BSE SECTORAL STOCK INDICES

Sector End-March 2007 Variation (per cent) End – march 2008 End –
March 2009

Fast moving consumer goods -21.4 31.7

-11.1

Public Sector Undertakings -3.2 25.4

-29.6

Information Technology 21.6 -27.6

-35.6

Auto -8.5 -7.1

-32.3

Oil and Gas 30.5 56.0

-29.6

Metal -4.3 65.2

-58.7

Banks -5.4 5.4

-26.5

Capital Goods 24.2 18.0

-41.8

Consumer durables 11.1 54.4

-53.8

BSE 500 9.7 243

-42.8

BSE SENSEX 15.9 19.7

-37.9

PORTFOLIO INVESTMENT PROCESS

PLANNING
 1) Investor Conditions

2) Market Conditions

3) Investment / Speculative policy

4) Statement of Investment Policy

5) Strategic Asset Allocation

IMPEMENTATION

1) Rebalance Stategic Asset Allocation

2) Tactical Asset Allocation

3) Security Selection

MONITORING

1) Eva;uate Statement Of Investment Policy

2) Evaluate Investment Performance

STOCK MARKET AND FINANCIAL DEVELOPMENT IN INDIA

Shareholding pattern is initiated in the interest of transparency. It is

observed that at the end of June 2008 companies listed on NSE, which
registered as the market leader in stock turnover by contributing 90.27% of
the total turnover, had the following shareholding pattern: 57.45% held by
promoters, 40.72% held by non promoters in which individuals held 12.86%
and institutional holding accounted for 13.19%

The trading in non-repo government security had been declining

considerable since 2004-05. The aggregate trading volumes in central and
state government dated securities on SGL declined from Rs 3,982,988 million
in 2006-07 to Rs 5,003,047 million in 2007-08.

Shoud I go into investment avenues, portfolio theory

Or
Bond valuation Foreign investments and derivatives and equity stategy

RESEARCH METHODOLOGY
Type of Research:
The type of research is theoretical (sem V) and analytical (sem VI). Analytical
research includes journals magazinies,
internet and fact finding enquiries of different kinds. The major purpose of analytical
research is description of the state of affairs as it exists at present. In social science
and business research we quite often use the term Ex post facto research for
analytical
research studies. The main characteristic of this method is that the researcher has
no
control over the variables; he can only report what has happened or what is
happening.
Research Design:
As the research type is descriptive, so we will be using Analytical Research
Design to
do our Research work. The methodology of study will be through
journals,internet,magazines.
Source of Data Sampling Plan:
Secondary data. Secondary data was collected from the bank’s annual
report,
brochures and its website.
Methods of data collection:
Secondary Data: For secondary data the methods used for data
collection are as
follows:
Internet, books, manuals etc.
Objectives of the study:
1. To assess fundamental security analysis.
2. Whether trade competitiveness and performance is reflected on company
share price.
3. Effect foreign investment and world markets have on valuations.
4. Investment stategy, techniques and analysis.
5. Portfolio diversification a proved winner
6. Role of investment co, CRA, financial institutions tc. In determining
market momentum
2. To study the traditional instruments of investments at HDFC BANK such as
Fixed Deposits, Recurring Deposits , saving account,current account etc.
3. Modern instruments of investments such as Mutual funds, SIP, ULIPetc. At
HDF
4. Limitations of the study:
Study on bond and derivatives strategy has not been given sufficient importance.
Intro

Investment scenario is changing very rapidly. Emergence of modern

instruments of

investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and

Infrastructure Bonds proves to be a better option for the investors in

comparison to

the old instruments of investment such as fixed deposits, savings, recurring

deposits

etc.

GROWTH & EVOLUTION OF THE FINANCIAL SECTOR

The financial sector is in a process of rapid transformation. Reforms are
continuing as
part of the overall structural reforms aimed at improving the productivity and
efficiency of the economy. The role of an integrated financial infrastructure is
to
stimulate and sustain economic growth.
The US$ 28 billion Indian financial sector has grown at around 15 per cent
and has
displayed stability for the last several years, even when other markets in the
Asian
region were facing a crisis. The financial sector has kept pace with the
growing needs
of corporate and other borrowers. Banks, capital market participants and
insurers
have developed a wide range of products and services to suit varied
customer
requirements. The Reserve Bank of India (RBI) has successfully introduced a
regime
where interest rates are more in line with market forces.
Financial institutions have combated the reduction in interest rates and
pressure on
their margins by constantly innovating and targeting attractive consumer
segments.

Intro
Investment scenario is changing very rapidly. Emergence of modern
instruments of

investment like Mutual Funds, Systematic Investment Plan, RBI Bonds, and

Infrastructure Bonds proves to be a better option for the investors in

comparison to

the old instruments of investment such as fixed deposits, savings, recurring

deposits

etc.

GROWTH & EVOLUTION OF THE FINANCIAL SECTOR

The financial sector is in a process of rapid transformation. Reforms are
continuing as
part of the overall structural reforms aimed at improving the productivity and
efficiency of the economy. The role of an integrated financial infrastructure is
to
stimulate and sustain economic growth.
The US$ 28 billion Indian financial sector has grown at around 15 per cent
and has
displayed stability for the last several years, even when other markets in the
Asian
region were facing a crisis. The financial sector has kept pace with the
growing needs
of corporate and other borrowers. Banks, capital market participants and
insurers
have developed a wide range of products and services to suit varied
customer
requirements. The Reserve Bank of India (RBI) has successfully introduced a
regime
where interest rates are more in line with market forces.
Financial institutions have combated the reduction in interest rates and
pressure on
their margins by constantly innovating and targeting attractive consumer
segments.

PRIVATE PLACEMENT MARKET

In the primary market corporate can raise resources though public issues
and right issues while public issues entail allotment of securities to the
shareholders, private placement in contrast refers to direct sale do newly
issued securities by the issuer to a small number of investors. Private
placement of issues is arranged though merchant bankers, with the issuer
entering into an arrangement regarding the various features of the issue
being privately placed with the selected clients, which are financial
institutions, Corporate and high net-worth individuals. Private placement
offer greater flexibility to the issuer as the instrument can be structured
according to the needs of the entrepreneurs.

Qualities of Investor

• Safety Players

Safety Players who take the path of least resistance, looking primarily for
security and safety in their investments and doing what has worked
previously.

• Entrepreneurs

Entrepreneurs are a particularly male-dominated profile driven by a passion

for excellence and commitment, and who are not motivated by money in
itself. Financial success is a scorecard and stock investment is a method of
implementing and demonstrating that success.

• Optimists

Optimists are non-risk oriented, often near retirement, seeking peace of

mind, these are investors who don’t like to become too involved with their
own financial management as it would cause them stress and reduce their
enjoyment of life.

• Hunters

Hunters are often educated, high-earning women with an impulsive streak, a

‘live now attitude.’ They have a strong work ethic, much like entrepreneurs,
but lack the same confidence in themselves. They may attribute their
success to luck rather than ability.

• Achievers
Achievers are conservative, risk-averse, these investors like to feel in control
of their money, with security and protection of their assets a primary
consideration. They are often, married, well educated, high-earners who feel
that hard work and diligence is more likely to bring financial reward than
investing.

• Perfectionists

Perfectionists are afraid of making financial mistakes, they tend to avoid

investment decisions altogether. They lack confidence and self-esteem, and
have low pride in handling financial matters, finding every conceivable
excuse for not taking action. For them no investment is without fault.

• Producers

Producers are highly committed to their work. They may earn less due to a
lack of self-confidence in money management. And with a lack of basic
financial knowledge they may have less available funds to invest. They do
not appreciate how to evaluate risk appropriately.

• High Rollers

High Rollers are thrill seekers, power seekers, creative and extroverted, they
work hard and play hard. They have to be involved in high risk investing with
a large amount of their assets. Financial security bores them - even though
their actions may have financially dangerous consequences.

• Money Masters

Money Masters are tending to have a balanced financial outlook that gives
contentment and security, these investors like to be involved with the
management of their money and their choice of investments, although they
will take onboard good, sound advice. They are determined individuals, not
easily thrown of their chosen course, and who don’t leave things to luck.
• Adventurers

Adventurers are confident ‘go for it’ types who are strongwilled and ready to
take chances.

• Celebrities

Celebrities are those who need to be in the center of things and don’t like to
be left out, often constantly checking whether they should be in the latest
fashionable investment but may not really have any clue as to how to take
control of their finances.

• Individualists

Individualists are confident individuals who make their own decisions but
who are methodical, careful, balanced and analytical.

• Guardians

Guardians are investors, often older ones, who are cautious and intent on
safeguarding their wealth, shunning volatility or excitement.

• Straight arrows

Straight arrows are Mr. or Mrs. Average who do not fall into any of the
extremes of the above categories, who is somewhat balanced in their
investment approach and willing to take on moderate risk.

WHAT INVESTING IS NOT?

Investing is not gambling. Gambling is putting money at risk
by betting on an uncertain outcome with the hope that you might
win money. Part of the confusion between investing and
gambling, however, may come from the way some people use
investment vehicles. For example, it could be argued that buying
a stock based on a “hot tip” you heard at the water cooler is
essentially the same as placing a bet at a casino.

True investing doesn’t happen without some action on your

part. A “real” investor does not simply throw his or her money at
any random investment; he or she performs thorough analysis
and commits capital only when there is a reasonable expectation
of profit. Yes, there still is risk, and there are no guarantees, but
investing is more than simply hoping Lady Luck is on your side.

WHY SHOULD ONE INVEST?

Obviously, everybody wants more money. It’s pretty easy to

understand that people invest because they want to increase
their personal freedom, sense of security and ability to afford the
things they want in life.

However, investing is becoming more of a necessity. The days

when everyone worked the same job for 30 years and then retired
to a nice fat pension are gone. For average people, investing is
not so much a helpful tool as the only way they can retire and
maintain their present lifestyle.

Nowadays, investments are the foundation of our future financial

level. Bad investments can bring us negative turnovers and
therefore decrease our future possibilities. You are looking at two
options for your money, the first you can spend it or save it and
second, invest it.
One of the important reasons why one needs to invest wisely is to
meet the cost of Inflation. Inflation is the rate at which the cost of
living increases. The cost of living is simply what it costs to buy
the goods and services you need to live. Inflation causes money
to lose value because it will not buy the same amount of a good
or a service in the future as it does now or did in the past. For
example, if there was a 6% inflation rate for the next 20 years, a
Rs. 100 purchase today would cost Rs. 321 in 20 years. This is
why it is important to consider inflation as a factor in any long-
term investment strategy. Remember to look at an investment’s
‘real’ rate of return, which is the return after inflation. The aim of
investments should be to provide a return above the inflation rate
to ensure that the investment does not decrease in value. For
example, if the annual inflation rate is 6%, then the investment
will need to earn more than 6% to ensure it increases in value.If
the after-tax return on your investment is less than the inflation
rate, then your assets have actually decreased in value; that is,
they won’t buy as much today as they did last year.

Even though all investors are trying to make money, each

one comes from a diverse background and has different needs. It
follows that specific investing vehicles and methods are suitable
for certain types of investors. Although there are many factors
that determine which path is optimal for an investor, we’ll look at
two main categories: investment objectives, and investing
personality.
What is meant by Interest?

When we borrow money, we are expected to pay for using it – this

is known as Interest. Interest is an amount charged to the
borrower for the privilege of using the lender’s money. Interest is
usually calculated as a percentage of the principal balance (the
amount of money borrowed). The percentage rate may be fixed
for the life of the loan, or it may be variable, depending on the
terms of the loan.

What factors determine interest rates?

When we talk of interest rates, there are different types of

interest rates - rates that banks offer to their depositors, rates
that they lend to their borrowers, the rate at which the
Government borrows in the Bond/Government Securities market,
rates offered to investors in small savings schemes like NSC, PPF,
rates at which companies issue fixed deposits etc.

The factors which govern these interest rates are mostly economy
related and are commonly referred to as macroeconomic factors.
Some of these factors are:

Demand for money

Level of Government borrowings

Supply of money

Inflation rate

The Reserve Bank of India and the Government policies which

determine some of the variables mentioned above

What are various options available for investment?

One may invest in:

Physical assets like real estate, gold/jewellery, commodities etc.

and/or

Financial assets such as fixed deposits with banks, small saving

instruments with post offices, insurance/provident/pension fund
etc. or securities market related instruments like shares, bonds,
debentures etc.

What are various Short-term financial options available for

investment?

Broadly speaking, savings bank account, money market/liquid

funds and fixed deposits with banks may be considered as short-
term financial investment options:
Savings Bank Account is often the first banking product people
use, which offers low interest (4%-5% p.a.), making them only
marginally better than fixed deposits.

Features of an Investment Programme

Features of an Investment Programme

Features of an investment programme consist of the following

factors:

• Safety of principal amount

• Liquidity of the investment

• Income stability of the investment

• Appreciation and purchasing power stability of the investor

investment

• Legality and freedom from care about the investment

• Tangibility of the investment

SOURCES OF INVESTMENT RISK (BUSINESS)

According to the Oxford dictionary definition of risk includes the

following meanings: “The possibility of meeting danger or of
suffering harm or loss.” This conforms to the connotations put on
the term by most investors. An investor commonly identifies five
kinds of investment risks. They are: • Business and Financial Risk
• Interest Rate Risk • Purchasing Power Risk • Social/Regulatory
Risk • Other Risk Business and Financial Risk Business risk and
financial risk are actually two separate types of risks. Of course,
they are interrelated. Business risk is also known as operating
risk. Operating risk is associated with day to day operations of the
business firm. Financial risk is created by debt and preference
shares (Fixed cost securities). Business and financial risk may be
caused by a variety of factors as mention below: • Heightened
Competition • Emergence of New Technologies • Development of
Substitute Products • Shifts in Consumer Preferences •
Inadequate Supply of Essential Inputs • Changes in Government
Policies • Poor Business Performance. Interest Rate Risk Interest
rate risk is another source of investment risk. Changes of the
interest rates on the securities is created risk for investors. If the
interest rate goes up, the marketing price of existing fixed income
securities falls, and vice versa. This happens because the buyer of
a fixed income security would not buy if its par value or face
value if its fixed interest rate is lower than the prevailing interest
rate on a similar security. Market Risk Even in the case of earning
power of the corporate sector and the interest rate structure
remain more or less changed, prices of securities, equity shares in
particular, tend to fluctuate. There are several reasons for this
fluctuation. The main reasons are listed below: • The changing
psychology of the investors.• There are periods when investors
become bullish and their investment horizons lengthen.• An
unexpected war, the election year, political activity, illness or
death of an important person, speculative activity in the market,
the outflow of business-all are tremendous psychologic factors in
the market. These reasons result in that the prices of almost all
equity shares register decline as fear and uncertainty spread in
the market. Purchasing Power Risk Purchasing power risk is the
major source of risk faced by investors. The investor select
investments whose market values change with consumer prices
which compensates them for increase in cost of living. If they do
not, they will find that their total wealth has been diminished.
Inflation which destroys the economic power of investors over
goods and services. In essence, all investors have to be
concerned with the command that their invested money has over
goods and services on a continuing basis. Other Risks Other types
of risks are particularly associated with investment in foreign
securities. It involves monetary value risk and political
environment risk. The investors who invest in foreign securities,
have faced several risks. They are outlined as below: • A change
in the foreign government and repudiation of outstanding debt •
Nationalisation of business, firms, that is, seizure by government
• The desire but inability of the foreign government or corporation
to handle its indebtedness.

STOCK EXCHANGE

The Securities Contract (Regulation) Act, 1956 [SCRA]

defines ‘Stock Exchange’ as any body of individuals, whether
incorporated or not, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing
in securities. Stock exchange could be a regional stock exchange
whose area of operation/jurisdiction is specified at the time of its
recognition or national exchanges, which are permitted to have
nationwide trading since inception. NSE was incorporated as a
national stock exchange.

STOCK MARKET AND FINANCIAL DEVELOPMENT IN INDIA

The role of stock markets as a source of economic growth has

initiated many possible investment securities. Profitable
investment necessitates a long-term commitment of capital, but
investors are relequent to part their savings for long periods.
Liquid equity markets make investments less risky and more
attractive. At the same time companies enjoy permanent access
to capital. Liquid markets improve the allocation of capital and
enhance then prospects for long – term economic growth.
Furthermore, by making investments relatively less risky, stock
market liquidity can also lead to more savings and investments.

Over the years, the stock market in India has become strong. The
number of stock exchanges increased from 8 in 1971 to 21 in
1993. The number of listed companies moved up over the same
period from 1,599 to 2,265 and thereafter to 9,871 in March 2000.
Today there are 23 recognized stock exchanges in India. The
market capitalization at BSE, as a percentage of GDP, improved
considerably from around 28% in the early ‘nineties to over 45%
at the end of ‘nineties.
Asset price bubbles entail significant risks in the form of higher
inflation when the bubble grows and in the form of financial
instability and lost output when the bubble bursts. Monetary and
fiscal authorities therefore closely watch the asset market
developments.

Beginning January 11, 2008, stock exchange markers witnessed

sever bouts of volatility due to heightened concerns over the
severity of sub-prime lending crises. Fears of recession in the US
economy on account of

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

Securities markets in developed countries are multi-tiered

with an element of in-built competition amongst various layers.
This prevents monopolization of securities exchange and makes
the markets more efficient. The multi-tier securities exchange
model was adopted in our country in October 1990 with the
establishment of OTCEI. The government has conferred it the
status of a ‘recognised stock exchange’ under Sec.4 of the
Securities Contracts Regulation Act.

OTCEI promoters have been designated as ‘sponsor

members and they alone can en

INVESTMENT COMPANIES

The management of an investment portfolio requires knowledge,

experience, constant research; appraisal and reappraisal of
securities markets, sectors within the market, and individual
securities. One has to keep trace of the trends in the national
economy and the competitive positions of different industries. He
must be familiar with not only those industries in which he
invests, but also those in which he does not invest, since they
might in the near future, offer attractive outlets for founds. To be
successful one requires combining the skills of a professional
analyst with those of a portfolio manager. Not many investors
possess the training and experience to carry out an investment
program. Hence arises the management problem and it is in
answer to this problem of managing investment portfolios that
investment companies have come up.

CREDIT RATING AGENCIES IN INDIA

In Indian context, the scope of credit rating is limited generally to

debt, commercial paper, fixed deposits and of late mutual funds
as well. So it is the instrument which is rate and not the company.
In other words, credit quality is not general evaluation of issuing
organization, i.e. if debt of company XYZ is rated AAA and debt of
company ABC is rated BBB, the it does not mean firm XYZ is
better than firm ABC. However the issuer company gets strength
and credibility with the grade of rating awarded. Rating in a w
way reflects upon the issuers strength and soundness of
operation, management, organization behavior and expresses a
view on its prospective composite performance and also the
organizational behavior based on the study of past results.
In fact, the speculator must have courage to make decisions when
the general atmosphere is one of panic, despair, or great
optimism. There is a psychology that makes many investors avoid
certain sound stocks or bonds because their broker speaks of
“speculative possibilities”. These investors judge safety by yield.
If a security pays beyond certain percentage it is classed
“speculative”, and is not for them. What is the solution of
investing primarily for income and yet relating the very important
and useful quality of ready marketability without loss is best
solved by making an investment that appears after some
investigation.

Speculation needs no defense. Sometimes it may run riot

and end in disaster, but only due to its misuse. The speculator
who attempts to corner a market is a menace. His aim is to create
an artificial value.

FUNDAMENTAL ANALYSIS

The objective of fundamental security analysis is to appraise

the intrinsic value” of a security. The intrinsic value is the true
economic worth of a financial asset. The fundamentalists maintain
that at any point of time every share has an intrinsic value which
should in principle be equal to the present value of the future
stream of income from that shard discounted at an appropriate
risk related rate of interest. The job of the fundamental a security
analyst is to sort out the temporary disequilibrium from the true
shifts in the national economy and the accounting gimmicks from
true changes in the firms income in order to arrive at an unbiased
estimate of the intrinsic value. The fundamentals are to analyze
the current condition of the economy, where it is headed, and the
implications for investment decisions. Such an analysis helps in
selecting the sectors of the economy that appear to offer
profitable opportunities.

ANALYSIS OF THE ECONOMY

Investment in fixed-income and ownership securities is intimately

associated with the economic activity of the nation. An
investment in the equity of any company is likely to be more
profitable if the economy is strong and prosperously so the
expectation of the growth of the economy is favorable for the
stock market. By the same token, studying an industry that has
evidenced rapid growth in the past suggests that companies
within that industry and on the periphery will benefit from this
growth.

Not all industries grow at the same rate, not do all

companies. The growth of a company or an industry depends
basically on its capacity to satisfy human wants through
production of goods or performance of a service. How people earn
their living and where they spend their money will, in the last
analysis, determine which companies and industries will grow and
prosper and which will decline.

In contrast, if expectations of a decline in the national

economy are strong, the over ones and implications for
investment in equity or debt instruments are serious. If we could
be certain that the next three years would bring a recession, this
fact would reflect in our investment position. Certainly it would
suggest greater attention to fixed-income obligation, because it
would offer considerably more safety then equity. It is important,
therefore to analyze the national economy, attempt to determine
its course over the next twelve months to three years and to
obtain some investment perspective to determine what the longer
term possibilities are. What’s going on today is not as important
as what will happen in the future, investors must constantly peer
into an uncertain future and anticipate change.

SIGNIFICANCE AND INTERPRETATION OF ECONOMIC INDICATIORS

The investor makes an analysis of the economy primarily to

determine an investment strategy. It is not necessary to make our
own economic forecasts. The primary responsibility is to identify
the trends and to adjust the investment position. Many of the
published forecasts are excellent and provide the necessary
perspective.
 The variables of the economy have their own significance.
The GNP in nominal and real terms is a useful economic indicator.
Inflation and price increases are detrimental to equity prices. A
real growth of GNP without inflation is favorable and desirable.
Business investment’s is a key economic variable to watch.

Economist Wallace Duncan has developed what he considers

to be a leading indicator of strengthening of the economy. A ratio
derived by dividing quarterly GNP – business inventories into
consumer durables plus residential and business fixed
investment. This holds good for a consumer economy like the U.S.
In inflationary conditions, a decline in house starts and auto
production would be a welcome sign. Basic laws of economics
hold true when analyzing the economic condition of a country.
Indicators that balance the economy against inflation and
depression are used along with other investment functions,
economic variables and forecasts are necessary to analyze a
countries economy.

INDUSTRY ANALYSIS

Seeking industries that are expected to grow faster than the

“real” rate of GNP seems to be a logical starting position.
Investment success is more likely to be found in growing and
strongly competitive industries.

For careful analysis, each industry is broken down into its

logical product classes. The growth of an industry usually begins
with a major technological change. As an industry expands, the
following growth pattern emerges, according to Simon Kuznets: In
the beginning, rapid growth takes place. As the industry expands
over long periods of time the percentage of growth diminishes
and industries never experience accelerated growth for long
periods of time. The major changes are reinforced by minor
changes as the bugs are worked out. Reasons for decline in the
competitive position of an industry are high labor costs, changes
in social habit, changes in government regulation, automation,
other factor etc.

If an industry appears to offer attractive future benefits, we

can easily translate this into the probability that a company’s
equity will allow us to share in the industry’s prosperity. The
investor must know the industry classification the characteristic,
problems and practices of each industry – its present and future
development and operating features. An understanding of the
growth pattern an investor must, except for special
circumstances, not invest in companies in the pioneering stage.

The competitive position of an industry can be measured in

two ways (1) by comparing the industry gowth over tiem with the
growth of the national economy, or (2) by measuring the growth
rate of the industry with itself. The first step would be to obtain
reliable estimates of physical output, shipments, or sales of the
industry. Industry growth can then be compared with the growth
of GNP, national income (NI) or disposable personal income (DPI).
 For the selection of the potential growth industry, its
competitiveness with the other industries for its share of gross
national product, the stage of the industry, and its stability of sale
at the time of economic recession are the three important factors.
Perhaps the ideal investment would be in a firm in a growth
industry.

COMPANY ANALYSIS

It is very difficult to identify industries. Therefore to maintain

menainful company anlayis we need to take breakdown its
operations into product classes and analyse all these product-mix
before the company analysis can be done.

The s

TECHNICAL ANALYSIS

CAHRTING AS A TECHNICAL TOOL

Most technicians rely heavily on charts of prices and trading

volume for their analysis. In markets history repeats itself most
often. Some patterns indicate that demand is greater others
suggest that supply is greater. Technical analysts claim that stock
price fluctuates in Fibonacci series. Chart systems attempt to
correlate a relationship between market price and the volume of
trading. The idea is that it is a sign of strength when a stock
advances on a large colume of shares traded. Conversely, when
volume in the market or on one stock enlarges as a stock or the
market declines it shows that the pessimism is mounting and that
the trend is for lower prices. In essence the chartists contend that
a study of a stock’s behavior not only tells where a stock has
been but also where it is going.

STRATEGIC ASSET ALLOCATION PROCESS

The most important investment decision which the owner

must make is the portfolio’s asset allocation. Asset allocation
refers to the percentage invested in various security classed.
Security classes are (1) Fixed-income obligations (2) Equity shares
(3) Real Estate investments. Deciding what the investor’s
strategic allocation requires predictions of future return
distributions for various security classes, estimates of major risks
faced by the investor. The portfolio objective should represent the
single most important requirement of the portfolio.

An investor can build an equity portfolio and not touch it for

decades. Unrealized gains are not taxed and investors can
postpone tax for a long time. But things are different with bonds
because they have maturity date ager which they can earn no
additional return. The time value of money marches on regardless
of any circumstances.

REGULATORY FRAMEWORK

Formation and Regulations

(i)

Schemes
(i) The mutual funds are allowed to initiate and operate both
closed-end and open-end schemes.
(ii) Each closed-end scheme must have a minimum corpus of
Rs 20 crore
(iii) Each open-end scheme must have a corpus of Rs 50 crore
(iv) In case of a close-end scheme, if the minimum amount of
Rs 20 crore or 60 per cent of the targeted amount,
whichever is higher is not raisedmthen the entire
subscription has to be refunded ot eh investors.
(v) In the case of a open-end scheme, if the minimum amount
of Rs 50 crore or 60 per cent of the targeted amount ,
whichever is higher is not raised, then the entire
subscription has to be refunded to the investors.

Investment Norms

(i) No mutual fund under all its schemes can own more than
five per cent of any company’s paid-up capital carrying
voting rights

Economic Analysis

A wise man once said, “No man is an island”. No person can work
and live in isolation. External forces are constantly influencing an
individual’s actions and affecting him. Similarly, no industry or
company can exist on isolation. It may have splendid managers
and tremendous product. However, its sales and its costs are
affecting by factors, some of which are beyond its control – the
world economy, price inflation, taxes and a host of others. It is
important, therefore, to have an appreciation of the politico-
economic factors that affect an industry and a company.

Gross National Product (GNP)

The GNP is the value of all goods and services produced by the
resources owned by the nation. Though GNP does not
differentiate between resources owned by the citizens of the
country within the country and abroad, it does not include the
value of goods and services produced totally by resources owned
by foreigners.

Gross Domestic Product (GDP)

The gross domestic product measures the value of the products

within the country irrespective of the ownership of resources used
in the production. A high degree of correlation is generally
observed between the GNP and the GDP through their definitions
imply that GNP is more related to the nations income then the
GDP. While GNP is more useful in predicting sales of consumption
goods, GDP is more related to the nations production and hence
useful in predicting the sales of intermediate products.

The Political equation

A stable political environment is necessary for steady,

balanced growth. If a country is ruled by a stable government
which takes decision for a long term development of the country,
industry and companies prosper. On the other hand, instability
causes insecurity, especially if there is the possibility of a
government being ousted and replaced by another that hold
diametrically different political and economic beliefs.

India has gone through a fairly difficult period. There had

been terrible political instability after the ouster of Mr. Narasimha
Rao from the Prime Ministership. Successive elections held did not
give any single political party a clear majority and mandate. As a
result there were coalitions of unlikes. This led to considerable
jockeying for power and led to the breakup of the governments
and fresh elections.

There has also been much grandstanding such as the mandal

recommendations in order to capture votes. These led to riots.
There were other religious and ethnic issues that also led to
violence such as the Babri Masjid/ Ram Janmabhoomi issue. All
these shook the confidence of the developed world in security and
stability of India. Tourism fell.
 Foreign direct investment fell. Investments were held back.
These had an adverse impact on the development of the
economy. In recent times this scenario has changed. The
government, even though a coalition has been stable. Its policies
have been doing well. There are predictions that by 2050, India
would be one of the three most powerful nations in the world. This
has led to remove interest in India and investors are back.

Inflation

Inflation has an enormous effect in the economy. Within the

country it erodes purchasing power. As a consequence, demand
falls. If the rate of inflation in the country from which a company
imports is high then the cost of production in that country will
automatically go up. This might reduce the cost competitiveness
of the product finally manufactured. Conversely, if the rate of
inflation in the country to which one exports is high, the products
become more attractive resulting in increased sales.

The USA and Europe have fairly low inflation rates (below 2%). In
India, inflation has been falling steadily in recent times. It is
currently estimated between 3.7% and 4%. Low inflation within a
country indicates stability and domestic companies and industries
prosper at such times.

Interest Rates
A low interest rate stimulates investment and industry.
Conversely, high interest rates result in higher cost of production
and lower consumption. When the cost of money is high, a
company's competitiveness decreases. In India, the government,
through the Reserve Bank, has been successful in lowering
interest rates. Increasing competition among banks has also
helped.

Taxation

The level of taxation in a country has a direct effect on the

economy. If tax rates are low, people have more disposable
income. In addition they have an incentive to work harder and
earn more. And an incentive to invest. This is good for the
economy. It is interesting to note that in every economy there
is a level between 35% to 55% where tax collection will be the
highest. While the tax rates may go up, collection will decline.
This is why there it has been argued that the rates in India must
be lowered.

Government Policy

Government policy has a direct impact on the economy. A

government that is perceived to be pro- industry will attract
investment. The liberalization policies of the Narsimha Rao
government excited the developed world and foreign companies
grew keen to invest in India and their existing stakes in their
Indian ventures. The initiative of the former BJP government in
improving the infrastructure grabbed the attention of foreign
investors. The present government continues to focus on infra-
structure as it is realized progress at a decent rate would not be
possible without infrastructure.

The Infrastructure

The development of an economy is dependent on its

infrastructure. Industry needs electricity to manufacture and
roads to transport goods. Bad infrastructure leads to
inefficiencies, poor productivity, wastage and delays. This is
possibly the reason why the 1993 budget lay so much emphasis,
and offered so many benefits to infrastructural industries, such as
power and transportation. In recent years there has been greater
emphasis. Flyovers have been built, national highways are being
widened and made better and the improvements made in
communications are awesome.

Budget Deficit

A budgetary deficit occurs when governmental expenditure

exceeds its income. Expenditure stimulates the economy by
creating jobs and stimulating demand. However, this can also
lead to deficit financing and inflation. Both these if not checked,
can result in spiraling prices. To control and cut deficits
government normally cut governmental expenditure. This would
result in a fall in money supply and a consequent fall in demand
which will check inflation.

All developing economies suffer from budget deficits as

governments spend to improve the infrastructure – build roads,
power stations and the like. India is no exception.

Wars have a similar effect. The war has had an

effect on exports of goods. The tragedy of 9/11 affected the entire
world. Many industries are yet to fully recover.

In conclusion, the political stability of a country is

of paramount importance. No industry or company can grow and
prosper in the midst of political turmoil.

Foreign Exchange Reserves

A country needs foreign exchange reserves to meet its

commitments, pay for its import and service foreign debts.
Without foreign exchange, a country would not be able to import
materials or goods for its development and there is also a loss
international confidence in such a country. In 1991, India was
forced to devalue the rupee as our foreign exchange reserves
were, at $532 million very low, barely enough for few weeks
imports. The crises was averted at that time by an IMF loan, the
pledging of gold, and the devalue of the rupee.
Companies exporting to such countries have to be careful as the
importing companies may not be able to pay for their purchases
because the country does not have adequate foreign exchanges.
An Indian company which had exported machines to an African
company a few years ago. The importing company paid the
money to its bank. It lies there still. The payment could not be
sent to India as the central bank refused the foreign exchange to
make the payment. Following the liberalization moves initiated by
the Narsimha Rao Government and endorsed/supported by
successive governments, India by 31 December 1999 had foreign
investments in excess of 28 billion and in 2003; the reserves are
in excess of $100billion.

The problem the reserve bank of India faces is managing the

huge reserves. In order to discourage short term flows, the
Reserve bank has lowered interest rates and even mandated that
the interest paid should not exceed 24 basis points over LIBOR on
foreign currency funds and non-resident deposits.

Foreign Exchange Risk

This is a real risk and one must be cognizant of the effect of a

revaluation or devaluation of the currency either in home country
or in the country the company deals in. Devaluation in the home
country would make the company’s products more attractive in
other countries. It would also make imports more expensive and if
a company is dependent on imports, margins can get reduced. On
the other hand, a devaluation in the country to which one
exports would make the company's products more expensive
and this can adversely impact sales. A method by which foreign
exchange risks can be hedged is by entering into forward
contracts, i.e. advance purchase or sale of foreign exchange
thereby crystallizing the exposure.

In India our currency has been appreciating against the dollar.

Thus, the threat investors or recipients of dollars face is that the
rupees that they finally receive are less than that they expected.
This is an about turn from the situation earlier. As a consequence
many have begun quoting in rupees.

Monsoons

The Indian economy is an agrarian one and it is therefore

extremely dependent on the monsoon. Economic activity often
comes to a stand still in late March and early April as people wait
to see whether the monsoon is likely to be good or not.

Employment
High employment is required to achieve a good growth in national
income. As the population growth is faster than economic growth
unemployment is increasing. This is not good for the economy.

The Economic cycle

Countries go through the business or economic cycle and the

stage of the cycle at which a country is in has an impact both on
industry and individual companies. It affects investment decision,
employment, demands and the profitability of companies. It
affects investment decisions, employment, demand and the
profitability of the companies. While some industries such as
shipping or consumer durable goods are greatly affected by the
business cycle, other such as food or health industry are not
affected to the same extent. This is because in regard to certain
products consumers can postpone their purchase decisions,
whereas in certain others they cannot.