INTRODUCTION

Investment is the activity, which is made with the objective of earning some sort of positive
returns in the future. It is the commitment of the funds to earn future returns and it involves
sacrificing the present investment for the future return. Every person makes the investment so
that the funds he has increases as keeping cash with himself is not going to help as it will not
generate any returns and also with the passage of time the time value of the money will come
down. As the inflation will rise the purchasing power of the money will come down and this will
result that the investor who does not invest will become more poor as he will not have any funds
whose value have been increased. Thus every person whether he is a businessman or a common
man will make the investment with the objective of getting future returns.

TYPES OF INVESTMENT:There are basically three types of investments from which the investors can choose. The three
kinds of investment have their own risk and return profile and investor will decide to invest
taking into account his own risk appetite. The main types of investments are
Economic investments:
These investments refer to the net addition to the capital stock of the society. The capital stock
of the society refers to the investments made in plant, building, land and machinery which are
used for the further production of the goods. This type of investments are very important for the
development of the economy because if the investment are not made in the plant and machinery
the industrial production will come down and which will bring down the overall growth of the
economy.
Financial Investments:
This type of investments refers to the investments made in the marketable securities which are
of tradable nature. It includes the shares, debentures, bonds and units of the mutual funds and
any other securities which is covered under the ambit of the Securities Contract Regulations Act
definition of the word security. The investments made in the capital market instruments are of
1

vital important for the country economic growth as the stock market index is called as the
barometer of the economy.
General Investments:
These investments refer to the investments made by the common investor in his own small assets
like the television, car, house, motor cycle. These types of investments are termed as the
household investments. Such types of investment are important for the domestic economy of the
country. When the demand in the domestic economy boost the over all productions and the
manufacturing in the industrial sectors also goes up and this causes rise in the employment
activity and thus boost up the GDP growth rate of the country. The organizations like the Central
Statistical Organization (CSO) regularly takes the study of the investments made in the
household sector which shows that the level of consumptions in the domestic markets.

CHARACTERISICS OF INVESTMENT
Certain features characterize all investments. The following are the main
characteristics features if investments
1. Return:
All investments are characterized by the expectation of a return. In fact, investments are made
with the primary objective of deriving a return. The return may be received in the form of yield
plus capital appreciation. The difference between the sale price & the purchase price is capital
appreciation. The dividend or interest received from the investment is the yield. Different types
of investments promise different rates of return. The return from an investment depends upon the
nature of investment, the maturity period & a host of other factors.

2. Risk:
Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of
capital, nonpayment of interest, or variability of returns. While some investments like

government securities & bank deposits are almost risk less, others are more risky. The risk of an
investment depends on the following factors.
The longer the maturity period, the longer is the risk.The lower the credit worthiness of the
borrower, the higher is the risk.
The risk varies with the nature of investment. Investments in ownership securities like equity
share carry higher risk compared to investments in debt instrument like debentures & bonds.
3. Safety:
The safety of an investment implies the certainty of return of capital without loss of money or
time. Safety is another features which an investors desire for his investments. Every investor
expects to get back his capital on maturity without loss & without delay.
4. Liquidity:
An investment, which is easily saleable, or marketable without loss of money & without loss of
time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O.
deposits, NSC, NSS etc. are not marketable. Some investment instrument like preference shares
& debentures are marketable, but there are no buyers in many cases & hence their liquidity is
negligible. Equity shares of companies listed on stock exchanges are easily marketable through
the stock exchanges.
An investor generally prefers liquidity for his investment, safety of his funds, a good return with
minimum risk or minimization of risk & maximization of return.

PORTFOLIO
Meaning of portfolio;
A combination of securities with different risk & return characteristics will constitute the
portfolio of the investor. Thus, a portfolio is the combination of various assets and/or instruments
of investments. The combination may have different features of risk & return, separate from
those of the components. The portfolio is also built up out of the wealth or income of the investor
over a period of time, with a view to suit his risk and return preference to that of the portfolio
that he holds. The portfolio analysis of the risk and return characteristics of individual securities
in the portfolio and changes that may take place in combination with other securities due to
interaction among themselves and impact of each one of them on others.

An investor considering investments in securities is faced with the problem of choosing from
among a large number of securities. His choice depends upon the risk and return characteristics
of individual securities. He would attempt to choose the most desirable securities and like to
allocate is funds over this group of securities. Again he is faced with the problem of deciding
which securities to hold and how much to invest in each. The investor faces an infinite number of
possible portfolios or groups of securities. The risk and return characteristics of portfolio differ
from those of individual securities combining to form a portfolio. The investor tries to choose the
optimal portfolio taking in to consideration the risk return characteristics of all possible
portfolios.
As the economy and the financial environment keep changing the risk return characteristics of
individual securities as well as portfolios also change. This calls for periodical review and
revision of investment portfolios of investors. An investor invests his funds in a portfolio
expecting to get a good return consistent with the risk that he has to bear. The return realized
from the portfolio has to be measured and the performance of the portfolio has to be evaluated.
It is evident that rational investment activity involves creation of an investment portfolio.
Portfolio management comprises all the processes involved in the creation and maintenance of
an investment portfolio. It deals specifically with the security analysis, portfolio analysis,
4

portfolio selection, portfolio revision and portfolio evaluation. Portfolio management makes use
of analytical techniques of analysis and conceptual theories regarding rational allocation of
funds. Portfolio management is a complex process which tries to make investment activity more
rewarding and less risky.

Phases of Portfolio Management

Security Analysis
(a) Fundamental analysis: This analysis concentrates on the fundamental factors
affecting the company such as EPS (Earning per share) of the company, the dividend
payout ratio, competition faced by the company, market share, quality of management
etc.

(b) Technical analysis: The past movement in the prices of shares is studied to identify
trends and patterns and then tries to predict the future price movement. Current
market price is compared with the future predicted price to determine the mispricing.
Technical analysis concentrates on price movements and ignores the fundamentals of
the shares.

(c) Efficient market hypothesis: This is comparatively more recent approach. This
approach holds that market prices instantaneously and fully reflect all relevant
available information. It means that the market prices will always be equal to the
intrinsic value.

Portfolio Analysis
A portfolio is a group of securities held together as investment. It is an attempt to
spread the risk allover. The return & risk of each portfolio has to be calculated
mathematically and expressed quantitatively. Portfolio analysis phase of portfolio
management consists of identifying the range of possible portfolios that can be
5

constituted from a given set of securities and calculating their risk for further
analysis.

Portfolio Selection
The goal of portfolio construction is to generate a portfolio that provides the highest
returns at a given level of risk. Harry Markowitzh portfolio theory provides both the
conceptual framework and the analytical tools for determining the optimal portfolio
in a disciplined and objective way.

Portfolio Revision
The investor/portfolio manager has to constantly monitor the portfolio to ensure that it
continues to be optimal. As the economy and financial markets are highly volatile dynamic
changes take place almost daily. As time passes securities which were once attractive may
cease to be so. New securities with anticipation of high returns and low risk may

Portfolio Evaluation
Portfolio evaluation is the process, which is concerned with assessing the
performance of the portfolio over a selected period of time in terms of return & risk.
The evaluation provides the necessary feedback for better designing of portfolio the
next time around.

Measurement of risk
Risk refers to the possibility that the actual outcome of an investment will differ from the
expected outcome. In other words we can say that risk refers to variability or dispersion. If
any investment is said to invariable it means that it is totally risk free. Whenever we
calculate the mean returns of an investment we also need to calculate the variability in the
returns.

Variance and Standard Deviation

The most commonly used measures of risk in finance are variance or its square root the
standard deviation. The variance and the standard deviation of a historical return series
is defined as follows:

Beta
A measure of risk commonly advocated is beta. The beta of a portfolio is computed the
way beta of an individual security is computed. To calculate the beta of a portfolio,
regress the rate of return of the portfolio on the rate of return of a market index. The
slope of this regression line is the portfolio beta. It reflects the systematic risk of the
portfolio.

Performance Measures Of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is
one of the most preferred investment avenues in India. However, with a plethora of schemes
to choose from, the retail investor faces problems in selecting funds. Factors such
as investment strategy and management style are qualitative, but the funds record is
an important indicator too. Though past performance alone can not be indicative of
future performance, it is, frankly, the only quantitative way to judge how good a fund is at
present. Therefore, there is a need to correctly assess the past performance of different
mutual funds.
7

Worldwide, good mutual fund companies over are known by their AMCs and this fame is
directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must
be held accountable for their selection of stocks. In other words, there must be
some performance indicator that will reveal the quality of stock selection of various AMCs.
Return alone should not be considered as the basis of measurement of the performance of a
mutual fund scheme, it should also include the risk taken by the fund manager because
different funds will have different levels of risk attached to them. Risk associated with a
fund, in a general, can be defined as variability or fluctuations in the returns generated by
it. The higher the fluctuations in the returns of a fund during a given period, higher will be
the risk associated with it. These fluctuations in the returns generated by a fund are
resultant of two guiding forces. First, general market fluctuations, which affect all the
securities present in the market, called market risk or systematic risk and second,
fluctuations

due

to

specific securities present in the portfolio of the fund, called

unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in
terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is
measured in terms of Beta, which represents fluctuations in the NAV of the fund vis--visa
market. The more responsive the NAV of autual fund is to the changes in the market;
higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the
returns in the market. While unsystematic risk can be diversified through investments in a
number of instruments, systematic risk can not. By using the risk return relationship, we try
to assess the competitive strength of the mutual funds vis--vis one another in a better way.
In order to determine the risk-adjusted returns of investment portfolios, several
eminent authors have worked since 1960s to develop composite performance indices to
evaluate a portfolio by comparing alternative portfolios within a particular risk class.
The most important and widely used measures of performance are:
The Treynor Measure
The Sharpe Measure
Jenson Model
8

The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above
risk free rate of return (generally taken to be the return on securities backed by the
government, as there is no credit risk associated), during a given period and
systematic risk associated with it (beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the
fund.All risk-averse investors would like to maximize this value. While a high and
positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indication of unfavorable performance.

The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which
is a ratio of returns generated by the fund over and above risk free rate of return and
the total risk associated with it. According to Sharpe, it is the total risk of the fund
that the investors are concerned about. So, the model evaluates funds on the basis
of reward per unit of total risk. Symbolically, it can be written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where, Si is standard deviation of the fund.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance
of a fund, a low and negative Sharpe Ratio is an indication of unfavorable
performance.

Jenson Model
Jenson's model proposes another risk adjusted performance measure. This measure
was developed by Michael Jenson and is sometimes referred to as the Differential
Return Method. This measure involves evaluation of the returns that the fund has
generated vs. the returns actually expected out of the fund given the level of its
systematic risk. The surplus between the two returns is called Alpha, which measures
the performance of a fund compared with the actual returns over the period. Required
return of a fund at a given level of risk (Bi) can be calculated as:
Ri = Rf + Bi (Rm - Rf)
Where, Rm is average market return during the given period. After calculating it,
alpha can be obtained by subtracting required return from the actual return of the
fund.Higher alpha represents superior performance of the fund and vice versa.
Limitation of this model is that it considers only systematic risk not the entire risk
associated with the fund and an ordinary investor can not mitigate unsystematic
risk, as his knowledge of market isprimitive.

10

NEED FOR THE STUDY:

In the finance field, it is a common knowledge that money or finance is scarce and that
investors try to maximize their return. But, the return is higher, if the risk is also higher. Return
and Risk go together and they have a trade off. The art of investment is to see that the return is
maximized with the minimum of the risk, which is inherent in invest. In the above discussion, we
concentrated on the word investment and for making invest we need to make securities
analysis. Combination of securities with different risk return characteristics will constitute the
portfolio of the investor. The portfolio is also built up out of the wealth or income of the investor
over period of a time, with a view to suit his risk or return preferences to that of the portfolio
analysis is thus an analysis of the risk return characteristics of the individual securities in the
portfolio and changes that may take place in the combination with other securities due to
interaction among themselves and impact of each one of them on others.

11

OBJECTIVES OF THE STUDY;

To provide basic idea of different stock market investment instruments to investor in

portfolio management.
To provide knowledge to investor about various type of risk associated with various
investment instruments in portfolio.
To provide investor knowledge about P\E, P\BV and Beta that would help them in
selection of script and creation of portfolio.
To help investor in learning about derivative instrument future for the purpose of
speculation and hedging.

12

SCOPE OF THE STUDY:

The report deals with the different investment decisions made by different people. It
explains the element of RISK in detail while investing
It explains how portfolio hedges the risk in investment and gives optimum return, to a
given amount of risk. It also goes to the in depth of mechanics of portfolio creation,
selection, revision & evaluation.
The report also shows different ways of analysis of securities, different theories of
portfolio management for effective and efficient portfolio construction.

13

RESEARCH METHODOLOGY:
Research problem:
To identified the Stock Market Investment Avenue and methods to help investor in selection of
script to create portfolio. And the measures of hedging the portfolio with the use of derivative
instrument future.
Research design:
Research design is exploratory as the basic objective is to identify the stocks and methods to
create and protect portfolio.
Data collection:
Primary data: - Primary data are collected by my regularly tracking the stock price of various
scripts selected
Secondary data: - Secondary data are collected from various journals, websites and financial
news paper.

14

LIMITATIONS OF THE STUDY:

The data collected was basically confined to secondary sources, with very little amount of
primary data associated with the project.

The time duration given to complete the report was not sufficient.

The report is basically is made between the horizon of two months and the situation of
market is very dynamic so the conclusion or the return might not reflect the true picture.

Detailed study of the topic was not possible due to the limited size of the project.

15

Theatrical Framework
ANALYSIS OF INVESTMENT
WHAT IS INVESTMENT?
Investment is the activity, which is made with the objective of earning some sort of positive
returns in the future. It is the commitment of the funds to earn future returns and it involves
sacrificing the present investment for the future return. Every person makes the investment so
that the funds he has increases as keeping cash with himself is not going to help as it will not
generate any returns and also with the passage of time the time value of the money will come
down. As the inflation will rise the purchasing power of the money will come down and this will
result that the investor who does not invest will become more poor as he will not have any funds
whose value have been increased. Thus every person whether he is a businessman or a common
man will make the investment with the objective of getting future returns.

TYPES OF INVESTMENT:There are basically three types of investments from which the investors can choose. The three
kinds of investment have their own risk and return profile and investor will decide to invest
taking into account his own risk appetite. The main types of investments are: -

Economic investments:These investments refer to the net addition to the capital stock of the society. The capital stock
of the society refers to the investments made in plant, building, land and machinery which are
used for the further production of the goods. This type of investments are very important for the
development of the economy because if the investment are not made in the plant and machinery
the industrial production will come down and which will bring down the overall growth of the
economy.

16

Financial Investments:This type of investments refers to the investments made in the marketable securities which are
of tradable nature. It includes the shares, debentures, bonds and units of the mutual funds and
any other securities which is covered under the ambit of the Securities Contract Regulations Act
definition of the word security. The investments made in the capital market instruments are of
vital important for the country economic growth as the stock market index is called as the
barometer of the economy.
General Investments:These investments refer to the investments made by the common investor in his own small assets
like the television, car, house, motor cycle. These types of investments are termed as the
household investments. Such types of investment are important for the domestic economy of the
country. When the demand in the domestic economy boost the over all productions and the
manufacturing in the industrial sectors also goes up and this causes rise in the employment
activity and thus boost up the GDP growth rate of the country. The organizations like the Central
Statistical Organization (CSO) regularly takes the study of the investments made in the
household sector which shows that the level of consumptions in the domestic markets.

CHARACTERISICS OF INVESTMENT
Certain features characterize all investments. The following are the main characteristics features
if investments: 1. Return: All investments are characterized by the expectation of a return. In fact, investments are made
with the primary objective of deriving a return. The return may be received in the form of yield
plus capital appreciation. The difference between the sale price & the purchase price is capital
appreciation. The dividend or interest received from the investment is the yield. Different types
of investments promise different rates of return. The return from an investment depends upon the
nature of investment, the maturity period & a host of other factors.

17

2. Risk: Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of
capital, nonpayment of interest, or variability of returns. While some investments like
government securities & bank deposits are almost risk less, others are more risky. The risk of an
investment depends on the following factors.
0

The longer the maturity period, the longer is the risk.

The lower the credit worthiness of the borrower, the higher is the risk.

2
The risk varies with the nature of investment. Investments in ownership securities like equity
share carry higher risk compared to investments in debt instrument like debentures & bonds.
3. Safety: The safety of an investment implies the certainty of return of capital without loss of money or
time. Safety is another features which an investors desire for his investments. Every investor
expects to get back his capital on maturity without loss & without delay.
4. Liquidity: An investment, which is easily saleable, or marketable without loss of money & without loss of
time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O.
deposits, NSC, NSS etc. are not marketable. Some investment instrument like preference shares
& debentures are marketable, but there are no buyers in many cases & hence their liquidity is
negligible. Equity shares of companies listed on stock exchanges are easily marketable through
the stock exchanges.
An investor generally prefers liquidity for his investment, safety of his funds, a good return with
minimum risk or minimization of risk & maximization of return.
IMPORTANCE:
In the current situation, investment is becomes necessary for everyone & it is important & useful
in the following ways:
18

1. Retirement planning: Investment decision has become significant as people retire between the ages of 55 & 60. Also,
the trend shows longer life expectancy. The earning from employment should, therefore, be
calculated in such a manner that a portion should be put away as a savings. Savings by
themselves do not increase wealth; these must be invested in such a way that the principal &
income will be adequate for a greater number of retirement years. Increase in working
population, proper planning for life span & longevity have ensured the need for balanced
investments.
2. Increasing rates of taxation: Taxation is one of the crucial factors in any country, which introduce an element of compulsion,
in a persons saving. In the form investments, there are various forms of saving outlets in our
country, which help in bringing down the tax level by offering deductions in personal income.
For examples: 0
1

Unit linked insurance plan,

Life insurance,

National saving certificates,

Development bonds,

Post office cumulative deposit schemes etc.

3. Rates of interest: -

It is also an important aspect for sound investment plan. It varies between investment & another.
This may vary between risky & safe investment, they may also differ due different benefits
schemes offered by the investments. These aspects must be considered before actually investing.
The investor has to include in his portfolio several kinds of investments stability of interest is as
important as receiving high rate of interest.

19

4. Inflation: Since the last decade, now a days inflation becomes a continuous problem. In these years of
rising prices, several problems are associated coupled with a falling standard of living. Before
funds are invested, erosion of the resource will have to be carefully considered in order to make
the right choice of investments. The investor will try & search outlets, which gives him a high
rate of return in form of interest to cover any decrease due to inflation. He will also have to judge
whether the interest or return will be continuous or there is a likelihood of irregularity. Coupled
with high rate of interest, he will have to find an outlet, which will ensure safety of principal.
Beside high rate of interest & safety of principal an investor also has to always bear in mind the
taxation angle, the interest earned through investment should not unduly increase his taxation
burden otherwise; the benefit derived from interest will be compensated by an increase in
taxation.
5. Income: For increasing in employment opportunities in India., investment decisions have assumed
importance. After independence with the stage of development in the country a number of
organization & services came into being.
For example: The Indian administrative services,
Banking recruitment services,
Expansion in private corporate sector,
Public sector enterprises,
Establishing of financial institutions, tourism, hotels, and education.
More avenues for investment have led to the ability & willingness of working people to save &
invest their funds.
6. Investment channels: The growth & development of country leading to greater economic activity has led to the
introduction of a vast array of investment outlays. Apart from putting aside saving in savings
20

banks where interest is low, investor have the choice of a variety of instruments. The question to
reason out is which is the most suitable channel? Which media will give a balanced growth &
stability of return? The investor in his choice of investment will give a balanced growth &
stability of return? The investor in his choice of investment will have try & achieve a proper mix
between high rates of return to reap the benefits of both.
For example: 0

Fixed deposit in corporate sector

Unit trust schemes.

21

INVESTMENTS AVENUES:There are various investments avenues provided by a country to its people depending upon the
development of the country itself. The developed countries like the USA and the Japan provide
variety of investments as compared to our country. In India before the post liberalization era
there were limited investments avenues available to the people in which they could invest. With
the opening up of the economy the number of investments avenues have also increased and the
quality of the investments have also improved due to the use of the professional activity of the
players involved in this segment. Today investment is no longer a process of trial and error and it
has become a systematized process, which involves the use of the professional investment
solution provider to play a greater role in the investment process.
Earlier the investments were made without any analysis as the complexity involved the
investment process were not there and also there was no availability of variety of instruments.
But today as the number of investment options have increased and with the variety of
investments options available the investor has to take decision according to his own risk and
return analysis.

22

An investor has a wide array of Investment Avenue. They are as under:

Investment

Equity

Fixed Income

Deposits

Mutual Fund

Tax Sheltered

Life Insurance

Real Estate

Precious

Financial Derivatives

23

EQUITY SHARES: -

Types of Equity Instruments:

Ordinary Shares
Ordinary shareholders are the owners of a company, and each share entitles the holder to
ownership privileges such as dividends declared by the company and voting rights at meetings.
Losses as well as profits are shared by the equity shareholders. Without any guaranteed income or
security, equity shares are a risk investment, bringing with them the potential for capital appreciation
in return for the additional risk that the investor undertakes in comparison to debt instruments with
guaranteed income.
Preference Shares
Unlike equity shares, preference shares entitle the holder to dividends at fixed rates subject to
availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of
inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to
ownership privileges such as voting rights at meetings.
Equity Warrants
These are long term rights that offer holders the right to purchase equity shares in a company at a
fixed price (usually higher than the current market price) within a specified period. Warrants are in
the nature of options on stocks.
Classification in terms of Market Capitalisation
Market capitalisation is equivalent to the current value of a company i.e. current market price per
share times the number of outstanding shares. There are Large Capitalisation companies, Mid-Cap
companies and Small-Cap companies. Different schemes of a fund may define their fund objective
24

as a preference for Large or Mid or Small-Cap companies' shares. Large Cap shares are more
liquid and hence easily tradable. Mid or Small Cap shares may be thought of as having greater
growth potential. The stock markets generally have different indices available to track these
different classes of shares.
Classification in terms of Anticipated Earnings
In terms of the anticipated earnings of the companies, shares are generally classified on the basis
of their market price in relation to one of the following measures:
* Price/Earnings Ratio is the price of a share divided by the earnings per share, and indicates
what the investors are willing to pay for the company's earning potential. Young and/or fast
growing companies usually have high P/E ratios. Established companies in mature industries
may have lower P/E ratios. The P/E analysis is sometimes supplemented with ratios such as
Market Price to Book Value and Market Price to Cash Flow per share.

Dividend Yield for a stock is the ratio of dividend paid per share to current market price.
Low P/E stocks usually have high dividend yields. In India, at least in the past, investors have
indicated a preference for the high dividend paying shares. What matters to fund managers is the
potential dividend yields based on earnings prospects.
Based on companies' anticipated earnings and in the light of the investment management
experience the world over, stocks are classified in the following groups:

Cyclical Stocks are shares of companies whose earnings are correlated with the state of the
economy. Their earnings (and therefore, their share prices) tend to go up during upward
economic cycles and vice versa. Cement or Aluminum producers fall into this category,
just as an example. These companies may command relatively lower P/E ratios, and
have higher dividend pay-outs.

Growth Stocks are shares of companies whose earnings are expected to increase at rates that
exceed normal market levels. They tend to reinvest earnings and usually have high P/E ratios and
25

low dividend yields. Software or information technology company shares are an example of
this type. Fund managers try to identify the sectors or companies that have a high growth
potential.

Value Stocks are shares of companies in mature industries and are expected to yield low
growth in earnings. These companies may, however, have assets whose values have not been
recognized by investors in general. Fund managers try to identify such currently under-valued
stocks that in their opinion can yield superior returns later. A cement company with a lot of real
estate and a company with good brand names are examples of potential value shares.

FIXED INCOME SECURITIES

Many instruments give regular income. Debt instruments may be secured by the assets of the
borrowers as generally in case of Corporate Debentures, or be unsecured as is the case with
Indian Financial Institution Bonds.
A debt security is issued by a borrower and is often known by the issuer category, thus giving us
Government Securities and Corporate Securities or FI bonds. Debt instruments are also distinguished
by their maturity profile. Thus, instruments issued with short-term maturities, typically under one
year, are classified as Money Market Securities. Instruments carrying longer than one-year
maturities are generally called Debt Securities.
Most debt securities are interest-bearing. However, there are securities that are discounted
securities or zero-coupon bonds that do not pay regular interest at intervals but are bought at a
discount to their face value. A large part of the interest-bearing securities are generally Fixed
Income-paying, while there are also securities that pay interest on a Floating Rate basis.
Review of the Indian Debt Market:
The Wholesale Debt Market segment deals in fixed income securities and is fast gaining ground
in an environment that has largely focused on equities.
26

The Wholesale Debt Market (WDM) segment of the Exchange commenced operations on June
30, 1994. This provided the first formal screen-based trading facility
This segment provides trading facilities for a variety of debt instruments including Government
Securities, Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/ Banks
like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers, Certificate of Deposits,
Corporate Debentures, State Government loans, SLR and Non-SLR Bonds issued by Financial
Institutions, Units of Mutual Funds and Securitized debt by banks, financial institutions,
corporate bodies, trusts and others.
Large investors and a high average trade value characterize this segment. Till recently, the
market was purely an informal market with most of the trades directly negotiated and struck
between various participants. The commencement of this segment by NSE has brought about
transparency and efficiency to the debt market, along with effective monitoring and surveillance
to the market.

27

Business Growth in WDM Segment:

Year

Market
Number
Capitalisation
of
(Rs.crores)
Trades

Net Traded
Value
(Rs.crores)

Average
Daily Value
(Rs.crores)

Average
Trade Size
(Rs.crores)

20112010

1,553,448

60,159

458,434.94

1,833.74

7.62

200102009

1,461,734

124,308

887,293.66

3,028.31

7.14

20092008

1,215,864

189,518

1,316,096.24

4,476.52

6.94

20082007

864,481

167,778

1,068,701.54

3,598.32

6.37

20072006

756,794

144,851

947,191.22

3,277.48

6.54

20062005

580,835

64,470

428,581.51

1,482.98

6.65

20052004

494,033

46,987

304,216.24

1,034.75

20042003

411,470

16,092

105,469.13

364.95

6.55

20032002

343,191

16,821

111,263.28

377.16

6.61

20022001

292,772

7,804

42,277.59

145.28

5.42

20012000

207,783

2,991

11,867.68

40.78

3.97

20001999

158,181

1,021

6,781.15

30.41

6.64

6.47

Instruments in the Indian Debt Market:

Certificate of Deposit:
Certificates of Deposit (CD) are issued by scheduled commercial banks excluding regional rural
banks. These are unsecured negotiable promissory notes. Bank CDs have a maturity period of 91
days to one year, while those issued by FIs have maturities between one and three years.

28

 Commercial Paper:
Commercial paper (CP) is a short term, unsecured instrument issued by corporate bodies
(public & private) to meet short-term working capital requirements. Maturity varies between 3
months and 1 year. This instrument can be issued to individuals, banks, companies and other
corporate bodies registered or incorporated in India. CPs can be issued to NRIs on nonreportable and non-transferable basis.
Corporate Debentures:
The debentures are usually issued by manufacturing companies with physical assets, as secured
instruments, in the form of certificates they are assigned a credit rating by rating agencies. Trading
in debentures is generally based on the current yield and market values are based on yield-tomaturity. All publicly issued debentures are listed on exchanges.
Floating Rate Bonds (FRB):
These are short to medium term interest bearing instruments issued by financial intermediaries
and corporate. The typical maturity of these bonds is 3 to 5 years. FRBs issued by financial
institutions are generally unsecured while those from private corporate are secured. The FRBs are
pegged to different reference rates such as T-bills or bank deposit rates. The FRBs issued by the
Government of India are in the form of Stock Certificates or issued by credit to SGL accounts
maintained by the RBI.
Government Securities:
These are medium to long term interest-bearing obligations issued through the RBI by the
Government of India and state governments. The RBI decides the cut-off coupon on the basis of bids
received during auctions. There are issues where the rate is pre-specified and the investor only bids
for the quantity. In most cases the coupon is paid semi-annually with bullet redemption features.

Treasury Bills:
29

T-bills are short-term obligations issued through the RBI by the Government of India at a discount.
The RBI issues T-bills for different tenures: now 91 -days and 364-days. These treasury bills are issued
through an auction procedure. The yield is determined on the basis of bids tendered and
accepted.
Bank/FI Bonds
Most of the institutional bonds are in the form of promissory notes transferable by endorsement
and delivery. These are negotiable certificates, issued by the Financial Institutions such as the
IDBI/ICICI/ IFCI or by commercial banks. These instruments have been issued both as regular
income bonds and as discounted long-term instruments (deep discount bonds).
Public Sector Undertakings (PSU) Bonds
PSU Bonds are medium and long term obligations issued by public sector companies in which
the government share holding is generally greater than 51%. Some PSU bonds carry tax
exemptions. The minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds.
PSU bonds are generally not guaranteed by the government and are in the form of promissory notes
transferable by endorsement and delivery. PSU bonds in electronic form (demat) are eligible for
repo transactions.

MUTUAL FUND SCHEMES

An investor can participant in various schemes floated by mutual fund

instead of buying equity shares. In mutual funds invest in equity shares & fixed income
securities. There are three broad types of mutual fund schemes.
Growth schemes
Income schemes
Balanced schemes

30

DEPOSITS

It is just like fixed income securities earn a fixed return. However, unlike fixed income
securities, deposits are negotiable or transferable. The important types of deposits in India are:
Bank deposits
Company deposits
Postal deposits.

TAX-SHELTERED SAVING SCHEMES

It provides benefits to those who participate in them. The most important tax sheltered saving
schemes in India is:
Employee provident fund scheme
Public provident fund schemes
National saving certificate

LIFE INSURANCE
In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent
the sacrifice & the assured sum the benefit. In India, the important types of insurance polices are:
Endowment assurance policy
Money back policy

31

REAL ESTATE
For the bulk of the investors the most important asset in their portfolio is a residential house. In
addition to a residential house, the more affluent investors are likely to be interested in
the following types of real estate:
Agricultural land
Semi-urban land

PRECIOUS
OBJECTS
PRECIOUS
OBJECTS:
It is highly valuable in monetary terms but generally they are small in size. The important
precious objects are:
Gold & silver
Precious stones
Art objects

FINANCIAL DERIVATIVES
FINANCIAL DERIVATIVES: A financial derivative is an instrument whose value is derived from the value of underlying asset.
It may be viewed as a side bet on the asset. The most import financial derivatives from the point
of view of investors are:
Options
Futures.

32

RISK RETURN OF VARIOUS INVESTMENT AVENUES

Every investment is characterized by return & risk. Investors intuitively understand the concept
of risk. A person making an investment expects to get some return from the investment in the
future. But, as future is uncertain, so is the future expected return. It is this uncertainty associated
with the returns from an investment that introduces risk into an investment. Risk arises where
there is a possibility of variation between expectation and realization with regard to an
investment.

Meaning of Risk :
Risk & uncertainty are an integrate part of an investment decision. Technically risk can be
define as situation where the possible consequences of the decision that is to be taken are known.
Uncertainty is generally defined to apply to situations where the probabilities cannot be
estimated. However, risk & uncertainty are used interchangeably.

33

TREYNOR RATIO:The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure), is a
measurement of the returns earned in excess of that which could have been earned on an
investmentthat has no diversifiable risk (e.g., Treasury Bills or a completely diversified
portfolio), per each unit of market risk assumed.
The Treynor ratio relates excess return over the risk-free rate to the additional risk
taken; however, systematic risk is used instead of total risk. The higher the ratio, the better the
performance of the portfolio under analysis.

portfolio i's return,

risk free rate
portfolio i's beta

SHARPE RATIO:The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability

ratio is a measure of the excess return (or risk premium) per unit of risk in an investment asset
or a trading strategy, named after William

Types of risks
1. Systematic risk: -

34

Systematic risk is non diversifiable & is associated with the securities market as well as the
economic, sociological, political, & legal considerations of prices of all securities in the
economy. The affect of these factors is to put pressure on all securities in such a way that the
prices of all stocks will more in the same direction.

Example: During a boom period prices of all securities will rise & indicate that the economy is moving
towards prosperity. Market risk, interest rate risk & purchasing power risk are grouped under
systematic risk.

RISKS

SYSTAMATIC
UNSYSTAMATIC
Market Risk

Business Risk

Interest Rate Risk

Financial Risk

Purchasing power Risk

35

1. Systematic Risk
(A) Market risk:
Market risk is referred to as stock variability due to changes in investors attitudes &
expectations. The investor reaction towards tangible and intangible events is the chief cause
affecting market risk.
(B) Interest rate risk :
There are four types of movements in prices of stocks in the markets. These may termed as (1)
long term, (2) cyclical (bull and bear markets), (3) intermediate or within the cycle, and (4) short
term. The prices of all securities rise or fall depending on the change in interest rates. The longer
the maturity period of a security the higher the yield on an investment & lower the fluctuations in
prices.
(C) Purchasing Power risk:
Purchasing power risk is also known as inflation risk. This risk arises out of change in the prices
of goods & services and technically it covers both inflation and deflation periods. During the last
two decades it has been seen that inflationary pressures have been continuously affecting the
Indian economy. Therefore, in India purchasing power risk is associated with inflation and rising
prices in the economy.
2. Unsystematic Risk: The importance of unsystematic risk arises out of the uncertainty surrounding of particular firm
or industry due to factors like labour strike, consumer preferences and management policies.
These uncertainties directly affect the financing and operating enviourment of the firm.
Unsystematic risks can owing to these considerations be said to complement the systematic risk
forces.
(A) Business risk
Every corporate organization has its own objectives and goals and aims at a particular gross
profit & operating income & also accepts to provide a certain level of dividend income to its
36

shareholders. It also hopes to plough back some profits. Once it identifies its operating level of
earnings, the degree of variation from this operating level would measure business risk.
Example:If operating income is expected to be 15% in a year, business risk will be low if the operating
income varies between 14% and 16%. If the operating income were as low as 10% or as high as
18% it would be said that the business risk is high.
(B) Financial Risk: Financial risk in a company is associated with the method through which it plans its financial
structure. If the capital structure of a company tends to make earning unstable, the company may
fail financially. How a company raises funds to finance its needs and growth will have an impact
on its future earnings and consequently on the stability of earnings. Debt financing provides a
low cost source of funds to a company, at the same time providing financial leverage for the
common stock holders. As long as the earnings of the company are higher than the cost of
borrowed funds, the earning per share of common stock is increased. Unfortunately, a large
amount of debt financing also increases the variability of the returns of the common stock holder
& thus increases their risk. It is found that variation in returns for shareholders in levered firms
(borrowed funds company) is higher than in unlevered firms. The variance in returns is the
financial risk.

37

Risk Return Of Various Investment Alternatives

Management
Decision

Market
Investment

Interest

Risk

Risk

L
L
L
L
L
L
L
L
L

L
L
L
L
L
L
L
L
L

H
H
L
L
L
L
L
L
L

H
H
H
H
H
H
M-H
H
H

Risk

Required
H
H
M
M
L
L
L
L
L
O
O
O
O
O

Growth stock
Speculative common
stock
Blue chips
Convertible referred
stock
Convertible
debentures
Corporate bonds
Government bonds
Short-term bonds
Money market funds
Life insurance
Commercial banks
Unit trusts
Saving a/c
Cash

Purchasing

Business

Power
Risk

So, there are so many investment options & the different option have different benefits &
limitations in the sense risk associated with it. So it is difficult for them to chose option, which
give maximum return at minimum risk.

PORTFOLIO
Meaning of portfolio:Portfolio

38

A combination of securities with different risk & return characteristics will constitute the
portfolio of the investor. Thus, a portfolio is the combination of various assets and/or instruments
of investments. The combination may have different features of risk & return, separate from
those of the components. The portfolio is also built up out of the wealth or income of the investor
over a period of time, with a view to suit his risk and return preference to that of the portfolio
that he holds. The portfolio analysis of the risk and return characteristics of individual securities
in the portfolio and changes that may take place in combination with other securities due to
interaction among themselves and impact of each one of them on others.
An investor considering investments in securities is faced with the problem of choosing from
among a large number of securities. His choice depends upon the risk and return characteristics
of individual securities. He would attempt to choose the most desirable securities and like to
allocate is funds over this group of securities. Again he is faced with the problem of deciding
which securities to hold and how much to invest in each. The investor faces an infinite number of
possible portfolios or groups of securities. The risk and return characteristics of portfolio differ
from those of individual securities combining to form a portfolio. The investor tries to choose the
optimal portfolio taking in to consideration the risk return characteristics of all possible
portfolios.
As the economy and the financial environment keep changing the risk return characteristics of
individual securities as well as portfolios also change. This calls for periodical review and
revision of investment portfolios of investors. An investor invests his funds in a portfolio
expecting to get a good return consistent with the risk that he has to bear. The return realized
from the portfolio has to be measured and the performance of the portfolio has to be evaluated.
It is evident that rational investment activity involves creation of an investment portfolio.
Portfolio management comprises all the processes involved in the creation and maintenance of
an investment portfolio. It deals specifically with the security analysis, portfolio analysis,
portfolio selection, portfolio revision and portfolio evaluation. Portfolio management makes use
of analytical techniques of analysis and conceptual theories regarding rational allocation of

39

funds. Portfolio management is a complex process which tries to make investment activity more
rewarding and less risky.

40

PORTFOLIO DESIGN
Before designing a portfolio one will have to know the intention of the investor or the returns
that the investor is expecting from his investment. This will help in adjusting the amount of
risk. This becomes an important point from the point of view of the portfolio designer because
if the investor will be ready to take more risk at the same time he will also get more returns.
This can be more appropriately understood from the figure drawn below.

R1
Expected Returns

R2

Risk less
Investment
M1

M2
Risk

From the above figure we can see that when the investor is ready to take risk of M 1, he is likely
to get expected return of R1, and if the investor is taking the risk of M2, he will be getting more
returns i.e. R2. So we can conclude that risk and returns are directly related with each other. As
one increases the other will also increase in same of different proportion and same if one
decreases the other will also decrease.

From the above discussion we can conclude that the investors can be of the following three
types:

41

1. Investors willing to take minimum risk and at the same time are also expecting minimum
returns.
2. Investors willing to take moderate risk and at the same time are also expecting moderate
returns.
3. Investors willing to take maximum risk and at the same time are also expecting maximum
returns.

42

PORTFOLIO AGE RELATIONSHIP

Your age will help you determine what a good mix is / portfolio is

Age
below 30
30 t0 40
40 to 50
50 to 60
above 60

Portfolio
80% in stocks or mutual funds
10% in cash
10% in fixed income
70% in stocks or mutual funds
10% in cash
20% in fixed income
60% in stocks or mutual funds
10% in cash
30% in fixed income
50% in stocks or mutual funds
10% in cash
40% in fixed income
40% in stocks or mutual funds
10% in cash
50% in fixed income

These aren't hard and fast allocations, just guidelines to get you thinking about how your
portfolio should look. Your risk profile will give you more equities or more fixed income
depending on your aggressive or conservative bias. However, it's important to always have some
equities in your portfolio (or equity funds) no matter what your age. If inflation roars back, this
will be the portion of your investments that protects you from the damage, not your fixed
income.

43

Also, the fixed income of your portfolio should be diversified. If you buy bonds and debentures
directly or if you invest in FDs, then make sure you have at least five different maturities to
spread out the interest rate risk.
Diversifying in equities and bonds means more than buying a number of positions. Each position
needs to be scrutinized as to how it fits into the stocks or bonds that already are in your portfolio,
and how they might be affected by the same event such as higher interest rates, lower fuel prices,
etc. Put your portfolio together like a puzzle, adding a piece at a time, each one a little different
from the other but achieving a uniform whole once the portfolio is complete.

Types of portfolio for study:

In portfolio Design, we are considering only two types of portfolio. They are as follow:
1. Random Portfolio
2. Sector Portfolio
1. Random portfolio
Random portfolio consists of the scripts that are randomly selected by the investor by its own
knowledge and preference of the stocks. Here there is no analysis is done of the script, they are
selected on the tips and buts received by the investors from the external sources.

Features of random portfolio

There is no method used for selection of the script in the portfolio.

Selection is based on the individual criteria for the scripts.

The investment is made for higher return in short term.

Generally in India most of the portfolio are selected according to this random methods as
no investor himself in that much analysis of the script.

44

Advantages of random portfolio

Easier to keep a track on the market as not much time wasted in the analysis.

This portfolio seems to have perform better in short term as script are generally which are
performing better at that time.

Tips are available every where for the investor to pouch.

It is the experience of the individual that can fetch him good return.

Disadvantages of random portfolio

There is every chance that you may select a script that has a very bad background in the
market.

Not every time the tips pay off for you. You need to have strong reason to select that
script.

Such portfolios are not able to sustain when there is a crisis in the market.

There is a very high risk and return involve in such portfolio.

2. Sector specific portfolio

Sector specific portfolio includes securities of those companies which are in the same business.
Sector portfolios are very useful when there is a particular sector which is doing very good and
has a bright future a head. Sector portfolio has the securities of those companies that engage in
same kind of business.
e.g. In late 1990s sector that was providing the highest return was information technology.
Investors who have invested their money in these securities had earned very high return.
Features of sector portfolio

Script form the same group of companies that are in to the similar type of business.

Maximum exposure to the industry/sector. So any news or event has the direct effect on
the portfolio.

Risk regarding the portfolio increases as it is expose to sector specific ups and downs.

Useful investment tools for speculator and short-sellers.

45

It is better suited for the sectors which have been providing good revenue in the near past.

Advantages of sector portfolio

It is better suited to investors who are willing to take risk.

It provides better short term return then other portfolios.

It is easy to keep a watch on one sector rather than many. You can have a good command
over the things happening.

Limited exposure to other sectors keeps the portfolio safe from the performance of other
sectors in the economy.

Disadvantages of sector portfolio

It is a highly risky portfolio as risk associated with the sector directly affects the
performance of the portfolio.

These types of portfolios are not suited for long-term investor as risk taken for the return
can be too high.

There is always the possibly many scripts in the sector may not be giving that much good
attractive return as others. They may eat the profits from other scripts.
Book value is based on historical costs, not current values, but can provide an important measure
of the relative value of a company over time. Book value can be figured as assets minus
liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure
that results is the company's net book value. This is contrasted with its market capitalization, or
total share price value, which is calculated by multiplying the outstanding shares by their current
market price.
You can also compare a company's market value to its book value on a per-share basis. Divide
book value by the number of shares outstanding to get book value per share and compare the
result to the current stock price to help determine if the company's stock is fairly valued. Most
stocks trade above book value because investors believe that the company will grow and the

46

value of its shares will, too. When book value per share is higher than the current share price, a
company's stock may be undervalued and a bargain to investors.

In case of our sensex as we can see that it is currently trading at a P/B ratio of 4.41 this shows
the average P/B ratio prevailing in the market. So any script trading below the P/B of 4.41 can
said to be under valued if we keep the BSE SENSEX as bench mark. But it would be advisable
for an investor to also look at the sector leaders P/B ratio to know what is the common industry
P/B and based on that he can decide about whether to invest in the company or not. As such there
is no guarantee that low P/B would able to give better return but this stocks are considered to be
undervalued so one can think that this companies are undervalued so chances of appreciation are
very high in case of low P/B scrip. Such companies having low P/B ratio can be considered as
value stock and one can thin about investing in those companies.
The P/E ratio as a guide to investment decisions
Earnings per share alone mean absolutely nothing. In order to get a sense of how expensive or
cheap a stock is, you have to look at earnings relative to the stock price and hence employ the
P/E ratio. The P/E ratio takes the stock price and divides it by the last four quarters' worth of
earnings. If AB ltd is currently trading at Rs. 20 a share with Rs. 4 of earnings per share (EPS), it
would have a P/E of 5. Big increase in earnings is an important factor for share value
appreciation. When a stock's P-E ratio is high, the majority of investors consider it as pricey or
overvalued. Stocks with low P-E's are typically considered a good value. However, studies done
and past market experience have proved that the higher the P/E, the better the stock.
First, one can obtain some idea of a reasonable price to pay for the stock by comparing its
present P/E to its past levels of P/E ratio. One can learn what is a high and what is a low P/E for
the individual company. One can compare the P/E ratio of the company with that of the market
giving a relative measure. One can also use the average P/E ratio over time to help judge the
reasonableness of the present levels of prices. All this suggests that as an investor one has to
attempt to purchase a stock close to what is judged as a reasonable P/E ratio based on the

47

comparisons made. One must also realize that we must pay a higher price for a quality company
with quality management and attractive earnings potential.
In the case if we look at the benchmark of BSE sensex on 1 st of December it is trading at a P/E of
24.49. So if we just keep the benchmark P/E in mind then we can say that any stock which is
trading bellow the P/E of 24.49 is available cheaply. But for an investor it is also advisable to
look at the industry P/E as it is more important because just looking at the above position we can
see that SBI is trading at a very low P/E of around 8 but if you see that in banking sector that to
public sector banks the normal industry P/E is 8 all most all banks are trading around 8 or bellow
the P/E of 8.
So always it is advisable to look at what is the P/E of industry in which we want to invest to get
the better idea, because if we take the example of IT industry there almost you will find
companies around P/E of 30. so if any IT company having of P/E would considered to be a cheap
option for the investor to invest in to. So the investor
should also look at the industry average P/E. The new investor can know about the industry P/E
or any other companies P/E in any financial magazine or from the internet also if he does not
know how to calculate the P/E or is not having the data available with them.

The formula for calculating the P/E ratio is

P/E = Current Market Price

RANDOM PORTFOLIO
Earning Per Share

Random portfolio consists of the scripts that are randomly selected by the investor by its own
knowledge and preference of the stocks. Here there is no analysis is done of the script, they are
selected on the tips and buts received by the investors from the external sources.
48

We are considering BETA factor to design our Random Portfolio.

Beta Factor Beta indicates the proportion of the yield of a portfolio to the yield of the entire
market (as indicated by some index). If there is an increase in the yield of the market, the yield of
the individual portfolio may also go up. If the index goes up by 1.5% and the yield of your
portfolio goes up by 0.9%, the beta is 0.9/1.5 i.e 0.6. in other words, beta indicates that for every
1 % increase in the market yield, the yield of the portfolio goes up by 0.6%. High beta shares do
move higher than the market when the market rises and the yield of the fund declines more than
the yield of the market when the market falls. In the Indian context a beta of 1.2% is considered
very bullish.
You can be indifferent to market swings if you know your stocks well. Or you can put your
portfolio into neutral or bias for the upside if you're bullish or a little for the downside if you're
bearish. One way to do that is to have a mix of stocks that have certain betas in your portfolio.
When investors are bullish on the market, they like to have high beta stocks in their portfolios
because if they're right, then their stocks go up faster than the market in general, and their
performance is better than the market. If investors are bearish on the market, then they use the
low beta or negative beta stocks because their portfolios will go down less than the market and
their performance will be better than the general market. And if they want to be neutral, they can
then make sure that they have stocks with a beta of 1 or develop a portfolio that has stocks with
betas greater than 1 and less than 1 so that they have the whole portfolio with an average beta of

1.A beta for a stock is derived from historical data. This means it has no predictive value for the
future, but it does show that if the stock continues to have the same price patterns relative to the
market in general as it has in the past, you've got a way of knowing how your portfolio will
49

perform in relation to the market. And with a portfolio with an average beta of 1, you can create
your own index fund since you'll move more or less in tandem with the market.

50

Interpretation of Beta
When B = 1 means that the scrip has same volatility as compared to Index. Suitable for moderate
investor.
When B>1 means that scrip is more volatile as compared to market suitable for aggressive
investors.
When B<1 then scrip is less volatile as compared to market and suitable for defensive investors.
investors.

Beta of scrips plays vital role in scrip selection in Portfolio management. Portfolio can be created
in many ways as sector wise, diversified in various sector, beta wise scrip portfolio.

SO BASED ON THIS BETA NOW WE WILL PREPARE THREE PORTFOLIO TO MATCH

THE RISK TAKING CAPACITY OF AN INVESTOR

THAT IS
PORTFOLIO

AGGRESSIVE

MODERATE

51

DEFENSIVE

INTRODUCTION
INDUSTRY PROFILE
Journey of Indian stock market
Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are meager and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to be
transacted towards the close of the eighteenth century.
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business
attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the Civil War American broke out and cotton supply from United States of Europe
was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about
200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began
(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a
place in a street (now appropriately called as Dalal Street) where they would conveniently
assemble and transact business. In 1887, they formally established in Bombay, the "Native Share
and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange "). In
1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899.
Thus, the Stock Exchange at Bombay was consolidated.

52

Growth Pattern of the Indian Stock Market

Sr.
No.
1
2
3
4

As on 31st
December
No. of
Stock
Exchanges
No. of
Listed Cos.
No. of Stock
Issues of
Listed Cos.
Capital of
Listed
Cos. (Cr. Rs.)
Market value
of
Capital of
Listed
Cos. (Cr. Rs.)
Capital per
Listed Cos.
(4/2)
(Lakh Rs.)
Market Value
of
Capital per
Listed
Cos. (Lakh
Rs.)
(5/2)
Appreciated
value
of Capital per
Listed Cos.
(Lakh Rs.)

1946

1961

1971

1975

1980

1985

1991

1995

14

20

22

1125

1203

1599

1552

2265

4344

6229

8593

1506

2111

2838

3230

3697

6174

8967

11784

270

753

1812

2614

3973

9723

32041

59583

971

1292

2675

3273

6750

25302

110279

478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

358

170

148

126

170

260

344

5564

53

803

COMPANY PROFILE
INDIAINFOLINELTD

5paisa.com

INDIA INFOLINE Limited

The IIFL (India Infoline) group, comprising the Holding Company
India Infoline Ltd (NSE: INDIAINFO, BSE: 532636) and its Subsidary is one
of the leading players in the Indian financial Services space. IIFL offers advice
and execution platform for the Entire range of financial services covering products ranging
from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance,
Fixed deposits, Loans, Investment Banking, GoId bonds and other small saving instruments
Our core strengths are our expertise in equity research and a wide retail distribution network. We
have an outstanding research division involved in macro economic studies, industry and
company specific equity research, with analyst specializing in particular economic sectors and
large cap stocks.
Indiainfoline Limited is one of the larger players in distribution of IPOs - it was ranked number
One in 2003-04 as Book Running Lead Manager in public equity offerings by PRIME Database.
It has also won the Best Equity House Award from Finance Asia - April 2004.
The Company has a full-fledged Research division involved in macro economic studies, sectoral
research and Company specific equity research combined with a strong and well networked sales
force which helps deliver current and up-to-date market information and news.
Indiainfoline Limited is also a depository participant with National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL) providing dual benefit
services wherein the investors can use the brokerage services of the Company for executing the
transactions and the depository services for settling them.

54

The Company has 113 branches servicing around 1,00,000 customers, through our own offices
and a large franchisee network. Its has an Online presence through Kotakstreet.com where we
offer Internet Broking services and also online IPO and Mutual Fund

55

1. Bajaj autoLtd.
Company at glance
Industry
: -Auto
52 Week High: - 1665.00
52 Week Low : - 920.80
Volume
: 59847
Face Value:
- 10.00
P/E Ratio
: - 73.58
EPS
: - 18.50

Three Months chart

The bellow given chart shows the performance of the script in the bse for last three months. It
shows the volatility of the stock for the months of November, December and January.

56

2. Maruti suzuki Ltd.

Company at glance
Industry:
52 Week High:
52 Week Low:
P/E Ratio:
EPS:
Volume:
Face Value:

Auto
1599
1125
60.15
35.73
2,25545
10.00

Three Months chart

The bellow given chart shows the performance of the script in the bse for last three months. It
shows the volatility of the stock for the months of November, December and January.

57

M&M Ltd.
Industry:
52 Week High:
52 Week Low:
P/E Ratio:
EPS:
Volume:
Face Value:

Auto
1084
491
86.60
8.4
4,56,768
10

Three Months chart

The bellow given chart shows the performance of the script in the bse for last three months. It
shows the volatility of the stock for the months of November, December and January.

58

TATAMOTARS Ltd.

Industry:
52 Week High:
52 Week Low:
P/E Ratio:
EPS:
Volume:
Face Value:

Auto
1381
670
9.43
120.43
3,45,789
10

Three Months chart:

The bellow given chart shows the performance of the script in the bse for last three months. It
shows the volatility of the stock for the months of November, December and January.

59

RATIO ANALYSIS:
PER SHARE RATIO
Reported Cash EPS Ratio
maruti
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Average

11.4
20.04
30.04
020.03
22.9
100.41
20.682

Tata motars
Bajaj auto
M&m
13.49
63.05
24.75
53.96
36.63
32.53
41.22
19.29
54.27
35.11
150.36
203.94
30.072
40.788

36.93
33.61
27.69
28.23
24.39
150.85
30.17

20.96
30.07
20.2
30.14
46.17
151.54
30.908

Tata motars
Bajaj auto
M&m
31.62
68.78
74.44
57.63
62.93
41.42
96.74
68.62
30.98
27.85
280.47
210.3
56.694
42.86

41.26
39.11
31.14
31.62
22.31
165.44
33.088

552.67
825.99
726.01
826.03
1124.13
254.83
750.966

Tata motars
Bajaj auto
M&m
39.26
231.18
65.44
176.98
75.66
194.75
93.55
181.3
105.95
200.98
4000.86
985.19
850.972
957.038

232.51
341.9
450.75
563.93
573.71
1762.8
352.56

Operatig Profit Per Share

maruti
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Average
Book Value per Share
maruti
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Average

60

Net Operating Income Per Share

Maruti
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Average

35.25
40.33
40.38
40.33
43.93
400.22
80.044

Tatamotars
Bajaj auto
M&m
138.64
138.64
160.32
160.32
200.52
200.52
277.15
277.15
227.49
115.9
1004.12
892.53
200.824
178.506

91.87
97.54
92.18
101.12
88.78
371.49
64.298

142.67
15.99
16.01
16.03
12.31
353.01
70.602

Tatamotars
Bajaj auto
M&m
78.97
213.88
129.54
159.63
149.75
177.41
167.64
164.07
280.01
183.76
765.91
898.75
153.182
179.75

57.18
63.74
50.96
62.02
140.68
314.58
62.916

Free Reserve per Share

Maruti
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Average

61

Reported Cash EPS

Ratio
Operatig Profit Per
Share
Book Value per Share

250
200
150
100
50
0
maruti Bajaj autoTata mtsM&m
Company

Average Return

Average Rate

Per Share Ratios

Net Operating Income

Per Share
Free Reserve per
Share

Profitability Ratio
Operatig Margin in
%

50
40
30
20
10
0

Gross Profit
margin in %
bajaj

Tata maruti M&m

Net Profit Margin

in %

Company

Return on long
term fund in %

62

Portfolio in Telecom Sector

Maruti
Tata motars
Bajaj auto
M&m

Average return
Portfolio
Wi
143.87
79663.1
415.04
229814
722.26
399927
524.81
290596
1805.98
1000000

Total Portfolio = 10,00,000 Rs.

Price as on particular date

Company
Maruti
Tata motars
Bajaj auto
M&m

10-10-2010
1159
1050
1258
678

Total Return on investment

= Total return total investment
= 1114000 1000000
= 14000.

Total return on investment ( in %) = 14 %

63

10-1-2011
1310
1276
1387
310

7.96631
22.9814
39.9927
29.0596
100

FINDING OF THE REPORT

Findings of the report gives the fruit of the all the analysis done on the research of measuring and
comparing performance of the portfolio with the market portfolio.

Random portfolio

After understanding the various concepts about what are the investments option and what are the
risks associated with the various investment avenues. And also about how one can use Derivative
to be specific Future for the purpose of Hedging and Speculation.

But it is advisable to use the direct equity investment only if the investors have adequate
knowledge about selection of stocks. There task does not ends with the selection of script
but they are also required to pay close attention to the various happening in the economy
that have direct or indirect effect on stock market as we have learn that the price of the
script is affected by two factor, one is company specific news and the other is economy
specific news so any investor investing in the equity directly has to keep the close track
of the economy as well as the company in which they invest to look out for any new
development that take place

As in the theoretical way we have scene that the Beta shows the movement or change in
the price of script vis--vis index. And a Beta >1 is more riskier and hence should give
more return as compared to the script having Beta < 1. as the person is taking more risk
then he should get more return. But in our case we have scene that Moderate portfolio
having Beta < 1 has given more return as compared to Aggressive Portfolio.

64

So we can easily say that the investment in equity market is subject to market risk and
any one having long-term investment horizon should only enter into equity market. This
analysis that has been carried out was only for a period of two month there are chances
that in the long run aggressive portfolio would outperform the other portfolio.

And we have also scene the Derivative- Future how one can use it for the purpose of
speculation and hedging. But hedging is only for the removal of unnecessary risk or
exposure one should not go for hedging for earning excess return.

So if one does not have enough knowledge, expertise & analytical capabilities then one
should avoid going for direct equity investment as the chances of loss increases. And the
other very important aspect is the regular monitoring of the portfolio and reviewing is
also an important aspect that one needs to pay close attention to.

65

SUGGESTIONS AND RECOMMENDATION

From the above given findings and the conclusions of the study done by me, here are the list of
recommendations that comes out of the study.

Form the study it is also proven that even in short run sector portfolio is highly risky
option for investment. Here in the study it is providing negative return. That shows that
investors who want to have safe return must think twice before selecting sector portfolio
for a long term investment.

Though random portfolio is having scripts with highest return and volatility, but for a
long term prospect is becomes hard to fetch good return out of it as it is hard to take use
of high volatility.

There is a requirement for frequent portfolio checking to maintain the higher return and
to make use of high volatility.

66

Annexure
NIFTY VALUES
S.No

Security Symbol

Equity

Weightage %

Beta

R2

Volatility %
1.6

1 ABB

423,816,750

0.75%

0.71

0.15
1.62

2 ACC

1,851,909,460

0.81%

0.78

0.27
2.19

3 BAJAJAUTO

1,011,835,100

1.84%

0.82

0.21
1.29

4 BHARTI

18,933,749,010

4.77%

0.98

0.25
1.79

5 BHEL

2,447,600,000

3.46%

1.09

0.32
1.77

6 BPCL

3,000,000,000

0.91%

0.69

0.14
3.43

7 CIPLA

599,740,466

1.15%

0.83

0.17
1.62

8 DABUR

573,302,784

0.44%

0.98

0.19
3.21

9 DRREDDY

383,034,985

0.70%

0.7

0.13
1.27

10 GAIL

8,456,516,000

1.61%

1.05

0.35
2.06

11 GLAXO

847,030,170

0.78%

0.7

0.16
2.35

12 GRASIM
13 GUJAMBCEM

916,736,360
2,705,593,000
67

1.11%
0.83%

0.86
0.97

0.27
0.26

1.53

1.16
14 HCLTECH

644,351,768

1.37%

1.15

0.3
2.07

15 HDFC

2,494,075,020

2.37%

0.84

0.18
1.8

16 HDFCBANK

3,127,855,080

1.61%

0.79

0.19
1.93

17 HEROHONDA

399,375,000

1.24%

0.81

0.17
1.87

18 HINDALCO

1,159,684,963

1.24%

1.16

0.39
2.77

19 HINDLEVER

2,201,243,793

3.74%

0.89

0.21
1.67

20 HINDPETRO

3,393,300,000

0.77%

0.81

0.24
2.35

21 ICICIBANK

8,896,209,860

3.82%

1.16

0.29
1.38

22 INFOSYSTCH

1,372,625,815

5.41%

1.03

0.39
1.78

23 IPCL

2,482,256,220

0.40%

1.16

0.36
2.07

24 ITC

3,755,157,950

4.52%

0.86

0.23
2.47

25 JETAIRWAYS

863,340,110

0.59%

0.75

0.16
3.18

26 LT

273,798,272

2.29%

0.94

0.22
1.77

27 MARUTI
28 M&M

1,444,550,300
2,360,812,020
68

1.66%
0.97%

1.14
0.95

0.34
0.29

1.87

2.8
29 MTNL

6,300,000,000

0.63%

1.04

0.24
3.45

30 NATIONALUM

6,443,096,280

1.25%

1.27

0.32
1.81

31 ONGC

14,259,339,920

11.30%

1.03

0.37
1.44

32 ORIENTBANK

2,505,397,000

0.42%

0.96

0.23
1.73

33 PNB

3,153,025,000

0.97%

1.23

0.36
3.01

34 RANBAXY

1,862,370,965

1.12%

0.82

0.13
1.31

35 REL

2,019,042,510

0.87%

1.09

0.34
1.2

36 RELIANCE

13,935,080,410

6.89%

1.06

0.43
3.03

37 SAIL

41,304,005,450

1.84%

1.44

0.32
1.55

38 SATYAMCOM

646,924,048

1.74%

1.26

0.39
1.27

39 SBIN

5,262,988,780

3.22%

1.19

0.48
1.82

40 SCI

2,823,024,300

0.30%

0.79

0.21
1.92

41 SUNPHARMA

927,578,150

1.01%

0.47

0.08
1.44

42 TATACHEM
43 TATAPOWER

2,151,026,510
1,978,978,640

69

0.36%
0.71%

0.81
1.27

0.19
0.43

1.72

2.68
44 TATATEA

562,198,570

0.36%

0.78

0.24
2.32

45 TATAMOTORS

3,767,922,890

2.14%

1.29

0.38
1.15

46 TCS

480,114,809

5.69%

1.03

0.34
1.71

47 TATASTEEL
48 VSNL

5,534,728,560
2,850,000,000

1.66%
0.73%

1.23
1.65

0.42
0.31

49 WIPRO

2,841,478,198

5.16%

1.26

0.41

1.72
1.5
2.86

50 ZEETELE

412,505,012

70

0.51%

1.05

0.16

NIFTY JUNIOR

Security Symbol

Equity

S. No.

Weight age % Beta

1 ANDHRABANK

4,850,000,000

1.73%

R2

1.17

Volatility %
2.04
0.25
1.55

2 APOLLOTYRE

383,379,770

0.47%

0.62

0.13
2.88

3 ASHOKLEY

1,189,294,200

1.86%

1.24

0.3
2.09

4 ASIANPAINT

962,789,280

2.63%

0.4

0.08
2.01

5 AUROPHARMA

266,350,000

1.21%

0.94

0.13
2.42

6 AVENTIS

230,306,220

1.71%

0.65

0.15
1.94

7 BANKBARODA

3,670,000,000

3.34%

1.55

0.39
3.98

8 BANKINDIA

4,874,002,000

2.67%

1.81

0.34
2.49

9 BEL

800,000,000

3.59%

1.01

0.26
2.72

10 BHARATFORG

441,018,830

3.75%

1.19

0.34
1.44

11 BIOCON

500,000,000

1.98%

0.56

0.12
0.97

12 BONGAIREFN
13 CADILAHC

1,998,179,000
314,034,270

0.56%
1.37%
71

0.98
0.44

0.25
0.08

1.45

3.95
14 CANBK

4,100,000,000

4.79%

1.37

0.31
1.33

15 CHENNPETRO

1,489,432,000

1.36%

1.08

0.23
1.17

16 CMC

151,500,000

0.31%

0.5

0.07
2.03

17 COCHINREFN

1,384,697,800

0.99%

0.76

0.18
1.85

18 CORPBANK

1,434,400,000

1.97%

0.18
3.74

19 CUMMINSIND

396,000,000

1.82%

0.91

0.15
2.14

20 GESHIPPING

1,903,424,050

1.91%

0.86

0.15
2.54

21 CONCOR

649,913,970

3.83%

0.41

0.05
1.53

22 I-FLEX

380,429,100

3.30%

0.83

0.17
2.1

23 IBP

221,473,690

0.50%

0.62

0.15
1.9

24 IDBI

7,236,162,580

2.47%

1.4

0.27
4.78

25 IFCI

6,386,757,620

0.29%

1.55

0.22
2.92

26 INGERRAND
27 IOB

315,680,000
5,448,000,000

0.49%
2.25%

72

0.72
1.15

0.08
0.2

2.47

2.58
28 JPASSOCIAT

1,855,970,840

3.36%

1.23

0.18
2.49

29 KOTAKBANK

3,092,166,250

2.89%

0.13
1.9

30 LICHSGFIN

849,326,000

0.69%

1.02

0.24
2.55

31 LUPIN

401,411,340

1.53%

0.75

0.13
2.67

32 MOSERBAER

1,115,129,440

1.00%

0.92

0.18
0.95

33 MPHASISBFL

1,606,343,030

1.14%

0.94

0.21
1.56

34 NICOLASPIR

418,035,212

2.02%

0.94

0.18
2.45

35 NIRMA

793,824,840

1.58%

0.81

0.16
2.03

36 PATNI

275,596,798

2.63%

0.97

0.24
2.42

37 PFIZER

298,414,400

1.23%

0.5

0.07
2.3

38 POLARIS

490,710,810

0.44%

1.44

0.25
1.5

39 PUNJABTRAC

607,557,000

0.58%

0.67

0.15
1.7

40 RAYMOND

613,808,530

1.09%

0.8

0.18
1.39

41 SIEMENS
42 STER

331,384,030
556,549,450

6.11%
6.02%
73

0.76
1.27

0.14
0.27

2.75

2.92
43 SYNDIBANK

5,219,682,820

1.99%

1.26

0.24
1.14

44 TTML

15,205,344,350

1.53%

1.19

0.27
1.61

45 TVSMOTOR

237,543,557

1.16%

1.1

0.21
1.78

46 UNIONBANK

4,601,179,000

2.29%

1.23

0.27

47 UTIBANK

2,786,241,460

3.72%

0.83

0.1

2.4
1.74
48 VIJAYABANK

4,335,178,000

1.01%

1.2

0.29
1.35

49 INGVYSYABK

905,644,160

0.55%

0.94

0.2
2.04

50 WOCKPHARMA

546,903,005

2.29%

74

1.02

0.24

Journey of Indian stock market

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are meager and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to be
transacted towards the close of the eighteenth century
By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business
attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the Civil War American broke out and cotton supply from United States of Europe
was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about
200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began
(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a
place in a street (now appropriately called as Dalal Street) where they would conveniently
assemble and transact business. In 1887, they formally established in Bombay, the "Native Share
and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange "). In
1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899.
Thus, the Stock Exchange at Bombay was consolidated.

75

Growth Pattern of the Indian Stock Market

Sr.
No.

As on 31st
December

1946

1961

1971

1975

1980

1985

1991

1995

No. of
Stock
Exchanges

14

20

22

No. of
Listed Cos.

1125

1203

1599

1552

2265

4344

6229

8593

1506

2111

2838

3230

3697

6174

8967

11784

270

753

1812

2614

3973

9723

32041

59583

No. of Stock
Issues of
Listed Cos
.
Capital of
Listed
Cos. (Cr.Rs.)

478121

Market value
of
Capital of
Listed
Cos. (Cr. s.)

971

1292

2675

3273

6750

25302

110279

24

63

113

168

175

224

514

Capital per
Listed Cos.
(4/2)
(Lakh Rs.)

693

76

Market Value
of
Capital per
Listed
Cos. (Lakh
Rs.)
(5/2)
Appreciated
value
of Capital per
Listed Cos.
(Lakh Rs.)

582
86

107

167

211

298

358

170

148

126

170

77

260

1770

5564

344

803

Bibliography
Books
1. Derivatives Module of NSE ( NCFM )
2. Securities analysis and Portfolio Management
-B.K. Bhalla
Web Bibliography
1. www.kotaksecurities.com
2. www.nseindia.com
3. www.bseindia.com
4. www.derivativesindia.com
5. www.moneycontrol.com
6. www.icicidirect.com

Others
1. Magazines
-

Business World

2. News Papers
-

Economic Times of India

Times of India

78