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Final project

  1. 1. A Project On PORTFOLIO MANAGEMENT Submitted By SHITAL .S. PATIL T.Y.B.F.M Semester V 2010-2011 Submitted To University of MumbaiSmt. Chandibai Himathmal Mansukhani College Ulhasnagar 421003
  2. 2. Smt. Chandibai Himathmal Mansukhani College Ulhasnagar 421003 CERTIFICATE Mr. /Mrs. SHITAL S. PATIL of B.F.MSemester V has undertaken & completed the project worktitled PORTFOLIO MANAGEMENT during the academicyear 2010-11 under the guidance of MS. POOJA NAGPALsubmitted on to this college in fulfillment of thecurriculum of Bachelor of Financial Markets. University ofMumbai.
  3. 3. DECLARATION Smt. Chandibai Himathmal Mansukhani College Ulhasnagar 421003I SHITAL .S. PATIL of Smt. Chandibai Himathmal Mansukhani College,T.Y.B.F.M Semester V hereby declare that I have completed the project onPORTFOLIO MANAGEMENT IN academic year 2010-11The information submitted is true and original to the best of my knowledge
  4. 4. ACKNOWLEDGEMENTI hereby acknowledge all those who directly or indirectly helped me to draft the project repot. Itwould not have been possible for me to complete the task without their help and guidance.First of all I would like to thank the principal Bhavna Motwani and the coordinator Dr. ManjuPathak who gave me the opportunity to do this project work. They also conveyed the importantinstruction from the university from time to time. Secondly, I am very much obliged of Prof.Pooja Nagpal for giving guidance for completing the projectLast but not the least; I am thankful to the University of Mumbai for offering the project thesyllabus. I must mention my hearty gratitude towards my family, others faculties and friends whosupported me to go ahead with the project.
  5. 5. INTRODUCTION TO THE STUDYAim of doing the project:The aim o doing the project is to have practical knowledge of the subject and know the actualor application of theories in the book, which were learned in the class rooms.This is to be done by meeting the experts in the field, talking to them, interviewing them.Objective of doing the project: The objective of doing this project is to relate the bookish theories with the actual Portfolio management. To know the importance of portfolio management. To understand how process of portfolio management are implemented. To understand the working of portfolio management. To take major decision in portfolio management. To understand the investors need for portfolio management.Limitation of doing the project: Limitation of time The portfolio management is a huge concept to work on.Methodology of data collection: Reference books Internet
  7. 7. 21 BIBLOGRAPHY
  9. 9. INTRODUCTIONAs per definition of SEBI Portfolio means “a collection of securities owned by an investor”. Itrepresents the total holdings of securities belonging to any person". It comprises of differenttypes of assets and securitiesIn finance, a portfolio is an appropriate mix or collection of investments held by an institution oran individual.Holding a portfolio is a part of an investment and risk-limiting strategy called diversification. Byowning several assets, certain types of risk (in particular specific risk) can be reduced. The assetsin the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate,futures contracts, production facilities, or any other item that is expected to retain its value.In building up an investment portfolio a financial institution will typically conduct its owninvestment analysis, whilst a private individual may make use of the services of a financialadvisor or a financial institution which offers portfolio management services.Portfolio ManagementPortfolio management refers to the management or administration of a portfolio of securities toprotect and enhance the value of the underlying investment. It is the management of varioussecurities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investmentgoals for the benefit of the investors. It helps to reduce risk without sacrificing returns. Itinvolves a proper investment decision with regards to what to buy and sell. It involves propermoney management. It is also known as Investment ManagementPortfolio management involves deciding what assets to include in the portfolio, given the goalsof the portfolio owner and changing economic conditions. Selection involves deciding whatassets to purchase, how many to purchase, when to purchase them, and what assets to divest.These decisions always involve some sort of performance measurement, most typically expectedreturn on the portfolio, and the risk associated with this return (i.e. the standard deviation of thereturn). Typically the expected return from portfolios of different asset bundles is compared.The unique goals and circumstances of the investor must also be considered. Some investors aremore risk averse than others.Mutual funds have developed particular techniques to optimize their portfolio holdings.
  10. 10. The art and science of making decisions about investment mix and policy, matching investmentsto objectives, asset allocation for individuals and institutions, and balancing risk againstperformance .Portfolio management is all about strengths, weaknesses, opportunities and threats in the choiceof debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffsencountered in the attempt to maximize return at a given appetite for risk.Portfolio management involves maintaining a proper combination of securities which comprisethe investor‟s portfolio in a manner that they give maximum return with minimum risk. Thisrequires framing of proper investment policy. Investment policy means formation of guidelinesfor allocation of available funds among the various types of securities including variation in suchproportion under changing environment. This requires proper mix between different securities ina manner that it can maximize the return with minimum risk to the investor. Broadly speakinginvestors are those individuals who save money and invest in the market in order to get returnover it. They are not much educated, expert and they do not have time to carry out detailed study.They have their business life, family life as well as social life and the time left out is very muchlimited to study for investment purpose. On the other hand institutional investors are companies,mutual funds, banks and insurance company who have surplus fund which needs to be investedprofitably. These investors have time and resources to carry out detailed research for the purposeof investing.
  11. 11. DEFINATION
  12. 12. DEFINATIONPORTFOLIO:As per definition of SEBI Portfolio means “a collection of securities owned byan investor”. It represents the total holdings of securities belonging to anyperson".PORTFOLIO MANAGEMENT: “The process of managing the assets of a mutual fund, including choosing and monitoring appropriate investments and allocating funds accordingly.”
  14. 14. Need of Portfolio and Portfolio ManagementThe portfolio is needed for the selections of optimal, portfolio by rational risk averse investorsi.e. by investors who attempt to maximize their expected return consistent with individuallyacceptable portfolio risk. The portfolio is essential for portfolio construction. The portfolioconstruction refers to the allocation of funds among a variety of financial assets open forinvestments. Portfolio concerns itself with the principles governing such allocation. Theobjective of the portfolio theory is to elaborate the principles in which the risk can be minimized,subject to the desired level of return on the portfolio or maximize the return, subject to theconstraints of a tolerable level of risk.The need for portfolio management arises due to the objectives of the investors. The emphasis ofportfolio management varies from investors to investor. Some want income, some capital gainsand some combination of both. However, the portfolio analysis enables the investors to identifythe potential securities, which will maximize the following objectives: Securities of principal, stability of income, capital growth, marketability, liquidity anddiversification.Thus the basic need of portfolio is to maximize yield and minimize yield and minimize the risk.The other ancillary needs are as follows: 1. Providing regular or stable income. 2. Creating safety of investments and capital appreciation. 3. Providing marketability and liquidity. 4. Minimizing the tax liability
  16. 16. GOALS OF PORTFOLIO MANAGEMENT1. Value MaximizationAllocate resources to maximize the value of the portfolio via a number of key objectives such asprofitability, ROI, and acceptable risk. A variety of methods are used to achieve thismaximization goal, ranging from financial methods to scoring models.2. BalanceAchieve a desired balance of projects via a number of parameters: risk versus return; short-termversus long-term; and across various markets, business arenas and technologies. Typical methodsused to reveal balance include bubble diagrams, histograms and pie charts.3. Business Strategy AlignmentEnsure that the portfolio of projects reflects the company‟s product innovation strategy and thatthe breakdown of spending aligns with the company‟s strategic priorities. The three mainapproaches are: top-down (strategic buckets); bottom-up (effective gate keeping and decisioncriteria) and top-down and bottom-up (strategic check).4. Pipeline BalanceObtain the right number of projects to achieve the best balance between the pipeline resourcedemands and the resources available. The goal is to avoid pipeline gridlock (too many projectswith too few resources) at any given time. A typical approach is to use a rank ordered priority listor a resource supply and demand assessment.5. SufficiencyEnsure the revenue (or profit) goals set out in the product innovation strategy are achievablegiven the projects currently underway. Typically this is conducted via a financial analysis of thepipeline‟s potential future value.
  18. 18. OBJECTIVES OF PORTFOLIO MANAGEMENTThe objective of portfolio management is to maximize the return and minimize the risk. Theseobjectives are categorized into:1. Basic Objectives.2. Subsidiary Objectives.1. Basic ObjectivesThe basic objectives of a portfolio management are further divided into two kinds viz.(a) Maximize yield(b) Minimize risk.The aim of the portfolio management is to enhance the return for the level of risk to the portfolioowner. A desired return for a given risk level is being started. The level of risk of a portfoliodepends upon many factors.The investor, who invests the savings in the financial asset, requires a regular return and capitalappreciation.2. Subsidiary ObjectivesThe subsidiary objectives of a portfolio management are expecting a reasonable income,appreciation of capital at the time of disposal, safety of the investment and liquidity etc. Theobjective of investor is to get a reasonable return on his investment without any risk. Anyinvestor desires regularity of income at a consistent rate. However, it may not always be possibleto get such income. Every investor has to dispose his holding after a stipulated period of time fora capital appreciation. Capital appreciation of a financial asset is highly influenced by a strongbrand image, market leadership, guaranteed sales, financial strength, large pool of reverses,retained earnings and accumulated profits of the company. The idea of growth stocks is the rightissue in the right industry, bought at the right time. A portfolio management desires the safety of
  19. 19. the investment. The portfolio objective is to take the precautionary measures about the safety ofthe principal even by diversification process. The safety of the investment calls for carefulreview of economic and industry trends. Liquidity of the investment is most important, whichmay not be neglected by any investor/portfolio manager. An investment is to be liquid, it must has “termination and marketable” facility any time. SCOPE OF PORTFOLIO MANAGEMENT
  20. 20. SCOPE OF PORTFOLIO MANAGEMENTPortfolio management is a continuous process. It is a dynamic activity. The following are thebasic operations of a portfolio management:1. Monitoring the performance of portfolio by incorporating the latest market conditions.2. Identification of the investor‟s objective, constraints and preferences.3. Making an evaluation of portfolio income (comparison with targets and achievements).4. Making revision in the portfolio.5. Implementation of strategies in tune with the investment objectives.
  21. 21. Steps of Portfolio Management
  22. 22. PROCESS/STEPS OF PORTFOLIO MANAGEMENTPROCESS /STEPS OF PORTFOLIO MANAGEMENT Specification of Investment objective and Constraints Selection of Asset Mix Selection of Asset Mixes Formulation of Portfolio Strategy Formulation of Portfolio Strategy Selection of Securities Selection of Securities Portfolio Execution Portfolio Execution
  23. 23. Portfolio Revision Portfolio Revision Portfolio Evaluation 1. SPECIFICATION OF INVESTMENT OBJECTIVES AND CONSTRAINTS:The first step in the portfolio management process is to specify the investment policy thatconsists of investment objectives, constraints and preferences of investor. The investmentpolicy can be explained as follows:Specification of investment objectives can be done in following two ways: Maximize the expected rate of return, subject to the risk exposure being held within a certain limit (the risk tolerance level). Minimize the risk exposure, without sacrificing a certain expected rate of return (the target rate of return).An investor should start by defining how much risk he can bear or how much he can afford tolose, rather than specifying how much money he wants to make. The risk he wants to beardepends on two factors:a) Financial situationb) TemperamentTo assess financial situation one must take into consideration position of the wealth, majorexpenses, earning capacity, etc and a careful and realistic appraisal of the assets, expensesand earnings forms a base to define the risk tolerance.After appraisal of the financial situation assess the temperamental tolerance of risk. Risktolerance level is set either by one‟s financial situation or financial temperament whichever islower, so it is necessary to understand financial temperament objectively. One must realizethat risk tolerance cannot be defined too rigorously or precisely. For practical purposes it isenough to define it as low, medium or high. This will serve as a valuable guide in taking an
  24. 24. investment decision. It will provide a useful perspective and will prevent from being a victimof the waves and manias that tend to sweep the market from time to time.Constraints and Preferences: Liquidity: Liquidity refers to the speed with which an asset can be sold, without suffering any loss to its actual market price. For example, money market instruments are the most liquid assets, whereas antiques are among the least liquid. Investment horizon: The investment horizon is the time when the investment or part of it is planned to liquidate to meet a specific need. For example, the investment horizon for ten years to fund the child‟s college education. The investment horizon has an important bearing on the choice of assets. Taxes: The post – tax return from an investment matters a lot. Tax considerations therefore have an important bearing on investment decisions. So, it is very important to review the tax shelters available and to incorporate the same in the investment decisions. Regulations: While individual investors are generally not constrained much by laws and regulations, institutional investors have to conform to various regulations. For example, mutual funds in India are not allowed to hold more than 10 percent of equity shares of a public limited company. Unique circumstances: Almost every investor faces unique circumstances. For example, an endowment fund may be prevented from investing in the securities of companies making alcoholic and tobacco products. 2. SELECTION OF ASSET MIXES:
  25. 25. Based on the objectives and constraints, selection of assets is done. Selection of assets refers to the amount of portfolio to be invested in each of the following asset categories: Cash: The first major economic asset that an individual plan to invest in is his or her own house. Their savings are likely to be in the form of bank deposits and money market mutual fund schemes. Referred to broadly as „cash‟, these instruments have appeal, as they are safe and liquid. Bonds: Bonds or debentures represent long-term debt instruments. They are generally of private sector companies, public sector bonds, gilt-edged securities, RBI saving bonds, national saving certificates, Kisan Vikas Patras, bank deposits, public provident fund, post office savings, etc. Stocks: Stocks include equity shares and units/shares of equity schemes of mutual funds. It includes income shares, growth shares, blue chip shares, etc. Real estate: The most important asset for individual investors is generally a residential house. In addition to this, the more affluent investors are likely to be interested in other types of real estate, like commercial property, agricultural land, semi-urban land, etc. Precious objects and others:Precious objects are items that are generally small in size but highly valuable in monetaryterms. It includes gold and silver, precious stones, art objects, etc. Other assets includes likethat of financial derivatives, insurance, etc.3. FORMULATION OF PORTFOLIO STRATEGY:After selection of asset mix, formulation of appropriate portfolio strategy is required. Thereare two types of portfolio strategies, active portfolio strategy and passive portfolio strategy. ACTIVE PORTFOLIO STRATEGY:Most investment professionals follow an active portfolio strategy and aggressive investorswho strive to earn superior returns after adjustment for risk. The four principal vectors of anactive strategy are:
  26. 26. 1. Market Timing2. Sector Rotation3. Security Selection4. Use of a specialized concept1. Market timing:Market timing is based on an explicit or implicit forecast of general market movements. Theadvocates of market timing employ a variety of tools like business cycle analysis, advance-decline analysis, moving average analysis, and econometric models. The forecast of thegeneral market movement derived with the help of one or more of these tools are temperedby the subjective judgment of the investor. Often, of course, the investor may go largely byhis market sense.2. Sector Rotation:The concept of sector rotation can be applied to stocks as well as bonds. It is however, usedmore commonly with respect to stock component of portfolio where it essentially involvesshifting the weightings for various industrial sectors based on their assessed outlook. Forexample if it is assumed that cement and pharmaceutical sectors would do well compared toother sectors in the forthcoming period, one may overweight these sectors, relative to theirposition in market portfolio. With respect to bonds, sector rotation implies a shift in thecomposition of the bond portfolio in terms of quality, coupon rate, term to maturity and soon. For example, if there is a rise in the interest rates, there may be shift in long term bondsto medium term or even short-term bonds. But we should remember that a long-term bond ismore sensitive to interest rate variation compared to a short-term bond.3. Security Selection: Security selection involves a search for under priced securities. If an investor resort to activestock selection, he may employ fundamental and or technical analysis to identify stocks thatseems to promise superior returns and overweight the stock component of his portfolio onthem. Likewise, stocks that are perceived to be unattractive will be under weighted relative totheir position in the market portfolio. As far as bonds are concerned, security selection callsfor choosing bonds that offer the highest yield to maturity at a given level of risk.4. Use of a specialized Investment Concept:A fourth possible approach to achieve superior returns is to employ a specialized concept orphilosophy, particularly with respect to investment in stocks. As Charles D. Ellis words says,a possible way to enhance returns “is to develop a profound and valid insight into the forces
  27. 27. that drive a particular group of companies or industries and systematically exploit that investment insight or concept PASSIVE PORTFOLIO STRATEGY: The passive strategy rests on the tenet that the capital market is fairly efficient with respect to the available information. The passive strategy is implemented according to the following two guidelines: 1. Create a well-diversified portfolio at a predetermined level of risk. 2. Hold the portfolio relatively unchanged over time, unless it becomes inadequately diversified or inconsistent with the investor‟s risk-return preferences. 4. SELECTION OF SECURITIES: The following factors should be taken into consideration while selecting the fixed income avenues:SELECTION OF BONDS (fixed income avenues)Yield to maturity: The yield to maturity for a fixed income avenue represents the rate of returnearned by the investors if he invests in the fixed income avenue and holds it till its maturity. Risk of default: To assess the risk of default on a bond, one may look at the credit rating of the bond. If no credit rating is available, examine relevant financial ratios (like debt-to-equity ratio, times interest earned ratio, and earning power) of the firm and assess the general prospects of the industry to which the firm belongs Tax Shield: In yesteryears, several fixed income avenues offered tax shield, now very few do so. Liquidity:
  28. 28. If the fixed income avenue can be converted wholly or substantially into cash at a fairly shortnotice, it possesses liquidity of a high order.SELECTION OF STOCK (Equity shares)Three board approaches are employed for the selection of equity shares: Technical analysis looks at price behavior and volume data to determine whether the share will move up or down or remain trend less. Fundamental analysis focuses on fundamental factors like the earnings level, growth prospects, and risk exposure to establish the intrinsic value of a share. The recommendation to buy, hold, or sell is based on a comparison of the intrinsic value and the prevailing market price. Random selection approach is based on the premise that the market is efficient and securities are properly priced.5. PORTFOLIO EXECUTION:The next step is to implement the portfolio plan by buying or selling specified securities in givenamounts. This is the phase of portfolio execution which is often glossed over in portfoliomanagement literature. However, it is an important practical step that has a significant bearing onthe investment results. In the execution stage, three decision need to be made, if the percentageholdings of various asset classes are currently different from the desired holdings.6. PORTFOLIO REVISION: In the entire process of portfolio management, portfolio revision is as important stage asportfolio selection. Portfolio revision involves changing the existing mix of securities. Thismay be effected either by changing the securities currently included in the portfolio or byaltering the proportion of funds invested in the securities. New securities may be added to theportfolio or some existing securities may be removed from the portfolio. Thus it leads topurchase and sale of securities. The objective of portfolio revision is similar to the objectiveof selection i.e. maximizing the return for a given level of risk or minimizing the risk for agiven level of return.The need for portfolio revision has aroused due to changes in the financial markets sincecreation of portfolio. It has aroused because of many factors like availability of additional
  29. 29. funds for investment, change in the risk attitude, change investment goals, the need toliquidate a part of the portfolio to provide funds for some alternative uses. The portfolioneeds to be revised to accommodate the changes in the investor‟s position.Portfolio Revision basically involves two stages: Portfolio Rebalancing:Portfolio Rebalancing involves reviewing and revising the portfolio composition (i.e. thestock- bond mix). There are three basic policies with respect to portfolio rebalancing: buyand hold policy, constant mix policy, and the portfolio insurance policy.Under a buy and hold policy, the initial portfolio is left undisturbed. It is essentially a „buyand hold‟ policy. Irrespective of what happens to the relative values, no rebalancing is done.For example, if the initial portfolio has a stock-bond mix of 50:50 and after six months ithappens to be say 70:50 because the stock component has appreciated and the bondcomponent has stagnated, than in such cases no changes are made.The constant mix policy calls for maintaining the proportions of stocks and bonds in linewith their target value. For example, if the desired mix of stocks and bonds is say 50:50, theconstant mix calls for rebalancing the portfolio when relative value of its componentschange, so that the target proportions are maintained.The portfolio insurance policy calls for increasing the exposure to stocks when the portfolioappreciates in value and decreasing the exposure to stocks when the portfolio depreciates invalue. The basic idea is to ensure that the portfolio value does not fall below a floor level. Portfolio Upgrading:While portfolio rebalancing involves shifting from stocks to bonds or vice versa, portfolio-upgrading calls for re-assessing the risk return characteristics of various securities (stocks aswell as bonds), selling over-priced securities, and buying under-priced securities. It may alsoentail other changes the investor may consider necessary to enhance the performance of theportfolio.7. PORTFOLIO EVALUATION:Portfolio evaluation is the last step in the process of portfolio management. It is the processthat is concerned with assessing the performance of the portfolio over a selected period oftime in terms of return and risk. Through portfolio evaluation the investor tries to find outhow well the portfolio has performed. The portfolio of securities held by an investor is theresult of his investment decisions. Portfolio evaluation is really a study of the impact of such
  30. 30. decisions. This involves quantitative measurement of actual return realized and the risk bornby the portfolio over the period of investment. It provides a mechanism for identifying theweakness in the investment process and for improving these deficient areas.The evaluation provides the necessary feedback for designing a better portfolio next time. ASPECTS OF PORTFOLIO MANAGEMENT
  31. 31. ASPECTS OF PORTFOLIO MANAGEMENTBasically, portfolio management involves: 1. A proper investment decision-making of what to buy and sell 2. Proper money management in terms of investment in a basket of assets to satisfy the asset preferences of the investors. 3. Reduce the risk and increase the returns. 4. Balancing fixed interest securities against equities. 5. Balancing high dividend payment companies against high earning growth companies as required. 6. Finding the income or growth portfolio as required. 7. Balancing transaction costs against capital gains from rapid switching. 8. Balancing income tax payable against capital gains tax. 9. Retaining some liquidity to seize upon bargains.
  33. 33. Types of Risk in Portfolio ManagementEach and every investor has to face risk while investing. What is Risk? Risk is theuncertainty of income/capital appreciation or loss of both. Risk is classified into: Systematicrisk or Market related risk and Unsystematic risk or Company related risk. TYPES OF RISK IN PORTFOLIO MANAGEMENT SYSTEMATIC RISK SYSTEMATIC RISK UNSYSTEMATIC RISK 1. Market Risk 1. Business Risk 2. Interest Rate Risk 2. Internal Risk 3. Inflation Rate Risk 3. Financial Risk SYSTEMATIC RISK Systematic risk refers to that portion of variation in return caused by factors that affect the price of all securities. It cannot be avoided. It relates to economic trends with effect to the whole market. This is further divided into the following:1. Market risks: A variation in price sparked off due to real, social political and economical events is referred as market risks.2. Interest rate risks: Uncertainties of future market values and the size of future incomes, caused by fluctuations in the general level of interest is referred to as interest rate risk. Here price of securities tend to move inversely with the change in rate of interest.3. Inflation risks: Uncertainties in purchasing power is said to be inflation risk.
  34. 34.  UNSYSTEMATIC RISK Unsystematic risk refers to that portion of risk that is caused due to factors related to a firm or industry. This is further divided into:1. Business risk: Business risk arises due to changes in operating conditions caused by conditions that thrust upon the firm which are beyond its control such as business cycles, government controls, etc.2. Internal risk: Internal risk is associated with the efficiency with which a firm conducts its operations within the broader environment imposed upon it.3. Financial risk: Financial risk is associated with the capital structure of a firm. A firm with no debt financing has no financial risk.
  36. 36. SEBI Guidelines to Portfolio ManagementSEBI has issued detailed guidelines for portfolio management services. The guidelines havebeen made to protect the interest of investors.The salient features of these guidelines are: The nature of portfolio management service shall be investment consultant. The portfolio manager shall not guarantee any return to his client. Client‟s funds will be kept in a separate bank account. The portfolio manager shall act as trustee of client‟s funds. The portfolio manager can invest in money or capital market. Purchase and sale of securities will be at a prevailing market price.
  38. 38. PORTFOLIO MANAGEMENT SERVICESA Portfolio in Securities Market refers to basket of securities that a person has invested into.Sometimes this includes Debt Instruments, Mutual Funds and even Bank Balance in additionto regular equities.The person designated to manage the portfolio is called Portfolio Manager. The PortfolioManager advises, manages and administers the securities and funds on behalf of the entrustingclient.The service is offered by a Portfolio Manager under a specific license from Securities andExchange Board of India. As per definition of SEBI Portfolio means “a collection of securities owned by an investor”. It represents the total holdings of securities belonging to any person". It comprises of different types of assets and securities. Portfolio management refers to the management or administration of a portfolio of securities to protect and enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and sell. It involves proper money management. It is also known as Investment Management. Portfolio Management Services, called, as PMS are the advisory services provided by corporate financial intermediaries. It enables investors to promote and protect their investments that help them to generate higher returns. It devotes sufficient time in reshuffling the investments on hand in line with the changing dynamics. It provides the skill and expertise to steer through these complex, volatile and dynamic times. It is a choice of selecting and revising spectrum of securities to it with the characteristics of an investor. It prevents holding of stocks of depreciating-value. It acts as a financial intermediary and is subject to regulatory control of SEBI. Under PMS, the Client and the Portfolio Manager chart out specific needs of the client and the Portfolio Manager manages the Portfolio in accordance with those needs. Sometimes the Portfolio Manager may also have separate ready schemes for the client to choose from. As a result of this customization, client, with his specific needs, benefits. The service level in the form of reporting transactions, holdings statements etc., also are comparable or even better than that of a mutual fund.
  39. 39. Benefits of pms
  40. 40. Benefits of PMS1. Personalized Advice: A client gets investment advice and strategies from expert Fund Managers. An Investment Relationship Manager will ensure that you receive all the services related to your investment needs. The personalized services also translates into zero paper work and all your financial statements will be e-mailed2. Professional Management: An experienced team of portfolio managers ensure your portfolio is tracked, monitored and optimized at all times.3. Continuous Monitoring: The clients are informed about your investment decisions. A dedicated website and a customer services desk allow you to keep a tab on portfolio‟s performance.4. Timing: Portfolio managers preserve client‟s money on time. Portfolio management services (PMS) help in allocating right amount money in right type of saving plan at right time. This means portfolio managers analyzes the market and provides his expert advice to the client regarding the amount he should take out at the time of big risk in stock market.5. Professional Management: PMS provides benefits of professional money management with the flexibility, control and potential tax advantages of owing individual stocks or other securities. The portfolio managers take care of all the administrative aspects of client‟s portfolio with a monthly or semiannual reporting on overall status of the portfolio and performance.6. Flexibility: Portfolio manager‟s plan saving of his client according to their need and preferences. But sometimes, portfolio managers can invest client‟s money according to his preference because they know the market very well than his client. It is his client‟s duty to provide him a level of flexibility so that he can manage the investment with full efficiency and effectiveness.
  42. 42. Services and Strategies Offered Through PMS 1. Portfolio management services (PMS) handles all types of administrative work like opening a new bank account or dealing with any financial settlement or depository transaction. 2. PMS also help in managing the tax of his client based on detailed statement of the transaction found on the client‟s portfolio. 3. PMS also provide a Portfolio manager to the client who acts as personal relationship manager though whom the client can interact with the fund manager at any time depending on his own preferences such as: i. To discuss any concern saving or money, the client can interact with portfolio manager on the monthly basis.ii. The client can discuss on any major changes he want in his asset allocation and investment strategies.
  43. 43. Portfolio manager
  44. 44. Portfolio ManagerPortfolio Manager is a professional who manages the portfolio of an investor with the objectiveof profitability, growth and risk minimization. According to SEBI, Any person who pursuant to acontract or arrangement with a client, advises or directs or undertakes on behalf of the client themanagement or administration of a portfolio of securities or the funds of the client, as the casemay be is a portfolio manager. He is expected to manage the investor‟s assets prudently andchoose particular investment avenues appropriate for particular times aiming at maximization ofprofit. He tracks and monitors all your investments, cash flow and assets, through live priceupdates. The manager has to balance the parameters which defines a good investment, liquidity and return. The goal is to obtain the highest return for the client of themanaged portfolio.There are two types of portfolio manager known as Discretionary Portfolio Manager and NonDiscretionary Portfolio Manager. Discretionary portfolio manager is the one who individuallyand independently manages the funds of each client in accordance with the needs of the clientand non-discretionary portfolio manager is the one who manages the funds in accordance withthe directions of the client.Who can be a Portfolio Manager?Only those who are registered and pay the required licence fee to SEBI are eligible to operate asManagers. An applicant for this purpose should have necessary infrastructure with professionallyqualified person and with a minimum of two person with experience in this business andminimum net worth of Rs.5 lack. The certificate once granted is valid for three years. Feespayable for registration are Rs2.5 lack for two years and Rs.1 lack for the third year. From thefourth year onwards, renewal fees per annum are Rs.75000. These are subject to change bySEBI.The SEBI has imposed number of obligation and code of conduct on portfolio manager. Theportfolio manager should have a high standard of integrity, honesty and should not have beenconvicted of any economic offence or moral turpitude. He should not resort of rigging up ofprices, insider trading or creating false market etc. Their books of account are subjected toinspection and audited by SEBI. The observance of code of conduct and guidelines given bySEBI are subject to inspection and penalties for violation are imposed. The Manager has tosubmit periodical returns and documents as may be required by the SEBI from time-to-time.
  46. 46. General Responsibilities of Portfolio ManagerFollowing are some of the responsibilities of a Portfolio Manager: 1. The portfolio manager shall act in a fiduciary capacity with regard to the clients funds. 2. The portfolio manager shall transact the securities within the limitations placed by the client. 3. The portfolio manager shall not derive any direct or indirect benefit out of the clients funds or securities. 4. The portfolio manager shall not borrow funds or securities on behalf of the client. 5. portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately 6. The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.
  47. 47. Payment Criteria Of PMS
  48. 48. Payment Criteria of PMS There are two types of payment criteria offered by Portfolio Manages to theirclients such as: 1. Fixed- linked management fee. 2. Performance-linked management fee.Fixed-linked management fee:In fixed-linked management fee the clients usually pays between 2-2.5% of the portfolio valuecalculated on weighted average method.Performance-linked management fee:In performance- linked management fees the client pays a flat ranging between 0.5-1.5percentbased on the performance of the portfolio manager. The profits are calculated on the basis of“high watermarking” concept. This means that the fee is paid only on the basis of positive returnon investment.In addition to these criteria the portfolio manager also gets around 15-20% earned by the client.The portfolio manager can also claim some separate charges gained from brokerage, custodialservice and tax payments.
  50. 50. Code of Conduct of Portfolio ManagerEvery portfolio manager in India as per the regulation 13 of SEBI shall follow the followingCode of Conduct: 1. A portfolio manager shall maintain a high standard of integrity fairness. 2. The client‟s funds should be deployed as soon as he receives. 3. A portfolio manager shall render all times high standards and unbiased service. 4. A portfolio manager shall not make any statement that is likely to be harmful to the integration of other portfolio manager. 5. A portfolio manager shall not make any exaggerated statement. 6. A portfolio manager shall not disclose to any client or press any confidential information about his client, which has come to his knowledge. 7. A portfolio manager shall always provide true and adequate information. 8. A portfolio manager should render the best pose advice to the client.
  52. 52. Objectives of Investors for Selecting of PMSFollowing are the objectives: 1. Keep the security, safety of principles intact both in terms of money as well as its purchasing power. 2. Stability of the flow of income so as to facilities planning more accurately and systematically the reinvestment or consumption of income. 3. To attain capital growth by re-investing in growth securities or through purchase of growth securities. 4. Marketability of the security which is essential for providing flexibility to the investment portfolio. 5. Liquidity i.e. nearness to the money which is desirable to the investors so as to take advantages of attractive opportunities upcoming in the market. 6. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and income by investing in various types of securities and over a wide range of industries. 7. Favorable tax status: the effectively yield a investors gets from his investments depends on tax to which it is subject.
  53. 53. 8. Capital growth which can be attained by reinvesting in growth securities or through purchased of growth securities. INVESTORS ALERTS
  54. 54. Investors AlertsDo’s: Only intermediaries having specific SEBI registration for rendering Portfolio management services can offer portfolio management services Investors should make sure that they are dealing with SEBI authorized portfolio manager. Investors must obtain a disclosure document from the portfolio manager broadly covering manner and quantum of fee payable by the clients, portfolio risks, performance of the portfolio manager etc. Investors must check whether the portfolio manager has a necessary infrastructure to effectively service their requirements. Investors must enter into an agreement with the portfolio manager. Investors should make sure that they receive a periodical report on their portfolio as per the agreed terms.
  55. 55. Investors must make sure that portfolio manager has got the respective portfolio account by an independent charted accountant every year and that the certificate given by the charted accountant is given to an investor by the portfolio manager. In case of complaints, the investors must approach the authorities for redressal in a timely manner.Don’ts: Investors should not deal with unregistered portfolio managers. They should not hesitate to approach the authorities for redressed of the grievances. They should not invest unless they have understood the details of the scheme including risks involved. Should not invest without verifying the background and performance of the portfolio manager. The promise of guaranteed returns should not influence the investors.
  56. 56. DIFFERENCE BETWEEN PORTFOLIO MANAGEMENT SERVICES AND MUTUAL FUNDS Difference between portfolio management Services and mutual fundsWhile the concept of Portfolio Management Services and Mutual Funds remains the same ofcollecting money from investors, pooling them and investing the funds in various securities.There are some differences between them described as follows:1. In the case of portfolio management, the target investors are high net-worth investors,while in the case of mutual funds the target investors include the retail investors.2. In case of portfolio management, the investments of each investor are managed separately,while in the case of MFs the funds collected under a scheme are pooled and the returns aredistributed in the same proportion, in which the investors/ unit holders make the investments.
  57. 57. 3. The investments in portfolio management are managed taking the risk profile ofindividuals into account. In mutual fund, the risk is pooled depending on the objective of ascheme.4. In case of portfolio management, the investors are offered the advantage of personalizedservice to try to meet each individual client‟s investment objectives separately while in caseof mutual funds investors are not offered any such advantage of personalized services.
  58. 58. BENEFITS OF CHOOSING PORFTFOLIO MANAGEMENT SERVICE INSTEAD OF MUTUAL FUNDSBenefits of Choosing Portfolio Management service Instead of Mutual Funds While selecting a portfolio management service over mutual fund services it is found that the portfolio manager offer some very service which are better than standardized product services offered by the mutual fund manager. Such as: 1. Asset Allocation : Asset allocation plan offered by portfolio management service (PMS) helps in allocating savings of the client in terms of stock bonds or equity funds. The plan is
  59. 59. tailor made and is designed after a detailed analysis of client‟s investment goals, saving pattern and risk taking goal.2. Timing: Portfolio manager preserves client‟s money on time. Portfolio management services helps in allocating right amount of money in right type of saving plan at right time. This means the portfolio manager provides their expert advice when his client should invest his money in equity or bonds or when he should take his money out of particular saving plan. Portfolio manager analyzes market and provides his expert advice to the client regarding the amount of cash he should take out at the time of big risk in stock market.3. Flexibility: Portfolio manager plan saving of his client according to their need and preferences. But sometime portfolio manager can invest the client‟s money according to his own preferences because they know the market very well than his client. It is his client‟s duty to provide him a level of flexibility so that he can manage the investment with full efficiency and effectiveness.4. Rules and Regulation: In comparison to mutual funds, portfolio managers do not need to follow any rigid rules of investing a particular amount of money in a particular mode of investment. Mutual fund managers need to work according to the regulations set up by financial authorities of their country. Like in India, they have to follow rules set up by SEBI
  60. 60. CONCLUSION ConclusionAfter the overall all study about each and every aspect of this topic it shows that portfoliomanagement is a dynamic and flexible concept which involves regular and systematic analysis,proper management, judgment, and actions and also that the service which was not so popularearlier as other services has become a booming sector as on today and is yet to gain more
  61. 61. importance and popularity in future as people are slowly and steadily coming to know about thisconcept and its importance.It also helps both an individual the investor and FII to manage their portfolio by expert portfoliomanagers. It protects the investor‟s portfolio of funds very crucially.Portfolio management service is very important and effective investment tool as on today formanaging investible funds with a surety to secure it. As and how development is done everysector will gain its place in this world of investment.
  62. 62. BIBLIOGRAPHY Bibliography
  63. 63.  Reference books: Prasanna Chandra – Security Analysis and Portfolio Management. V.A. Adadani- Security Analysis and Portfolio Management. V. Gangadhar- Security Analysis and Portfolio Management. Website :