-going process involving the following basictasks:  Identification of the investor’s objectives, constraints and preferences.   Strategies are to be developed and implemented in tune with investment policy formulated.  Review and monitoring of the performance of the portfolio.  Finally the evaluation of the portfolio. 30
  • 31. Projectsformba.blogspot.com PROSPECTS OF POTFOLIO MANAGEMENT ⇒ At present, there are a very few agencies which render this type of services in an organized and professional way. ⇒ However, their share in the total volume is very small. ⇒ There is no constraint on the demand for this type of financial service as every entity would be saving and investing and interested in optimizing the rate of return. ⇒ The size of capital market is increasing. ⇒ There is an increase in the number of stock exchanges. ⇒ New instruments are being introduced in the capital market. ⇒ The equity cult is spreading in the interiors and rural areas. ⇒ The percentage of investment of the household savings is bound to go up. ⇒ It is conservatively estimated that during the eighth plan resources to the tune of over Rs.50000crore will be mobilized through the stock market. ⇒ India today has 20 million investors, as compared to 2 million in 1980. . 31
  • 32. Projectsformba.blogspot.com STEPS IN PORTFOLIO MANAGEMENT Performance Portfolio Evaluation Revision Portfolio Execution STEPS Selection of Asset Mix Identification Portfolio Of Strategy Objectives 1) IDENTIFICATION OF THE OBJECTIVES  The starting point in this process is to determine the characteristics of the various investments and then matching them with the individuals need and preferences.  All the personal investing is designed in order to achieve certain objectives. 32
  • 33. Projectsformba.blogspot.com  These objectives may be tangible such as buying a car, house etc. and intangible objectives such as social status, security etc.  Similarly, these objectives may be classified as financial or personal objectives.  Financial objectives are safety, profitability and liquidity.  Personal or individual objectives may be related to personal characteristics of individuals such as family commitments, status, depends, educational requirements, income, consumption and provision for retirement etc. 2) FORMULATION OF PORTFOLIO STRATEGY  The aspect of Portfolio Management is the most important element of proper portfolio investment and speculation.  While planning, a careful review should be conducted about the financial situation and current capital market conditions.  This will suggest a set of investment and speculation policies to be followed.  The statement of investment policies includes the portfolio objectives, strategies and constraints.  Portfolio strategy means plan or policy to be followed while investing in different types of assets.  There are different investment strategies.  They require changes as time passes, investor’s wealth changes, security price change, investor’s knowledge expands.  Therefore, the optional strategic asset allocation also changes.  The strategic asset allocation policy would call for broad diversification through an indexed holding of virtually all securities in the asset class. 33
  • 34. Projectsformba.blogspot.com 3) SELECTION OF ASSET MIX  The most important decision in portfolio management is selection of asset mix.  It means spreading out portfolio investment into different asset classes like bonds, stocks, mutual funds etc.  In other words selection of asset mix means investing in different kinds of assets and reduces risk and volatility and maximizes returns in investment portfolio.  Selection of asset mix refers to the percentage to the invested in various security classes.  The security classes are simply the type of securities as under: » money market instrument » fixed income security » equity shares » real estate investment » international securities  Once the objective of the portfolio is determined the securities to be included in the portfolio must be selected.  Normally the portfolio is selected from a list of high-quality bonds that the portfolio manager has at hand.  The portfolio manager has to decide the goals before selecting the common stock.  The goal may be to achieve pure growth, growth with some income or income only. Once the goal has been selected, the portfolio manager can select the common stocks. 34
  • 35. Projectsformba.blogspot.com 3) PORTFOLIO EXECUTION:  The process of portfolio management involves a logical set of steps common to any decision, plan, implementation and monitor.  Applying this process to actual portfolios can be complex.  Therefore, in the execution stage, three decisions need to be made, if the percentage holdings of various asset classes are currently different from desired holdings.  The portfolio than, should be rebalanced. If the statement of investment policy requires pure investment strategy, this is only thing, which is done in the execution stage.  However, many portfolio managers engage in the speculative transactions in the belief that such transactions will generate excess risk-adjusted returns.  Such speculative transactions are usually classified as timing or selection decisions.  Timing decisions over or under weight various asset classes, industries or economic sectors from the strategic asset allocation.  Such timing decisions are known as tactical asset allocation and selection decision deals with securities within a given asset class, industry group or economic sector.  The investor has to begin with periodically adjusting the asset mix to the desired mix, which is known as strategic asset allocation.  Then the investor or portfolio manager can make any tactical asset allocation or security selection decision.5) PORTFOLIO REVISION 35
  • 36. Projectsformba.blogspot.com  Portfolio management would be an incomplete exercise without periodic review.  The portfolio, which is once selected, has to be continuously reviewed over a period of time and if necessary revised depending on the objectives of investor.  Thus, portfolio revision means changing the asset allocation of a portfolio.  Investment portfolio management involves maintaining proper combination of securities, which comprise the investor’s portfolio in a manner that they give maximum return with minimum risk.  For this purpose, investor should have continuous review and scrutiny of his investment portfolio.  Whenever adverse conditions develop, he can dispose of the securities, which are not worth.  However, the frequency of review depends upon the size of the portfolio, the sum involved, the kind of securities held and the time available to the investor.  The review should include a careful examination of investment objectives, targets for portfolio performance, actual results obtained and analysis of reason for variations.  The review should be followed by suitable and timely action.  There are techniques of portfolio revision.  Investors buy stock according to their objectives and return-risk framework.  These fluctuations may be related to economic activity or due to other factors.  Ideally investors should buy when prices are low and sell when prices rise to levels higher than their normal fluctuations.  The investor should decide how often the portfolio should be revised.  If revision occurs to often, transaction and analysis costs may be high.6) PORTFOLIO PERFORMANCE EVALUATION: 36
  • 37. Projectsformba.blogspot.com  Portfolio management involves maintaining a proper combination of securities, which comprise the investor’s portfolio in a manner that they give maximum return with minimum risk.  The investor should have continues review and scrutiny of his investment portfolio.  These rates of return should be based on the market value of the assets of the fund.  Complete evaluation of the portfolio performance must include examining a measure of the degree of risk taken by the fund.  A portfolio manager, by evaluating his own performance can identify sources of strength or weakness.  It can be viewed as a feedback and control mechanism that can make the investment management process more effective.  Good performance in the past might have resulted from good luck, in which case such performance may not be expected to continue in the future.  On the other hand, poor performance in the past might have been result of bad luck.  Therefore, the first task in performance evaluation is to determine whether past performance was good or poor.  Then the second task is to determine whether such performance was due to skill or luck.  Good performance in the past may have resulted from the actions of a highly skilled portfolio manager.  The performance of portfolio should be measured periodically, preferably once in a month or a quarter.  The performance of an individual stock should be compared with the overall performance of the market. CHAPTER6 37
  • 38. Projectsformba.blogspot.com TYPES OF PORTFOLIO MANAGEMENT:The two types of portfolio management services are available o the investors: Discretionary portfolio Non-discretionary Management portfolio ManagementThe Discretionary portfolio management services (DPMS):  In this type of services, the client parts with his money in favor of manager, who in return, handles all the paper work, makes all the decisions and gives a good return on the investment and for this he charges a certain fees.  In this discretionary PMS, to maximize the yield, almost all portfolio managers parks the funds in the money market securities such as overnight market, 182 days treasury bills and 90 days commercial bills.  Normally, return on such investment varies from 14 to 18 per cent, depending on the call money rates prevailing at the time of investment. 2. The Non-discretionary portfolio management services:  The manager function as a counselor, but the investor is free to accept or reject the manager’s advice; the manager for a services charge also undertakes the paper work. The manager concentrates on stock market instruments with a portfolio tailor made to the risk taking ability of the investor.EQUITY PORTFOLIO MANAGEMENT. 38
  • 39. Projectsformba.blogspot.com  It is logical that the expected return of a portfolio should depend on the expected return of the security contained in it.  There are two approaches to the selection of equity portfolio.  One is technical analysis and the other is fundamental analysis.  Technical analysis assumes that the price of a stock depends on supply and demand in the stock market.  All financial and market information of given security is already reflected in the market price.  Charts are drawn to identify price movements of a given security over a period of time.  These charts enable the investors to predict the future movement of the price of security.  Equity portfolio is a risky portfolio, but at the same time the return is also higher.  Equity portfolio provides highest returns.  An efficient portfolio manager can obviously give more weight age to fundamental analysis than the technical analysis.  The fundamental analysis includes the study of ratio analysis, past and present track record of the company, quality of management, government policies etc.  There may be several combinations of investment portfolio. BONDS PORTFOLIO MANAGEMENT 39
  • 40. Projectsformba.blogspot.com  The individual investors can invest in bond portfolio.  The portfolio can be spared over variety of securities.  Investment in bond is less risky and safe as compared to equity investment.  However, the return on bond is very low.  There are no much fluctuations in bond prices.  Therefore, there is no capital appreciation in this case.  Some bonds are tax saving which help the investor to reduce his tax liability.  There is no much liquidity in bonds, investment in bond portfolio is less risky and safe but, return is reasonable, low liquidity and tax saving are some of the more important features of bond portfolio investment.  However, it is suitable for normal investors for getting average return over their investment.  Bond portfolio includes different types of bond, tax free bonds and taxable bonds.  Tax free bonds are issued by public sector undertaking or Government on which interest s compounded half yearly and payable accordingly.  They have a maturity of 7 to 10 years with the facility for buyback.  The tax free bonds means the interest income on these bonds is not  Therefore, the interest rates on these bonds are very low. ADVANTAGES OF PORTFOLIO MANAGEMENT 40
  • 41. Projectsformba.blogspot.com Individuals will benefits immensely by taking portfolio management services for the following reason: - a) Whatever may be the status of the capital market; over the long period capital markets have given an excellent return when compared to other forms of investment. The return from bank deposits, units etc., is much less than from stock market. b) The Indian stock markets are very complicated. Though there are thousands of companies that are listed only a few hundred, which have the necessary liquidity. It is impossible for any individual whishing to invest and sit down and analyses all these intricacies of the market unless he does nothing else. c) Even if an investor is able to visualize the market, it is difficult to investor to trade in all the major exchanges of India, look after his deliveries and payments. This is further complicated by the volatile nature of our markets, which demands constant reshuffling of port 41
  • 42. Projectsformba.blogspot.com IMPORTANCE OF PORTFOLIO MANAGEMENT ⇒ In the past one-decade, significant changes have taken place in the investment climate in India. ⇒ Portfolio management is becoming a rapidly growing area serving a broad array of investors- both individual and institutional-with investment portfolios ranging in asset size from thousands to cores of rupees. ⇒ It is becoming important because of: i. Emergence of institutional investing on behalf of individuals. A number of financial institutions, mutual funds, and other agencies are undertaking the task of investing money of small investors, on their behalf. ii. Growth in the number and the size of invisible funds–a large part of household savings is being directed towards financial assets. iii. Increased market volatility- risk and return parameters of financial assets are continuously changing because of frequent changes in governments industrial and fiscal policies, economic uncertainty and instability. iv. Greater use of computers for processing mass of data. v. Professionalization of the field and increase use of analytical methods (e.g. quantitative techniques) in the investment decision-making, and vi. Larger direct and indirect costs of errors or shortfalls in meeting portfolio objectives- increased competition and greater scrutiny by investors. 42
  • 43. Projectsformba.blogspot.com CHAPTER7PERSONS INVOLVED IN PORTFOLIO MANAGEMENT 1) INVESTOR: Are the people who are interested in investing their funds? 2) PORTFOLIO MANAGERS: Is a person who is in the wake of a contract agreement with a client, advices ordirects or undertakes on behalf of the clients, the management or distribution ormanagement of the funds of the client as the case may be. 3) DISCRETIONARY PORTFOLIO MANAGER: Means a manager who exercise under a contract relating to a portfoliomanagement exercise any degree of discretion as to the investment ormanagement of portfolio or securities or funds of clients as the case may be. Therelationship between an investor and portfolio manager is of a highly interactivenature. The portfolio manager carries out all the transactions pertaining to theinvestor under the power of attorney during the last two decades, and increasingcomplexity was witnessed in the capital market and its trading procedures inthis context a key (uninformed) investor formed ) investor found himself in atricky situation , to keep track of market movement ,update his knowledge, yetstay in the capital market and make money , therefore in looked forward toresuming help from portfolio manager to do the job for him . The portfoliomanagement seeks to strike a balance between risk’s and return. The generally rule in that greater risk more of the profits but S.E.B.I. in itsguidelines prohibits portfolio managers to promise any return to investor. 43
  • 44. Projectsformba.blogspot.comPortfolio management is not a substitute to the inherent risks associated withequity investment. QUALITIES OF PORTFOLIO MANAGER 1. Sound general knowledge:  Portfolio management is an existing and challenging job.  He has to work in an extremely uncertain and conflicting environment.  In the stock market every new piece of information affects the value of the securities of different industries in a different way.  He must be able to judge and predict the effects of the information he gets.  He must have sharp memory, alertness, fast intuition and self- confidence to arrive at quick decisions. 2. Analytical Ability:  He must have his own theory to arrive at the value of the security.  An analysis of the security’s values, company, etc. is continues job of the portfolio manager.  A good analyst makes a good financial consultant. 44
  • 45. Projectsformba.blogspot.com  The analyst can know the strengths, weakness, opportunities of the economy, industry and the company. 45
  • 46. Projectsformba.blogspot.com 3. Marketing skills:  He must be good salesman.  He has to convince the clients about the particular security.  He has to compete with the Stock brokers in the stock market.  In this Marketing skills help him a lot. 4. Experience:  In the cyclical behavior of the stock market history is often repeated, therefore the experience of the different phases helps to make rational decisions.  The experience of different types of securities, clients, markets trends etc. makes a perfect professional manager. 46
  • 47. Projectsformba.blogspot.com FACTORS AFFECTING THE INVESTORThere may be many reasons why the portfolio of an investor may have to be changed.The portfolio manager always remains alert and sensitive to the changes in therequirements of the investor. The following are the some factors affecting the investor,which make it necessary to change the portfolio composition. 1) Change in Wealth  According to the utility theory, the risk taking ability of the investor increases with increase in wealth.  It says that people can afford to take more risk as they grow rich and benefit from its reward.  But, in practice, while they can afford, they may not be willing.  As people get rich, they become more concerned about losing the newly got riches than getting richer.  So they may become conservative and vary risk- averse.  The fund manager should observe the changes in the attitude of the investor towards risk and try to understand them in proper perspective.  If the investor turns to be conservative after making huge gains, the portfolio manager should modify the portfolio accordingly. 47
  • 48. Projectsformba.blogspot.com 2) Change in the Time Horizon  As time passes, some events take place that may have an impact on the time horizon of the investor.  Births, deaths, marriages, and divorces – all have their own impact on the investment horizon.  There are, of course, many other important events in the person’s life that may force a change in the investment horizon.  The happening or the non-happening of the events will naturally have its effect.  For example, a person may have planned for an early retirement, considering his delicate health.  But, after turning 55 years of age, if his health improves, he may not take retirement. 3) Change in Liquidity Needs  Investors very often ask the portfolio manager to keep enough scope in the portfolio to get some cash as and they want.  This forces portfolio manager to increase the weight of liquid investments in the asset mix.  Due to this, the amounts available for investment in the fixed income or growth securities that actually help in achieving the goal of the investor get reduced. 48
  • 49. Projectsformba.blogspot.com  That is, the money taken out today from the portfolio means that the amount and the return that would have been earned on it are no longer available for achievement of the investor’s goals. 4) Changes in Taxes  It is said that there are only two things certain in this world- death and taxes.  The only uncertainties regarding them relate to the date, time, place and mode.  Portfolio manager have to constantly look out for changes in the tax structure and make suitable changes in the portfolio composition.  The rate of tax under long- term capital gains is usually lower than the rate applicable for income. If there is a change in the minimum holding period for long-term capital gains, it may lead to revision. The specifics of the planning depend on the nature of the investments 5) Others  There can be many of other reasons for which clients may ask for a change in the asset mix in the portfolio.  For example, there may be change in the return available on the investments that have to be compulsorily made with the government say, in the form of provident fund.  This may call for a change in the return required from the other investments. 49
  • 50. Projectsformba.blogspot.com CHAPTER 8 RISK – RETURN ANALYSISRISK ON PORTFOLIO : The expected returns from individual securities carry some degree of risk. Riskon the portfolio is different from the risk on individual securities. The risk isreflected in the variability of the returns from zero to infinity. Risk of the individualassets or a portfolio is measured by the variance of its return. The expected returndepends on the probability of the returns and their weighted contribution to therisk of the portfolio. These are two measures of risk in this context one is theabsolute deviation and other standard deviation. Most investors invest in a portfolio of assets, because as to spread risk by notputting all eggs in one basket. Hence, what really matters to them is not the riskand return of stocks in isolation, but the risk and return of the portfolio as a whole.Risk is mainly reduced by Diversification.Following are the some of the types of Risk: 1) Interest Rate Risk: This arises due to the variability in the interest rates from time to time. A change in the interest rate establishes an inverse relationship in the price of the security i.e. price of the security tends to move inversely with change in rate of interest, long term securities show greater variability in the price with respect to interest rate changes than short term securities.Interest rate risk vulnerability for different securities is as under: TYPES RISK EXTENT Cash Equivalent Less vulnerable to interest rate risk. Long Term Bonds More vulnerable to interest rate risk. 50
  • 51. Projectsformba.blogspot.com 2) Purchasing Power Risk: It is also known as inflation risk also emanates from the very fact that inflation affects the purchasing power adversely. Nominal return contains both the real return component and an inflation premium in a transaction involving risk of the above type to compensate for inflation over an investment holding period. Inflation rates vary over time and investors are caught unaware when rate of inflation changes unexpectedly causing erosion in the value of realized rate of return and expected return. Purchasing power risk is more in inflationary conditions especially in respect of bonds and fixed income securities. It is not desirable to invest in such securities during inflationary periods. Purchasing power risk is however, less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gains. 3) Business Risk: Business risk emanates from sale and purchase of securities affected by business cycles, technological changes etc. Business cycles affect all types of securities i.e. there is cheerful movement in boom due to bullish trend in stock prices whereas bearish trend in depression brings down fall in the prices of all types of securities during depression due to decline in their market price. 4) Financial Risk: It arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis-à-vis equity in the capital structure indicates that the company is highly geared. Although a leveraged 51
  • 52. Projectsformba.blogspot.com company’s earnings per share are more but dependence on borrowings exposes it to risk of winding up for its inability to honor its commitments towards lender or creditors. The risk is known as leveraged or financial risk of which investors should be aware and portfolio managers should be very careful. 5) Systematic Risk or Market Related Risk: Systematic risks affected from the entire market are (the problems, raw material availability, tax policy or government policy, inflation risk, interest risk and financial risk). It is managed by the use of Beta of different company shares. 6) Unsystematic Risks: The unsystematic risks are mismanagement, increasing inventory, wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is possible to eliminate or diversify away this component of risk to a considerable extent by investing in a large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of those factors different form one company to another.RISK RETURN ANALYSIS: All investment has some risk. Investment in shares of companies has its ownrisk or uncertainty; these risks arise out of variability of yields and uncertainty ofappreciation or depreciation of share prices, losses of liquidity etc The risk over time can be represented by the variance of the returns while thereturn over time is capital appreciation plus payout, divided by the purchaseprice of the share. 52
  • 53. Projectsformba.blogspot.com Normally, the higher the risk that the investor takes, the higher is the return.There is, however, a risk less return on capital of about 12% which is the bank,rate charged by the R.B.I or long term, yielded on government securities ataround 13% to 14%. This risk less return refers to lack of variability of return andno uncertainty in the repayment or capital. But other risks such as loss of liquiditydue to parting with money etc., may however remain, but are rewarded by thetotal return on the capital. Risk-return is subject to variation and the objectives of the portfolio managerare to reduce that variability and thus reduce the risk by choosing an appropriateportfolio. Traditional approach advocates that one security holds the better, it isaccording to the modern approach diversification should not be quantity thatshould be related to the quality of scripts which leads to quality of portfolio. Experience has shown that beyond the certain securities by adding moresecurities expensive.RETURNS ON PORTFOLIO:Each security in a portfolio contributes return in the proportion of its investmentsin security. Thus the portfolio expected return is the weighted average of theexpected return, from each of the securities, with weights representing theproportions share of the security in the total investment. Why does an investorhave so many securities in his portfolio? If the security ABC gives the maximumreturn why not he invests in that security all his funds and thus maximize return? 53
  • 54. Projectsformba.blogspot.comThe answer to this questions lie in the investor’s perception of risk attached toinvestments, his objectives of income, safety, appreciation, liquidity and hedgeagainst loss of value of money etc. this pattern of investment in different assetcategories, types of investment, etc., would all be described under the caption ofdiversification, which aims at the reduction or even elimination of non-systematicrisks and achieve the specific objectives of investors CHAPTER9 ASSEST ALLOCATION  INTRODUCTION The portfolio manager has to invest in these securities that form the optimalportfolio. Once a portfolio is selected the next step is the selection of the specificassets to be included in the portfolio. Assets in this respect means group ofsecurity or type of investment. While selecting the assets the portfolio managerhas to make asset allocation. It is the process of dividing the funds amongdifferent asset class portfolios.  ASSET ALLOCATION The different asset class definitions are widely debated, but four commondivisions are stocks, bonds, real-estate and commodities. The exercise ofallocating funds among these assets (and among individual securities withineach asset class) is what investment management firms are paid for. 54
  • 55. Projectsformba.blogspot.com Asset classes exhibit different market dynamics, and different interactioneffects; thus, the allocation of monies among asset classes will have a significanteffect on the performance of the fund. Some research suggests that allocationamong asset classes has more predictive power than the choice of individualholdings in determining portfolio return. Arguably, the skill of a successfulinvestment manager resides in constructing the asset allocation, and separatelythe individual holdings, so as to outperform certain benchmarks (e.g., the peergroup of competing funds, bond and stock indices). In order to achieve long term success, individual investors should concentrateon the allocation of their money among stocks, bonds and cash. It means howmuch to invest in stocks? How much to invest in bonds? And how much to keepin cash reserves? Thus, the asset allocation decision is the most importantdeterminant of investment performance. The basic long term objective of any investor should be to maximize his realoverall return on initial investment after investment. To achieve this objective, theinvestor should look where the best bargains lie. 55
  • 56. Projectsformba.blogspot.com Asset allocation means different things to different people. The portfoliomanager has to complete the following stages before making asset allocation.(a) SECURITY SELECTION: This means identifying groups of securities in each asset class and decides theoptimal portfolio. The following are the different asset classes:(1) Equity shares-new issues (5) PSU bonds(2) Equity shares-old issues (6) Government Securities(3) Preference Shares (7) Company Fixed Deposits(4) DebenturesPortfolio management is handling the fund on behalf of the company or institutionin order to determine the suitable combination of different assets so that the totalrisk can be reduced to the minimum while the return can be achieved to themaximum extent. This is a tricky job which needs efficiency of high caliber.Therefore, the portfolio manager has to keep in mind the following factors whilemaking asset allocation and design an efficient portfolio. a) Liquidity or marketability f) Capital appreciation or gain b) Safety of investment g) Funds requirements c) Tax Saving d) Maximization of return e) Minimization of return 56
  • 57. (b) BASIS OF SELECTION OF EQUITY PORTFOLIO: A portfolio is a collection of securities. It is essential that every securitybe viewed in a portfolio context. It is logical that the expected return of aportfolio should depend on the expected return of each of the securitycontained in it. Moreover, the amounts invested in each security shouldalso be important. There are two approaches to the selection of equity portfolio. One istechnical analysis and the other is fundamental analysis. Technicalanalysis assumes that the price of a stock depends on supply and demandin the capital market. All financial and market information of given securityis already reflected in the market price. Charts are drawn to identify pricemovements of a given security over a period of time. These charts enableus to predict the future movement of the security. The fundamental analysis includes the study of ratio analysis, past andpresent track record of the company, quality of management, governmentpolicies etc… an efficient portfolio manager can obviously give moreweight to fundamental analysis than technical analysis.  DIVERSIFICATIONInvesting funds in a single security is advisable only if the security’sperformance is rewarding. To reduce risk of a portfolio investors resort todiversification. Diversification means shifting form one security to anothersecurity. The maximum benefits of risk reduction can be achieved by justhaving of 10 to 15 carefully selected securities.
  • 58. Portfolio risk can be divided into two groups- diversible risk and non-diversible risk. Diversible risk arises from company’s specific factors.Hence, such risk can be diversified by including stocks of other companiesin the portfolio.Non-diversible risk arises from the influence of economy wide factorswhich affect returns of all companies; investors cannot avoid the riskarising from them. Often investors tend to buy or sell securities on casualtips, prevailing mood in the market, sudden impulse, or to follow others. Aninvestor should investigate the following factors about the stock to beincluded in his portfolio:(a) Earnings per share (b) Growth potential (c) Dividend and bonus records (d) Business, financial and market risks (e) Behavior of price-earnings ratio (f) High and low prices of the stock (g) Trend of share prices over the few months or weeks. Y C --------------------------------------- B HIGH RISK (SHARES) A (DEBENT) MEDIUM RISK O X Risk free (Bank Deposits)We can observe from the above diagram that the strategy of an investorshould be at A, B or C respectively, depending upon his preferences andincome requirements. If he takes some risk at B or C, the risk can bereduced if it is concerned with a specific company risk, but the market riskis outside his control. The risk can be reduced by a proper diversification of
  • 59. scripts in the portfolio. There may be a combination of A, B and C positionsin his portfolio so that he can have a diversified risk-return pattern. Thisdiversification can help to minimize risk and maximum the returns.
  • 60. CHAPTER10 PRIMARY SURVEYPurpose of the study:  To ascertain investor awareness about services provided by portfolio management institutions and the interest shown by investor to invest in portfolio management services.  To know whether they are interested to hire such services in future and if not, why?
  • 61. QUESTIONNAIRESurvey on investor’s views about Portfolio Management Name: Age: Occupation: » Are you aware of services offered by portfolio manager? Yes No » If yes, what types of services you are aware of? Management of Mutual fund investment Management of Equities Management of Money market investment Advisory or consultancy services Others » Would you want to hire a portfolio manager at present or in future? Yes No
  • 62. » If yes, for what type of services? Investments in Mutual Funds Investments in Equities Investments in Money market Investments in other[s] (If other please specify) Advisory or consultancy service» If No why?» What is the Percentage of commission that you are ready to pay to portfolio manager for services provided by him in? Equities Money market investment Mutual fund investment Advisory or consultancy services Other investment (If other please specify)
  • 63. » Do you think there will be growth in portfolio management in future? If Yes why? If No, why?» What type of services would you want from portfolio manager in future?» Suggestions if any: ____________ Signature
  • 64. CHAPTER11 FINDINGSThis case study has been conducted on various age groups of individualinvestors on portfolio management. These consist of age group ranging from18-30, 30-45, 45-60 and 60 & above. Following interpretation has been made onthe basis of the information collected from individual investor’s of various agegroups through questionnaire:  Age group of 18-30 is more aware about services offered by portfolio manager whereas age group of 60 & above is less aware of such services.  Management of mutual fund investment, management of equities, management of money market investment, advisory and consultancy services are the services provided by the portfolio management institution. Amongst these, advisory and consultancy services are the services that the individual investors are more aware of.  Due to lack of experience and market knowledge, the age group of 45-60 is more interested to hire portfolio manager at present in order to manage their portfolio. The age group ranging from 18-30 is more interested in making investment in equities whereas group ranging from 60 & above are more interested in making investment in mutual fund. On the other hand, age group of 30-45 and 45-60 are least interested in any of the services
  • 65. provided by portfolio management institution. Reasons specified for the presence of disinterest in any of these services were that the investors are having good hold on their investment. Also they possess good knowledge with regards to market fluctuations, investment portfolio’s and other factors relating to portfolio management.  All the age groups of individual investors in portfolio management believe that there is a better scope for portfolio management in future. CHAPTER12 CONCLUSIONFrom the above discussion it is clear that portfolio functioning is based onmarket risk, so one can get the help from the professional portfoliomanager or the Merchant banker if required before investment becauseapplicability of practical knowledge through technical analysis can help aninvestor to reduce risk. In other words Security prices are determined bymoney manager and home managers, students and strikers, doctors anddog catchers, lawyers and landscapers, the wealthy and the wanting. Thisbreadth of market participants guarantees an element of unpredictabilityand excitement. If we were all totally logical and could separate ouremotions from our investment decisions then, the determination of pricebased on future earnings would work magnificently. And since we would allhave the same completely logical expectations, price would only changewhen quarterly reports or relevant news was released. “I believe the future is only the past again, entered through anothergate” –Sir Arthur wing Pinero. 1893.
  • 66. If price are based on investors’ expectations, then knowing what asecurity should sell for become less important than knowing what otherinvestors expect it to sell for. “There are two times of a man’s life when heshould not speculate; when he can’t afford it and when he can” – MarkTwin, 1897. A Casino make money on a roulette wheel, not by knowing whatnumber will come up next, but by slightly improving their odds with theaddition of a “0” and “00”. Yet many investors buy securities withoutattempting to control the odds. If we believe that this dealings is not a‘Gambling” we have to start up it with intelligent way. CHAPTER13 BIBLIOGRAPHYREFERENCE BOOKS:Security Analysis and Portfolio Management - Dr. P.K.BANDGARInvestment Analysis and Portfolio ManagementEconomic TimesNDTV ProfitForbes India MagazineDARE MagazineMoney control.comSecurities Analysis and Portfolio Management, sixth edition, Donald EFisher, Ronald J. Jordan, Portfolio management 571-572, WEBLIOGRAPHYSOURCES: www.google.com www.yahoo.com
  • 67. www.wikipedia.comwww.Kotaksecurities.com