INTRODUCTION

PORTFOLIO MANAGEMENT SERVICES

WHAT IS PORTFOLIO MANAGEMENT SERVICE?

A group of experts design and manage your equity portfolio suiting risk-return appetite Benefit of Diversification and an element of customization No Settlement hassles Separately held securities Greater Flexibility Efficient switch between cash and equity positions Portfolio designing is done as per market conditions and market considerations Customized Performance Reporting 100% Transparency, managed under SEBI license and regulations Competitive Fee Structure

So investments under portfolio management are risk diversified and research oriented.

 Discretionary Portfolio Management

The Portfolio Manager undertakes the entire management of portfolio. Starting from buying and selling of securities to reshuffling and safe custody is undertaken. Investors involvement will be minimum thereby allowing investor the flexibility to attend to their personal matters, while the Portfolio Manager takes care of investors investments and keeps it posted on a regular basis.

DIFFERENCE BETWEEN PMS & MUTUAL FUND

PMS
Flexibility Customized Performance Reporting Separately held securities Relationship Management STCG LTCG Dividend Distribution Tax possible. Yes Yes Personal 10% NIL Not Applicable

MUTUAL FUND
fund size do not allow flexibility No No Impersonal 10% 10%-20% Applicable

Liquidation of holdings Regulatory restrictions and large

PORTFOLIO MANAGEMENT PROCESS

Portfolio management is a complex activity, which may be broken down into the following steps:

Specification of investment objectives and constraints:

The typical objectives sought by an investor are current income, capital appreciation, safety, fixed returns on principal investment.

Choice of asset mix:

The most important decision in portfolio management is the asset mix decision. This is concerned with the proportions of Stock or Units of mutual fund or Bond in the portfolio. The appropriate mix of Stock and Bonds will depend upon the risk tolerance and investment horizon of the investor.

Formulation of portfolio strategy:

Once the certain asset mix has been chosen an appropriate portfolio strategy has to be decided out. Two broad portfolio choices are available An active portfolio management: it strive to earn superior risk adjusted returns by resorting to market timing, or sector rotation or security selection or some combination of these. A passive portfolio management involves holding a broadly diversified portfolio and maintaining a pre-determined level of risk exposure.

MUTUAL FUND SCENARIO

First Phase 1963-87(UTI)
MF industry started in India in 1963 with formation of UTI 1987-1988 UTI had Rs.6, 700 crore of assets under management. The first scheme launched by UTI was Unit Scheme 1964. Followed by ULIP in 1971, CGGA (1986), Masters hare (1987). UTI was still only player in the market enjoying monopoly position and huge Mobilization of funds.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of SBI MF the first non- UTI MF. SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. Change in mindset of investors. UTI was still the undisputed leader of the market. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crore.

Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. At the end

of March 2006, there were 38 Asset Management Companies with total assets of Rs. 2,31,861 crore.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29, 835 crore as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

TYPES OF MUTUAL FUNDS

Mutual Fund schemes may be classified on the basis of its structure and its investments.

BY STRUCTURE:

Open-End Funds:
Available for sale and repurchase at all times based on the net asset values. Unit capital of the fund is not fixed. Fund size and its total investment go up if more new subscriptions come in than redemptions and vice versa.

Close-End Funds:
One time sale of fixed number of units. Investors are not allowed to buy or redeem the units directly from the funds. Some funds offer repurchase after a fixed period. Listed on stock exchange and investors can buy or sell units through exchange. May be traded at a discount or premium to NAV based on investors perception about the funds future performance and other market factors. A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

Interval Funds:
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

BY INVESTMENT OBJECTIVE:
Money/Cash Market Funds: Instruments having less then one year maturity; Treasury bills issued by government Certificates of deposit issued by governments Commercial paper issued by companies Inter bank call money Aim to provide easy liquidity, preservation of capital and moderate income.

Gilt Funds:
Securities maturity over a year; Invested in government securities are called dated securities Virtually zero risk of default it is backed by the government It is more sensitive to market interest rates

Debt/Income Funds:
Investment in debt instruments issued not only by Government but also by private companies, banks and financial institution and other entities such as infrastructure companies. Target low risk and stable income for investors. Have higher price fluctuation as compared to money market funds due to interest rate fluctuation. Have higher risk of default by borrowers as compared to Gilt funds. Debt funds can be categorized further based on their risk profiles. Carry both credit risk and interest rate risk. 9

Equity Funds:
Invest a major portion of their surplus in equity shares issued by cos, acquired directly in initial public offering or through secondary market and keep a part in cash to take care of redemption. Risk is very high than debt funds but offer very high growth potential for the capital. It can be further categorized based on investment strategy. It must have along term objectives.

Balanced Funds:
Has a portfolio of debt instrument, convertible securities, and preference and equity shares. Consists of almost equal proportion of debt/money market securities and equities. Normally funds maintain a ratio of 55:45 or 60:40 some funds allocate a flexible proportion based on market conditions. Aim is to gain income, capital appreciation and preservation of capital. Ideal for investors for a conservative and long term orientation.

Load Funds:
A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

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No-Load Funds:
A no-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

OTHER SCHEMES:

Tax saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA by investing in Mutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30, 2000.

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 SPECIAL SCHEMES: Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG and Pharmaceuticals etc.

Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sense or the NSE 50

Sector Schemes
Sector Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.

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STRUCTURE OF MUTUAL FUNDS

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What is Index Funds?

Index funds are aligned to a particular benchmark index like the Standard & Poor, CNX, Nifty or the BSE Sensex. The endeavor of these funds is to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocation or weightage.

What is Actively Managed Funds?

Actively managed funds are the ones wherein the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns, and in the process outperform the designated benchmark index.

What people think of active fund managers?

Active fund managers enjoy a strong marketing edge over passive managers. Many attain celebrity status and their opinions on what the market is doing are highly sought after by the media. Great faith is often placed in their abilities, and what they do is often portrayed as glamorous. Some fund managers are paid seven figure salaries and bonuses and are often aggressively head hunted by rival firms. Above all, active fund managers are usually perceived to be interesting.

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What people think of passive fund managers?

In contrast to their more colorful active counterparts, passive fund managers are seen as the nerds of the investment business. Their performance objective is only to match an index. Is this deliberate mediocrity bordering on negligence? You probably wouldnt want to be stuck next to a passive fund manager on a long flight, because all they ever talk about is tax efficiency, cost minimization, diversification, asset allocation and buy and hold investing. Where is the fun in that? Passive fund managers claim to have no special insights into what the market is going to do, and have no clever strategy that they intend to employ to beat the market by a large margin, often recommending investors stay the course and hold a diversified portfolio through thick and thin. Above all, passive fund managers are usually perceived to be boring.

Is index tracking more risky?

Investor would think that with diligent professionals at the wheel, even if they cant outperform indexes after costs at least they can manage risk properly by prudently avoiding risky companies. Are active funds less volatile?

Actually, active funds on average are more volatile than index funds because they are less diversified.

Index funds are also actively managed funds since they represents continuous shifts in their structure by experts according to change in markets.

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CHARACTERISTICS OF INDEX FUNDS

Adopt a passive approach. Main focus is on achieving maximum diversification at a minimum expense by holding a fixed percentage of every security in the market, or a representative basket. Performance is determined by the asset class, index funds make little attempt to do better.

If the asset class does poorly, index funds do poorly. If the asset class does well, index funds do well.

These funds are quite boring because they offer no potential to beat the market, most investors arent even aware they exist. Many sophisticated investors (and those that aspire to be) flatly refuse to even consider indexing because it is just too mediocre and too dull.

CHARACTERISTICS OF ACTIVE FUNDS

When an investor buys an active fund, he is making a bet on a team of professional investors, and their ability to generate high returns.

Active funds may perform quite differently to the asset class as the manager adjusts the portfolio based on their research.

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Nature of active fund managers?

Active fund managers enjoy a strong marketing edge over passive managers. Many attain celebrity status and their opinions on what the market is doing are highly sought after by the media. Great faith is often placed in their abilities, and what they do is often portrayed as glamorous. Some fund managers are paid seven figure salaries and bonuses and are often aggressively head hunted by rival firms.

Above all, active fund managers are usually perceived to be interesting.

Nature of passive fund managers?

In contrast to their more colorful active counterparts, passive fund managers are seen as the nerds of the investment business. Their performance objective is only to match an index. Is this deliberate mediocrity bordering on negligence? Investor probably wouldnt want to be stuck next to a passive fund manager on a long flight, because all they ever talk about is tax efficiency, cost minimization, diversification, asset allocation and buy and hold investing. Where is the fun in that? Passive fund managers claim to have no special insights into what the market is going to do, and have no clever strategy that they intend to employ to beat the market by a large margin, often recommending investors stay the course and hold a diversified portfolio through thick and thin.

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Above all, passive fund managers are usually perceived to be boring. Is index tracking more risky?
Investor would think that with diligent professionals at the wheel, even if they cant outperform indexes after costs at least they can manage risk properly by prudently avoiding risky companies. Are active funds less volatile?

Actually, active funds on average are more volatile than index funds because they are less diversified.

Risk v/s. Reward

Risk is the chance you take of making or losing money on your investment. Greater the risk, the more you stand to gain or lose. There is no such thing as zero risk. There are always factors you cannot control like recession or high inflation. Your range of investment choices and their relative risk factors is often described as a pyramid. The base of your investment pyramid consists of those investments only, which are highly liquid and safe. The bulk of your portfolio should comprise limited and moderate risk investments, and only small percentage of your total portfolio should be invested in the highest risk category. Your expected returns will also increase accordingly as you go up the pyramid.

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The arithmetic of active management

The average performance of all investors will be the same as the market. It is impossible for everyone to be above average, mathematically it just cant happen!! Half will fail because somebody always gets stuck holding the bad stocks! The aggregate return of all investors in the market will be the market return, (obviously), because all the investors own all the stocks. The market return is the weighted average of passive returns plus active returns. If the index funds have the same pre-fee return as the market (which is what they set out to do), then the other type of investor (active) will also have the same pre-fee return. If index funds bought, say, 30% of every stock issued, the remaining 70% left to the active investors would still have market index weightings. This is a zero sum game, the average return of all active investors before costs is necessarily going to equal the average return of the market. Active investment is usually more expensive than passive investment so active funds, as a group, will do worse than index funds after fees. No amount of trading or research will change that. Some will outperform, but as a group they will underperform. Like a poker game, money is redistributed but not created or destroyed by active management. Costs drag down the average performance of all investors. The average performance of all investors will be the market average return, minus the average expenses. To ensure that your net performance is above average, diversify extensively and keep expenses well below average.

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Why to buy an index fund?

Chances of relatively high performance compared to active funds are very good. Most index funds are extremely tax efficient (stocks anyway, not bonds of course!), so their performance after tax compares even more favourably. Index funds dont change much. You can buy one and safely forget about it, no need to change funds every year. Apart from anything else this saves you the time and costs of having to closely monitor your investments, or pay an advisor to do it. Index funds are usually less volatile than actively managed funds. Active funds usually hold more concentrated portfolios, but index funds only hold a couple of percent in their biggest investments. Exposure to individual stocks is minimal. Indexing means never having to say youre sorry.

Returns of Index funds

In the Indian context, index funds have never really caught the retail investors fancy. This is in complete contrast to developed economies like the United States. Reasons for the same are not very difficult to guess. In the United States, stock markets are more efficient, so investment opportunities are at a premium and are relatively difficult to identify. Consequently, a number of actively managed funds fail to outperform the broader stock market. Also other factors like no loads and lower expenses further the cause of index funds.

Investing in index funds is less difficult to handle as compared to investing in actively managed funds. Broadly speaking, investors need to consider two important aspects. The expense ratio & the tracking error (i.e. the difference between the returns clocked by the designated index and index fund).

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Investing in actively managed funds demands a deeper review and understanding of the fund houses investment philosophy; also the investor needs to decide on the kind of funds he wishes to invest in a large cap/mid cap/small cap fund among others. In the Indian context, the mutual fund industry is dominated by actively managed funds; index funds occupy a smaller share of the market. Well-managed actively managed funds have been successful in outperforming index funds by a huge margin. This could be attributed to the fact that the Indian markets are still in an evolutionary phase and there exist a number of inefficiencies. These inefficiencies are in turn utilized by competent fund managers to outperform the index. This explains why many actively managed funds manage to outperform the index over the long-term (3-5 years). We conducted study on index funds as well as actively managed funds with diversified equity funds, over varied time frames. We came to know the below mentioned facts.

Why to buy an actively managed fund?

There are a few reasons to use active funds instead of, or as well as index funds: despite the odds, perhaps investor think a particular fund can outperform there may not be an index fund available for an asset class investor wish to invest in, so investor dont have much choice If the active fund is different enough to the index, maybe it will diversify the portfolio and potentially reduce overall portfolio volatility.

Other things to look for in an actively managed fund

The fund should be very different to an index fund. Active funds that try to minimise tracking error inevitably fail to add value in the long term. To outperform the index takes more than conservative tilts to 20% of your portfolio. Top investors like Warren Buffett get beaten by the index 40% of the time. You may remember the heady days of the tech boom of the late 1990s, pundits called Buffett an obsolete dinosaur who had lost his touch, though in the end Buffett was proven right, as 21

usual. If you want to outperform in the long term youll have to be prepared for periods of underperformance, and learn to ignore the pundits. Index funds are cheap. You can buy the SSGA Street tracks ASX200 index fund for an annual fee of only 0.286%pa, so how do you value active management? An active fund that is 80% index + 20% active will not add value. If the index hugging active fund is charging 1.5%pa, then they are charging a small fortune for their little tilts: 80% x 0.286%pa + 20% x 6.356%pa = 1.5%pa It would be more cost effective to combine a cheap index fund with a fire breathing active stock picking fund if you want performance, rather than buy an index hugging active fund. Dont pay active MERs to index your money.

Returns of Actively managed funds

Not all actively managed funds are investment worthy and capable of generating superior returns vis--vis benchmark indices. There are many laggards in the category as well who have failed to match the benchmark indices (in this case BSE Sensex). We also looked at various schemes in equity based open ended mutual funds, managed by Franklin Templeton. These funds were actively managed funds.

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OPEN-ENDED EQUITYSCHEME S
FRANKLIN FMCG G FRANKLIN ASIAN EQUITY G FRANKLIN INFOTECH G FRANKLIN BLUECHIP G TEMPLETON INDIA EQUITY G FRANKLIN PHARMA G FRANKLIN PRIMA PLUS G FRANKLIN FLEXI CAP G FT INDIA INDEX NIFTY G FRANKLIN OPP G TEMPLETON GROWTH G FRANKLIN PRIMA FUND G FRANKLIN HIGH GROWTH G FT INDIA INDEX BSE G

NAV (Rs)
30.99 6.24 21.85 92.04 8.04 21.07 101.50 13.58 21.09 15.27 47.72 105.75 5.23 24.53

1WEEK
-0.41 % -2.34 % -2.87 % -2.94 % -3.49 % -3.50 % -3.60 % -3.88 % -4.02 % -4.20 % -4.26 % -4.50 % -4.69 % -5.40 %

1-MTH
-0.80 % -7.40 % -8.12 % -7.59 % -7.46 % -4.64 % -7.59 % -9.59 % -10.54 % -10.90 % -8.77 % -9.39 % -11.68 % -11.12 %

6-MTH
-10.80 % -27.15 % -39.57 % -25.01 % -41.59 % -25.46 % -26.59 % -30.05 % -36.25 % -36.50 % -37.72 % -37.02 % -36.11 % -37.32 %

1-YR
-14.49 % -29.75 % -36.93 % -46.34 % -43.51 % -15.40 % -41.22 % -45.76 % -45.10 % -51.25 % -43.00 % -55.93 % -53.69 % -47.13 %

3-YR
-0.56 % 0.00 % -16.88 % 0.86 % 0.00 % -7.57 % 2.38 % -3.53 % -2.47 % -3.55 % -1.61 % -15.64 % 0.00 % -2.69 %

5-YR
15.30 % 0.00 % 2.82 % 12.22 % 0.00 % 5.52 % 16.48 % 0.00 % 16.63 % 12.07 % 10.33 % 6.51 % 0.00 % 0.00 %

INCEPTI ON
0.00 % -0.06 % 0.00 % 3.56 % 5.26 % 3.78 % 0.00 % 0.21 % 0.33 % 0.33 % 0.00 % 0.00 % 0.00 % 4.35 %

(NAV Appreciation date: Jan 22, 2009, Returns over periods greater than 12

months are annualized.)

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Index Tracking Tricks

MACRO-ECONOMIC FACTORS External shocks

An unanticipated drop in export prices can impair the capacity of domestic firms to service their debts. This can result in deterioration in the quality of banks' loan portfolios. Adverse shock to domestic income associated with a decline in the terms of trade may slow output and raise default rates. Capital outflows induced by an increase in world interest Drop in deposits; may force banks to liquidate long-term assets to raise liquidity or cut lending abruptly. May entail a recession and a rise in default rates.

The Exchange Rate Regime

A credibly-fixed exchange rate provides an implicit guarantee (no foreign exchange risk) which may lead to excessive (and unhedged) short-term foreign borrowing. This increases the fragility of the banking system to adverse external shocks, particularly if the degree of capital mobility is high under any pegged rate regime, capital outflows affect the financial system through an expansion or contraction of bank balance sheets; they can lead to instability in the banking sector.

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A flexible exchange rate may also create problems. An abrupt outflow of capital can lead to a sharp depreciation of the nominal exchange rate. The depreciation may raise the domestic-currency value of foreign-currency liabilities, for banks and their customers. Large, unhedged foreign-currency positions increase risk of default on existing loans and vulnerability to adverse (domestic or external) shocks. The fall in borrowers net worth may also lead to a rise in the finance premium and to increased default rates; higher incidence of nonperforming loans may lead to a banking crisis.

Financial Repression
Financial system in most developing countries is repressed by government interventions. This keeps interest rates that domestic banks can offer to savers very low. By keeping interest rates low, it creates an excess demand for credit. It then requires the banking system to set a fixed fraction of the credit available to priority sectors. Combination of low nominal deposit interest rates and moderate to high inflation has resulted in negative rates of return on domestic financial assets. Financial Repression Leads to Low Growth, Poor legal system, weak accounting standards, financial institutions nationalized, inadequate government regulation.

Domestic shocks
Increase in domestic interest rates (to reduce inflation or defend the currency) slows output growth and may weaken the ability of borrowers to service their loans. It may lead to an increase in non-performing assets.

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TECHNICAL ANALYSIS

TRENDLINE ANALYSIS

Trend line is technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals. As shown in Figure 5, an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.

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 Channels
A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance. Figure 6 illustrates a descending channel on a stock chart; the upper trendline has been placed on the highs and the lower trendline is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue.

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 Support and Resistance

Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movement sis thought to have shifted, in which case new levels of support and resistance will likely be established.

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 The Importance of Support and Resistance

Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend has accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.

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 Head and Shoulders

This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can see in Figure 20, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.

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 Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years.

A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make it a difficult pattern to trade. We have finished our look at some of the more popular chart patterns. You should now be able to recognize each chart pattern as well the signal it can form for chartists. We will now move on to other technical techniques and examine how they are used by technical traders to gauge price movements.

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 Moving Average Analysis

Among the most popular technical indicators, moving averages are used to gauge the direction of the current trend. Every type of moving average is a mathematical result that is calculated by averaging a number of past data points. Once determined, the resulting average is then plotted onto a chart in order to allow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that are inherent in all financial markets. The simplest form of a moving average, appropriately known as a simple moving average (SMA), is calculated by taking the arithmetic mean of a given set of values. For example, to calculate a basic 10-day moving average you would add up the closing prices from the past 10 days and then divide the result by 10. In Figure 1, the sum of the prices for the past 10 days (110) is divided by the number of days (10) to arrive at the 10-day average. If a trader wishes to see a 50-day average instead, the same type of calculation would be made, but it would include the prices over the past 50 days. The resulting average below (11) takes into account the past 10 data points in order to give traders an idea of how an asset is priced relative to the past 10 days. Perhaps you're wondering why technical traders call this tool a "moving" average and not just a regular mean? The answer is that as new values become available, the oldest data points must be dropped from the set and new data points must come in to replace them. Thus, the data set is constantly "moving" to account for new data as it becomes available. This method of calculation ensures that only the current information is being accounted for. In Figure 2, once the new value of 5 is added to the set, the red box (representing the past 10 data points) moves to the right and the last value of 15 is dropped from the calculation. Because the relatively small value of 5 replaces the high value of 15, you would expect to see the average of the data set decrease, which it does, in this case from 11 to 10.

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RETURNS

Income Funds
Sahara Classic Fund Growth HSBC Flexi Debt Fund - Ret Growth DWS Money Plus Advantage Fund - Reg Growth Birla Sun Life Income Plus Growth Birla Sun Life Income Fund Growth Birla Sun Life Income Fund - 54EA Growth Birla Sun Life Income Fund - 54EB Growth Kotak Bond Regular Plan Growth ICICI Prudential Income Fund Growth Reliance Income Fund - Retail - G P Growth Escorts Income Plan- Growth Canara Robeco Income Scheme Growth DSP BlackRock Bond Fund - Retail Plan Growth HDFC HIF Growth LIC Bond Fund Growth Kotak Bond Deposit Growth ICICI Prudential L T P Cumulative IDFC SSIF - Invt. Plan - Plan A Growth Sundaram BNP Paribas Bond Saver Growth PRINCIPAL Income Fund Growth UTI Bond Fund Growth ING Income Fund - Regular Plan Growth IDFC D B F- Plan A Growth

Since Return Size(crore)

2008 2007 16.4641 11.5144 0.13 344.09

Rank
1 2

2007 1995 1997 1997 1997 1999 1998 1997 1998 2002

10.9532 10.8305 10.2867 10.2804 10.2226 10.1498 10.0312 10.0268 9.6108 9.6081

8.59 2788.06 928.82 39.74 39.74 673.12 3965.5 2395.39 5.51 462.23

3 4 5 6 7 8 9 10 11 12

1997 1997 1999 1999 2002 2000 1997 2000 1998 1999 2002

9.4645 9.4203 9.4011 9.3111 9.2359 9.1386 8.9505 8.9122 8.8611 8.7969 8.7059

939.24 789.74 91.22 673.12 8.23 647.82 98.39 197.03 609.83 70.04 615.07

13 14 15 16 17 18 19 20 21 22 23

36

Fortis Flexi Debt Fund Growth HDFC Income Fund Growth Birla Sun Life DBF - Retail Growth Sahara Income Fund Growth Reliance Medium Term Fund Growth HSBC Income Fund - Invst Plan - Reg - Growth DWS Premier Bond Fund - Regular Plan Growth IDFC SSIF - MTP - Plan A Growth Tata Income Plus Fund - Plan A Growth ING Dynamic Duration Fund Growth Franklin India International Fund

2004 2000 2004 2002 2000 2002

8.6851 8.4939 8.2868 7.3519 7.2364 6.6091

94.18 1486.4 1713.45 2.35 15966.74 105.62

24 25 26 27 28 29

2003 2003 2002 2004 2002

6.1577 5.8619 5.793 5.6331 3.5923

315.3 57 3.19 1.58 1.29

30 31 32 33 34

37

Index funds
HDFC Index Fund - Sensex Plus Plan Tata Index Fund - Nifty Plan - Option A Birla Sun Life Index Fund Growth Tata Index Fund - Sensex Plan - Option A ICICI Prudential Index Fund HDFC Index Fund - Nifty Plan HDFC Index Fund - Sensex Plan SBI Magnum Index Fund Growth LIC MF Index Fund - Sensex Plan Growth Franklin India Index Fund - NSE Nifty Plan Growth LIC MF Index Fund - Sensex Advantage Plan Growth UTI Master Index Fund Growth Franklin India Index Fund - BSE Sensex Plan Growth Canara Robeco Nifty Index Growth LIC MF Index Fund - Nifty Plan Growth ING Nifty Plus Fund Growth PRINCIPAL Index Fund Growth UTI Nifty Fund Growth JM Nifty Plus Fund Growth Benchmark S&P CNX 500 Fund Growth

Since Return Size(crore) Rank

2002 2003 2002 2003 2002 2002 2002 2002 2002 19.2251 18.1197 17.2292 16.8287 14.4655 14.3733 13.9161 13.5472 10.8045 27.21 5.71 27.46 4.16 36.32 25.23 37.85 14.81 20.98 1 2 3 4 5 6 7 8 9

2000

10.8026

66.93

10

2002 1998

10.3235 9.9076

2.84 35.71

11 12

2001 2004 2002 2004 1999 2000 2009 2008

9.6463 9.5083 9.4008 7.2147 7.1378 6.4704 0.586 -4.874

25.41 4.29 100.12 6.92 45.14 179.04 8.82 1.29

13 14 15 16 17 18 19 20

38

RATIO MEASUREMENT

TREYNOR RATIO:
The Treynor ratio is a measurement of the returns earned in excess of that which could have been earned on a riskless investment The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however systematic risk instead of total risk is used. The higher the Treynor ratio, the better the performance under analysis.

Explanation of Treynors Ratio

In other words, the Treynor ratio is a risk-adjusted measure of return based on systematic

risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses beta as the measurement of volatility.

Also known as the "reward-to-volatility ratio".

39

SHARPE RATIO
A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:

Explanation of Sharpe Ratio

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.

A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility. 40

JENSON MEASURE

Explanation of Jensons Measure

A risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha."

The basic idea is that to analyze the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio. For example, if there are two mutual funds that both have a 12% return, a rational investor will want the fund that is less risky. Jensen's measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with his or her stock picking skills.

41

Return of Index (SENSEX)

Year

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sensex 5209 3990 3262 3383 5872 6626 9422 13827 20325 9340

Return

A = P [1+r] ^ n

9720 = 5209 X [1+r] ^ 8.16

R = 7.412 % p.a.

42

Index Funds

Index Funds
HDFC TATA BIRLA TATA ICICI HDFC HDFC SBI LIC FRANK LIC UTI FRANK CANARA LIC ING PRINCI
UTI

Sharpe ratio
26.49454 23.24113 22.10862 21.46854 16.73868 14.44416 14.1663 11.93218 7.41239 4.925985 6.425306 4.309831 3.504287 3.216273 3.64728 -1.70436 -2.00343
-3.46574

Sharpe rank
1 2 3 4 5 6 7 8 9 11 10 12 14 15 13 16 17
18

treynor ratio
11.29286 10.23225 9.275578 9.008878 6.952151 6.463793 6.253805 5.470611 3.161781 2.805405 2.717544 1.898109 1.676477 1.554948 1.579256 -0.81973 -0.88704
-1.5342

treynor rank
1 2 3 4 5 6 7 8 9 10 11 12 13 15 14 16 17
18

jenson measure
0.067351 0.111317 0.046146 0.176574 0.452585 0.089226 0.319469 -0.07766 0.316909 0.002803 0.336908 -0.00954 0.029633 0.045249 0.15829 -0.03298 -0.02414
-0.00459

RETURN %
19.2251 18.1197 17.2292 16.8287 14.4655 14.3733 13.9161 13.5472 10.8045 10.8026 10.3235 9.9076 9.6463 9.5083 9.4008 7.2147 7.1378
6.4704

43

FINDINGS

INDEX FUNDS Rank Sharpe rank

1 2 3 4 5 HDFC TATA(N) BIRLA TATA(S) ICICI 19.2251 18.1197 17.2292 16.8287 14.4655

Return %

Treynors rank
HDFC TATA(N) BIRLA TATA(S) ICICI

Return %

19.2251 18.1197 17.2292 16.8287 14.4655

The top five index funds hold the same ranking according to Sharpes and Treynors ratio. This indicates that the total risk as well as the volatility is well managed and tracked by the best five index funds. Thus index funds actively manage the total risk and are efficient at diversifying the risk over excess returns.

44

INCOME FUNDS
Income sharpe funds ratio
HSBC BIRLA KOTAK ICICI RIL ESCORT CANARA DSP HDFC LIC KOTAK ICICI IDFC UTI ING IDFC FORTIS HDFC
BIRLA SAHARA HSBC FRANK

sharpe treynor trynor rank ratio rank

****** 3 4 8 5 2 11 7 9 6 10 1 13 12 14 17 16 15
18 19 20 21

jenson measure RETURN%

-5.37703 1.534131 1.160892 1.119191 1.096499 0.823119 0.916617 0.784972 0.772643 0.743984 0.713238 0.625365 0.633062 0.458966 0.445467 0.39248 0.338439 0.263743
0.135083 -0.3584 -0.74135 -2.36253

************* 0.340258 0.31586 0.238235 0.307276 0.48937 0.158383 0.287079 0.215528 0.300422 0.195618 1.078591 0.123574 0.135654 0.098561 0.074022 0.077994 0.088519
0.068448 -0.08143 -0.22614 -0.41787

1.389091 6.180131 4.673478 4.523831 4.415686 3.29407 3.739767 3.15625 3.114693 2.98742 2.875219 2.501822 2.564414 1.843897 1.807029 1.589865 1.353953 1.059871
0.542155 -1.44989 -2.97837 -9.49935

16 1 2 3 4 6 5 7 8 9 10 12 11 13 14 15 17 18
19 20 21 22

11.5144 10.8305 10.1498 10.0312 10.0268 9.6108 9.6081 9.4645 9.4203 9.4011 9.3111 9.2359 9.1386 8.8611 8.7969 8.7059 8.6851 8.4939
8.2868 7.3519 6.6091 3.5923

45

INCOME FUNDS

Rank

Sharpe rank

Return %
9.2359

Treynors rank

Return %

ICICI PRU LTP

BIRLA INCOME PLUS

10.8305

2 3 4 5

ESCORT BIRLA KOTAK RIL

9.6108 10.8305 10.1498 10.0268

KOTAK ICICI PRU RIL INCOME CANARA ROBECO

10.1498 10.0312 10.0268 9.6081

46

FINDINGS
ICIC holds first rank according to Sharpes ratio and stands 3rd according to Treynors ratio. It suggests that ICICI fund gives good returns given the total risk but it is unable to manage or diversify the risk among the various securities. So its returns fall due to inability to diversify the risk properly. Similarly kotak holds 2nd rank according to Treynors ratio and 4th according to Sharpes ratio. This indicates that increase in total risk lowers the return of portfolio but here Sharpes ratio fails to reap from market premium which is best done by Treynors ratio by allocating funds between risky and non risky assets and diversifying the risk. Thus it can be concluded that funds ranking first according to Sharpes ratio perform best when overall risk is minimum. Such funds are best at managing inherent risk. Whereas Treynors ratio gives the best result by manipulating effectively between risky and non risky assets.

47

COMPARISON OF TOP FIVE FUNDS

Income funds Sharpes Sharpes Treynors Treynors Jensons ratio
BIRLA KOTAK ICICI RIL ESCORT Index funds HDFC TATA BIRLA TATA ICICI 0.340258 0.31586 0.238235 0.307276 0.48937

rank
3 4 8 5 2

ratio
6.180131 4.673478 4.523831 4.415686 3.29407

rank
1 2 3 4 6

ratio
1.534131 1.160892 1.119191 1.096499 0.823119

RETURN%
10.8305 10.1498 10.0312 10.0268 9.6108

26.49454 23.24113 22.10862 21.46854 16.73868

1 2 3 4 5

11.29286 10.23225 9.275578 9.008878 6.952151

1 2 3 4 5

0.067351 0.111317 0.046146 0.176574 0.452585

19.2251 18.1197 17.2292 16.8287 14.4655

48

FINDINGS
From the above table it is clear that index funds perform relatively better than income funds because they track the index and provides return in the respective proportion. Whereas the income funds capital allocation depends upon the fund managers perception of risk and return of assets.

The funds that prove best in index funds are best at managing inherent risks. But the same funds gives poor return on income funds because they are not able to diversify risk among various assets or adjust the investments according to non diversifiable risks.

Moreover index funds just track the movements of index so its less risky and provides more returns than income funds. Whereas income funds proportion of capital investment varies widely from index and is based upon the perception of fund managers. Thus risk is inherent in income funds than index funds based on the managers ability to judge the risk inherent in particular assets.

49

RETURNS % 10

SENSEX

20

15

10000

15000

20000

25000

5000

January 2000

1 3 5 7 9 11 13 15 17 19

February 2001

FUNDS

March 2002 April 2003 May 2004 June 2005 July 2006

SENSEX

RETURN ON FUNDS

TIME

21

August 2007 September 2008

SENSEX

INDEX FUND

S1

INCOME FUNDS

50

INVESTMENT CRIETERIA

Equity Funds

High Risk

Stocks & Shares

Aggressive investors with long term out look.

3 years plus

Balanced ratio of equity and Capital Balanced Market Risk debt funds to and Interest ensure higher Funds returns at Risk lower risk Portfolio NAV varies indices like Index with index BSE, NIFTY Funds performance etc Gilt Funds Bond Funds (Floating - Longterm) Interest Rate Risk Government securities Predominantly Debentures, Government securities, Corporate Bonds Treasury Bills, Certificate of Deposits, Commercial Papers, Call Money Call Money, Commercial Papers, Treasury Bills, CDs, Shortterm Government securities.

Moderate & Aggressive

2 years plus

Aggressive investors. Salaried & conservative investors Salaried & conservative investors

3 years plus

12 months & more

Credit Risk & Interest Rate Risk

More than 9 - 12 months

Money Market

Negligible

Those who park their funds in current accounts or short-term bank deposits

2 days - 3 weeks

Shortterm Funds (Floating - shortterm)

Little Interest Rate

Those with surplus short-term funds

3 weeks 3 months

51

KEY INVESTMENT CONSIDERATION:

Safety : you get your money back

The biggest risk is the losing the money investor has invested. Another equally important risk is that investors investments will not provide enough growth or income to offset the impact of inflation, which could lead to a gradual increase in the cost of living. There are additional risks as well but the biggest risk of all is not investing at all.

Liquidity : you get the money back when you want it

How easily an investment can be converted to cash, since part of your invested money must be available to cover any financial emergencies

52

 Plus convenience: How easy is it to invest, disinvest and adjust to your needs?

Investment risk means uncertainty of expected returns. All investments are exposed to various sources of risk, due to which there is a potential for fluctuation in the value of an investment, which could result in loss of principal.

Post-tax Returns: How much is really left for you post tax?????

53

SUMMARY
Active funds as a group do not beat index funds. If investor wants a low stress high probability investment strategy, forget beating the market and buy and hold index funds. There is also a slight performance premium for smaller companies, particularly small value companies. Small growth companies, usually the favourites of speculators and stock brokers are historically the most risky and worst performing class of stock. It can give superb return for very short time, but for more than 4 to 6 months, they are the worst stocks. Costs matter a lot. If investors want to improve performance they are more likely to get better results by focusing on tax efficiency, brokerage, reducing turnover and minimising fees. There simply is no more reliable way to increase returns. Fees will probably matter more in the next ten years than the last, because average returns are probably not going to be as high. They can be stable in long run.

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54