PORTFOLIO MANAGEMENT SERVICES

EXECUTIVE SUMMARY

In Today‟s Competitive world, where banks and financial institutions provide number of services which provides a customer with a wide spectrum of investment opportunities. They in order to retain their customers provide them special services besides traditional services. The invention of new technology and services by banks and financial institutions has given the consumers a wide range of investment avenues to invest in. One of the special services brought out by banks and financial institutions is PORTFOLIO MANAGEMENT SERVICES (PMS) which aims at providing an investor to invest a combination of securities all together which enables him to earn maximum returns at minimum level of risk. The main objective of this project is to review the real meaning of Portfolio Management, its objectives, role, framework, responsibilities of portfolio manger and the study of various other issues related to it such as its comparison with, Mutual funds, role of Merchant Bankers in Portfolio Management, SEBI guidelines. I am inclined to this topic, as it has given me actual knowledge of this service along with its working and how the portfolio manager manages the portfolio. Moreover, it has guided me to understand this so called complex world of investment and also increase my knowledge to such extent. I hope it will prove beneficial to me in developing my further career.

INTRODUCTION PORTFOLIO MANAGEMENT SERVICES As per definition of SEBI Portfolio means “a collection of securities owned by an investor”. It represents the total holdings of securities belonging to any person". It comprises of different types of assets and securities. Portfolio management refers to the management or administration of a portfolio of securities to protect and enhance the value of the underlying investment. It is the management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. It helps to reduce risk without sacrificing returns. It involves a proper investment decision with regards to what to buy and sell. It involves proper money management. It is also known as Investment Management. Portfolio Management Services, called, as PMS are the advisory services provided by corporate financial intermediaries. It enables investors to promote and protect their investments that help them to generate higher returns. It devotes sufficient time in reshuffling the

investments on hand in line with the changing dynamics. It provides the skill and expertise to steer through these complex, volatile and dynamic times. It is a choice of selecting and revising spectrum of securities to it with the characteristics of an investor. It prevents holding of stocks of depreciating-value. It acts as a financial intermediary and is subject to regulatory control of SEBI.

ROLE OF

PORTFOLIO MANAGEMENT

In the beginning of the nineties India embarked on a programme of economic liberalization and

globalization. This reform process has made the Indian capital markets active. The Indian stock markets are steadily moving towards capital efficiency, with rapid computerization, increasing market transparency, better infrastructure, better customer service, closer integration and higher volumes. Large institutional investors with their diversified portfolios dominate the markets. A large number of mutual funds have been set up in the country since 1987. With this development, investment securities have gained considerable momentum. Along with the spread of securities investment among ordinary investors, the acceptance of quantitative techniques by the investment community changed the investment scenario in India. Professional portfolio management, backed by competent research, began to be practiced by mutual funds, investment consultants and big brokers. The Securities and Exchange Board of India, the stock market regulatory body in India, is supervising the whole process with a view to making portfolio management a responsible professional service to be rendered by experts in the field. With the advent of computers the whole process of portfolio management has become quite easy. The computer can absorb large volumes of data, perform the computations accurately and quickly give out the results in a desired form. The trend towards liberalization and globalization of the economy has promoted free flow capital across international borders. Portfolios now include not only domestic securities but also foreign securities. Diversification has become international. Another significant development in the field of portfolio management is the introduction of derivatives securities such as options and futures. The trading in derivative securities, their valuation, etc. has broadened the scope of portfolio management.

Portfolio management is a dynamic concept, having systematic approach that helps it to achieve efficiency in investment.

Ø Identification of the investor‟s objective. Ø Making an evaluation of portfolio income (comparison with targets and achievements). . The following are the basic operations of a portfolio management: Ø Monitoring the performance of portfolio by incorporating the latest market conditions. constraints and preferences. Ø Making revision in the portfolio. Ø Implementation of strategies in tune with the investment objectives. It is a dynamic activity.SCOPE OF PORTFOLIO MANAGEMENT Portfolio management is a continuous process.

ELEMENTS OF PORTFOLIO MANAGEMENT Portfolio management is an on-going process involving the following basic tasks: ü Identification of the investor‟s objectives.. time horizon. The investment strategies developed by the portfolio managers have to be correlated with their expectation of the capital market and the individual sectors of industry. which will help formulate the investment policy. debentures. According to these objectives and constraints. companies performance and investor‟s circumstances. etc. ü Strategies are to be developed and implemented in tune with the investment policy formulated. the investment policy can be formulated. . and the proportion of funds to be invested in each class and selection of assets and securities in each class are made on this basis. The policy will lay down the weights to be given to different asset classes of investment such as equity share.. objectives. ü Review and monitoring of the performance of the portfolio by continuous overview of the market conditions. taxes. these are the building blocks for the construction of a portfolio. asset preferences of investors. etc. Then a particular combination of assets is chosen on the basis of investment strategy and managers expectations of the market. The collection of data on the investor‟s preferences. constraints and preferences. This will help the selection of asset classes and securities in each class depending upon their riskreturn attributes. The next stage is to formulate the investment strategy for a time horizon for income and capital appreciation and for a level of risk tolerance. ü Finally. This gives an idea of channels of investment in terms of asset classes to be selected and securities to be chosen based upon the liquidity requirements. is the foundation of portfolio management. the evaluation of the portfolio for the results to compare with the targets and needed adjustments have to be made in the portfolio to the emerging conditions and to make up for any shortfalls in achievement vis-à-vis targets. preference shares. etc. company deposits.

(a) maximize yield (b) minimize risk. An investment is to be liquid. who invests the savings in the financial asset. The level of risk of a portfolio depends upon many factors. Basic Objectives. A desired return for a given risk level is being started. guaranteed sales. appreciation of capital at the time of disposal. Capital appreciation of a financial asset is highly influenced by a strong brand image. which may not be neglected by any investor/portfolio manager. bought at the right time. These objectives are categorized into: 1. 2. A portfolio management desires the safety of the investment. The objective of investor is to get a reasonable return on his investment without any risk. safety of the investment and liquidity etc. The idea of growth stocks is the right issue in the right industry. The portfolio objective is to take the precautionary measures about the safety of the principal even by diversification process. . Subsidiary Objectives. financial strength. it must have “termination and marketable” facility at any time. 2. Liquidity of the investment is most important. However.OBJECTIVES OF PORTFOLIO MANAGEMENT The objective of portfolio management is to maximize the return and minimize the risk. Every investor has to dispose his holding after a stipulated period of time for a capital appreciation. Subsidiary Objectives The subsidiary objectives of a portfolio management are expecting a reasonable income. it may not always be possible to get such income. 1. Any investor desires regularity of income at a consistent rate. The investor. requires a regular return and capital appreciation. The safety of the investment calls for careful review of economic and industry trends. Basic Objectives The basic objectives of a portfolio management are further divided into two kinds viz.. retained earnings and accumulated profits of the company. large pool of reverses. The aim of the portfolio management is to enhance the return for the level of risk to the portfolio owner. market leadership.

cash flow and assets. security. . Discretionary portfolio manager is the one who individually and independently manages the funds of each client in accordance with the needs of the client and non-discretionary portfolio manager is the one who manages the funds in accordance with the directions of the client.e. The goal is to obtain the highest return for the client of the managed portfolio. Ø He is expected to manage the investor‟s assets prudently and choose particular investment avenues appropriate for particular times aiming at maximization of profit. through live price updates. liquidity and return. growth and risk minimization. Ø The manager has to balance the parameters which defines a good investment i. as the case may be is a portfolio manager. Any person who pursuant to a contract or arrangement with a client. Ø According to SEBI. Ø There are two types of portfolio manager known as Discretionary Portfolio Manager and Non Discretionary Portfolio Manager. He tracks and monitors all your investments.PORTFOLIO MANAGER Ø Portfolio Manager is a professional who manages the portfolio of an investor with the objective of profitability. advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the client.

8. A portfolio manager shall render all times high standards and unbiased service. Ø The portfolio manager shall transact the securities within the limitations placed by the client. 6. A portfolio manager shall maintain a high standard of integrity fairness. The client‟s funds should be deployed as soon as he receives. A portfolio manager shall not disclose to any client or press any confidential information about his client. . A portfolio manager shall always provide true and adequate information. A portfolio manager shall not make any exaggerated statement. 7. 4. which has come to his knowledge. A portfolio manager shall not make any statement that is likely to be harmful to the integration of other portfolio manager. Ø The portfolio manager shall not borrow funds or securities on behalf of the client. CODE OF CONDUCT OF A PORTFOLIO MANAGER Every portfolio manager in India as per the regulation 13 of SEBI shall follow the following Code of Conduct: 1. 2. 5. A portfolio manager should render the best pose advice to the client. 3. Ø The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities.GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGER Following are some of the responsibilities of a Portfolio Manager: Ø The portfolio manager shall act in a fiduciary capacity with regard to the client's funds. Ø The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately Ø The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.

Ø The portfolio manager can invest in money or capital market. Ø Client‟s funds will be kept in a separate bank account. Ø Purchase and sale of securities will be at a prevailing market price. The guidelines have been made to protect the interest of investors. Ø The portfolio manager shall not guarantee any return to his client.SEBI GUIDELINES TO PORTFOLIO MANAGEMENT SEBI has issued detailed guidelines for portfolio management services. Ø The portfolio manager shall act as trustee of client‟s funds. POWERS OF SEBI . The salient features of these guidelines are: Ø The nature of portfolio management service shall be investment consultant.

etc. Minimization of risk. modernization and expansion changes in government policies and other such factors.The Securities and Exchange Board of India has the following powers to control and manage the portfolio managers: 1. records. SEBI has full authority in the event of violation of any provision to suspend or cancel the license. Liquidity.. 3. 4. . 2. No exemptions will be given under any circumstances to portfolio manager. Maximum regulation return. It is better to buy shares in a rising market than to hold on to shares in a falling market. returns and documents as may be prescribed. 2. The portfolio manager shall submit to SEBI such reports. Safety of their investment. The current prices may be higher than the price at which he has relinquished them. An investor may decide on the basis of a detailed study of marketing information that the shares he has sold earlier are worth buying again. 3. SEBI may investigate the affairs of a portfolio manager such as inspection of books of accounts. 4. OBJECTIVES OF INVESTORS Following are the objectives of the investors: 1. The growth potential of a company may improve due to the rising trend in sales or profits.

· Systematic risk refers to that portion of variation in return caused by factors that affect the price of all securities. TYPES OF RISK IN PORTFOLIO MANGEMENT Each and every investor has to face risk while investing. ü The promise of guaranteed returns should not influence the investors. ü Investors must make sure that portfolio manager has got the respective portfolio account by an independent charted accountant every year and that the certificate given by the charted accountant is given to an investor by the portfolio manager. ü Investors must enter into an agreement with the portfolio manager. performance of the portfolio manager etc.INVESTORS ALERT Do‟s: ü Only intermediaries having specific SEBI registration for rendering Portfolio management services can offer portfolio management services. What is Risk? Risk is the uncertainty of income/capital appreciation or loss of both. Risk is classified into: Systematic risk or Market related risk and Unsystematic risk or Company related risk. the investors must approach the authorities for redressal in a timely manner. ü They should not invest without verifying the background and performance of the portfolio manager. Don‟ts: ü Investors should not deal with unregistered portfolio managers. ü Investors should make sure that they are dealing with SEBI authorized portfolio manager. It cannot be avoided. This is further divided into the following: . ü In case of complaints. ü Investors must obtain a disclosure document from the portfolio manager broadly covering manner and quantum of fee payable by the clients. portfolio risks. ü They should not invest unless they have understood the details of the scheme including risks involved. It relates to economic trends with effect to the whole market. ü Investors should make sure that they receive a periodical report on their portfolio as per the agreed terms. ü They should not hesitate to approach the authorities for redressal of the grievances. ü Investors must check whether the portfolio manager has a necessary infrastructure to effectively service their requirements.

social political and economical events is referred as market risks. ü Interest rate risks: Uncertainties of future market values and the size of future incomes. while in the case of mutual funds the target investors include the retail investors. ü Inflation risks: Uncertainties in purchasing power is said to be inflation risk. ü Financial risk: Financial risk is associated with the capital structure of a firm. Here price of securities tend to move inversely with the change in rate of interest. caused by fluctuations in the general level of interest is referred to as interest rate risk. · Unsystematic risk refers to that portion of risk that is caused due to factors related to a firm or industry. This is further divided into: ü Business risk: Business risk arises due to changes in operating conditions caused by conditions that thrust upon the firm which are beyond its control such as business cycles. The extends depends upon the leverage of the firms capital structure. ü In case of portfolio management. government controls. the investments of each investor are managed separately. in which the investors/ unit holders make the investments. etc. A firm with no debt financing has no financial risk. ü Internal risk: Internal risk is associated with the efficiency with which a firm conducts its operations within the broader environment imposed upon it. There are some differences between them described as follows: ü In the case of portfolio management. the target investors are high net-worth investors. pooling them and investing the funds in various securities. DIFFERENCE BETWEEN PORTFOLIO MANAGEMENT SERVICES (PMS) AND MUTUAL FUNDS While the concept of Portfolio Management Services and Mutual Funds remains the same of collecting money from investors. while in the case of MFs the funds collected under a scheme are pooled and the returns are distributed in the same proportion.ü Market risks: A variation in price sparked off due to real. .

ü The competition faced by the industry with similar type of industries. Merchant bankers also help NRI-Non Resident Indians in selecting right type of securities and offering expertise guidance in fulfilling government regulations. portfolio management. Merchant Bankers provide portfolio management services to their clients. In mutual fund. the investors are offered the advantage of personalized service to try to meet each individual client‟s investment objectives separately while in case of mutual funds investors are not offered any such advantage of personalized services. By this service to NRI account holders. ü Changing pattern of the industry. Thus portfolio management plans successful investment strategies for investors.ü The investments in portfolio management are managed taking the risk profile of individuals into account. ü Secondary market position i. Today the investor is very prudent and he is interested in safety. but he cannot study and choose the appropriate securities. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return with minimum risk. etc.e. debentures. They have to conduct regular market and economic surveys to know the following needs: ü Monetary and fiscal policies of the government. Merchant bankers are the persons who are engaged in business of issue management by making arrangements regarding selling. Let us have a look on the role played by Merchant bankers in relation to Portfolio Management: Portfolio refers to investment in different kinds of securities such as shares. Merchant bankers have a role to play in this regard.. credit syndication. The portfolio managers will generally have to classify the investors based on capacity and risk they can take and arrange appropriate investment. . Merchant bankers can mobilize more resources for the corporate sector. and advisor or by rendering corporate advisory services. which covers a wide range of activities such as customer services. the risk is pooled depending on the objective of a scheme. consultant. how the share market is moving. buying or subscribing securities as a manager. liquidity. In case of portfolio management. insurance. ü Financial statements of various corporate sectors in which the investments have to be made by the investors. and profitability of his investment. it is not merely a collection of un-related assets but a carefully blended asset combination within a unified framework. he requires expert guidance. ROLE OF MERCHANT BANKERS IN RESPECT TO PORTFOLIO MANAGEMENT Merchant Banking is the institution. etc. The Merchant bankers have to analyze the surveys and help the prospective investors in choosing the shares.

The role of individual investors and remaining categories of investors can have their say only in the Annual general body meetings or other extra ordinary general body meetings. allocation of funds and declaration of dividends. and other corporates. whose objective is maximization of their wealth. LIC. The ownership of individual shareholders does not exceed an average to 20-30%. The share price reflects the investor‟s perception of that company. own Corporates. next only to promoters and hence their interest stands prominent in the minds of the portfolio managers in the corporate business. The prudential norms for raising resources. leaving aside. GIC. Corporate ownership pattern in India shows that the bulk owners are the financial institutions and mutual funds. the Company law and the Listing Agreement with the Stock Exchange also guide the performance of corporates and their operations. etc. FIIs and NRIs. except through the daily price quotation of the scrip on the exchanges. are governed by the Law and Government notifications from time-to-time. The companies generally keep continuous contact and dialogue with financing bankers and financial institutions and not with other categories of investors. there is no direct dialogue between Corporate Managers and the individual investors. the FFIs. The Government and SEBI regulations.. and financial institutions. in matter of operations. In case of listed corporate securities. Corporate Managers secure funds from banks.PORTFOLIO MANAGEMENT BY CORPORATES Investors. The interest of financial and nonfinancial institutions and corporates do not coincide with that of individual shareholders who are the true savers of the household sectors while the former categories are only intermediaries. relative to others in the field. . called by the corporate management.

PORTFOLIO INVESTMENT BY FOREIGN INSTITUTIONAL INVESTORS A country with a developing economy cannot depend exclusively on its own domestic savings to propel its economy's rapid growth. The domestic savings of India presently are 25% of its GDP. which is currently under implementation: "The strategy to achieve a high annual growth target of 8.00 to about 3. But this can provide only a 2 to 3% growth of its economy on annual basis. infrastructure development. and increased foreign investment and .00% combines accelerated capital accumulation to raise the average investment rate from 24.23% to 28. The country has to maintain an 8 to 10% growth for a period of two decades to reach the level of advanced nations and to wipe out widespread poverty of its people.55.41% with an increase in capital-use efficiency to reduce the ratio of incremental capital to output from 4. The gap is to be covered by inflow of foreign investment along with advanced technology. As per the Development Goals and Strategy of the 10th Plan. Private sector development.

An efficient market is one where prices reflect a given body of information. It is both an art and a science. “the ability of the capital market to function. as securities can be bought. When remittances are made by Foreign Institutional Investors for portfolio investments. James Lorie has defined the efficient security market as.trade are key to increasing efficiency" The regular inflow of external capital investment is indispensable to sustain our economic growth at the planned level and this is well recognized by the plan document itself. investor‟s objective should be to choose their preferred levels of risk and expected return and to diversify as easily as possible to meet their investment goal. have the ability to consistently pick up investments that outperform other investments on a risk/expected-return basis. The art aspect derives from the notion that some investors. as well as sold back through approved stock exchanges. by whatever means. is a complex and a dynamic process or activity that may be divided into various phases as described as follows: PORTFOLIO MANAGEMENT PROCESS . In such a situation. In other words. the concept of market efficiency maintains that for most investors. Such efficiency will produce prices that are appropriate in terms of current knowledge. If markets are reasonably efficient in a risk/expected-return sense. portfolio management has become very analytical. markets are said to be efficient if there is a free flow of information and market absorbs this information quickly. so that the prices of securities react rapidly to new information. MANAGEMENT OF INVESTMENT PORTFOLIOS Investment Management or Portfolio Management deals with the manner in which investors analyze. also referred to as portfolio management. and investors will be less likely to make unwise investments. one investment should not persistently dominate another in terms of risk and expected return. As a consequence. This may be trading transaction. PORTFOLIO MANAGEMENT FRAMEWORK Investment management. such remittances are on trading account. select and evaluate investments in terms of their risks and expected returns. Various techniques are today available which enable investors to identify the diversified portfolio that has the highest expected return at their preferred level of risk.” This brings to the science aspect of portfolio/investment management. the ability to consistently select high-return/low risk investments may be difficult to do. but net amount at any time (purchases minus sales) is a significant figure and this adds to the foreign exchange reserves of the country. Although many techniques have been developed to assist investors in the selection of investments.

The risk he wants to bear depends on two factors: a) Financial situation b) Temperament To assess financial situation one must take into consideration: position of the wealth. . But investment objectives may be more clearly expressed in terms of returns and risk. rather than specifying how much money he wants to make. subject to the risk exposure being held within a certain limit (the risk tolerance level). The investment policy can be explained as follows: · OBJECTIVES ü Return requirements: Return is the primary motive that drives investment. After appraisal of the financial situation assess the temperamental tolerance of risk. earning capacity. This will serve as a valuable guide in taking an investment decision. constraints and preferences of investor. An investor should start by defining how much risk he can bear or how much he can afford to lose. with out sacrificing a certain expected rate of return (the target rate of return). major expenses. growth and stability. so it is necessary to understand financial temperament objectively. An investor would primarily be interested in a higher return (in the form of income or capital appreciation) and lower level of risk. medium or high. However. So he has to bear higher level of risk in order to earn high return. return and risk go hand in hand. Ø Minimize the risk exposure. The commonly stated investment goals are income. expenses and earnings forms a base to define the risk tolerance. Since income and growth represent two ways through which income is generated and stability implies containment or elimination of risk. SPECIFICATION OF INVESTMENT OBJECTIVES AND CONSTRAINTS: The first step in the portfolio management process is to specify the investment policy that consists of investment objectives. Specification of investment objectives can be done in following two ways: Ø Maximize the expected rate of return. For practical purposes it is enough to define it as low. One must realize that risk tolerance cannot be defined too rigorously or precisely. etc and a careful and realistic appraisal of the assets. It will provide a useful perspective and will prevent from being a victim of the waves and manias that tend to sweep the market from time to time.INTER RELATIONSHIP AMONG VARIOUS PHASES OF PORTFOLIO MANAGEMENT 1. Risk tolerance level is set either by one‟s financial situation or financial temperament which ever is lower. How much risk he would be willing to bear to earn a high return depends on his risk disposition. The investment objective should state the investor the preference of return in relation to risk. It is the reward for undertaking the investment.

etc. ü Regulations: While individual investors are generally not constrained much by laws and regulations. the investment horizon for ten years to fund the child‟s college education. etc. national saving certificates. selection of assets is done. ü Bonds: Bonds or debentures represent long-term debt instruments. ü Unique circumstances: Almost every investor faces unique circumstances. public provident fund. semi-urban land. he is expected to get high return and if he is willing to bear low risk. it is very important to review the tax shelters available and to incorporate the same in the investment decisions. The investment horizon has an important bearing on the choice of assets. Selection of assets refers to the amount of portfolio to be invested in each of the following asset categories: ü Cash: The first major economic asset that an individual plan to invest in is his or her own house. SELECTION OF ASSET MIX: Based on the objectives and constraints. RBI saving bonds. Kisan Vikas Patras. post office savings. institutional investors have to conform to various regulations. an endowment fund may be prevented from investing in the securities of companies making alcoholic and tobacco products. Their savings are likely to be in the form of bank deposits and money market mutual fund schemes. these instruments have appeal.ü Risk tolerance: Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. whereas antiques are among the least liquid. bank deposits. money market instruments are the most liquid assets. ü Investment horizon: the investment horizon is the time when the investment or part of it is planned to liquidate to meet a specific need. For example. · CONSTRAINTS AND PREFERENCES ü Liquidity: Liquidity refers to the speed with which an asset can be sold. It all depends on the investor. It includes income shares. gilt-edged securities. 2. They are generally of private sector companies. without suffering any loss to its actual market price. The wider the range of possible outcomes. he will get low return. For example. mutual funds in India are not allowed to hold more than 10 percent of equity shares of a public limited company. Tax considerations therefore have an important bearing on investment decisions. the more affluent investors are likely to be interested in other types of real estate. So. In addition to this. ü Stocks: Stocks include equity shares and units/shares of equity schemes of mutual funds. ü Precious objects and others: Precious objects are items that are generally small in size but . how much risk he is able to bear. ü Taxes: The post – tax return from an investment matters a lot. agricultural land. blue chip shares. More specifically. most of the investors are concerned about the actual outcome being less than the expected outcome. Referred to broadly as „cash‟. like commercial property. If he is willing to bear high risk. etc. public sector bonds. ü Real estate: The most important asset for individual investors is generally a residential house. as they are safe and liquid. For example. the greater is the risk. growth shares. For example.

in the near future. The four principal vectors of an active strategy are: ü Market Timing ü Sector Rotation ü Security Selection ü Use of a specialized concept ü Market timing: This involves departing from the normal (or strategic or long run) asset mix to reflect one‟s assessment of the prospects of various assets in the near future. whereas an investor with lesser tolerance for risk should tilt the portfolio in favor of bonds. moving average analysis. This will naturally lower the beta of his portfolio. etc. would raise the beta of his portfolio. an investor with greater tolerance for risk should tilt the portfolio in favor of stocks.highly valuable in monetary terms. the risk from stock diminishes as investment period lengthens. · The fallacy of Time Diversification: The notion or the idea of time diversification is fallacious. Market timing is based on an explicit or implicit forecast of general market movements. on a risk-adjusted basis. Other assets includes like that of financial derivatives. FORMULATION OF PORTFOLIO STRATEGY: After selection of asset mix. Even though the uncertainty about the average rate of return diminishes over a longer period. it also compounds over a longer time period. on a risk-adjusted basis. advance-decline analysis. stocks are riskier than bonds hence earn higher return than bonds. and econometric models. in the near future. . The advocates of market timing employ a variety of tools like business cycle analysis. precious stones. · ACTIVE PORTFOLIO STRATEGY: Most investment professionals follow an active portfolio strategy and aggressive investors who strive to earn superior returns after adjustment for risk. It includes gold and silver. the latter effect dominates. This is because. he may set up the bond component of his portfolio to 60 to 70 percent. Often. Hence the total return becomes more uncertain as the investment horizon lengthens. of course. There are two types of portfolio strategies. formulation of appropriate portfolio strategy is required. an investor with a longer investment horizon should tilt his portfolio in favor of stocks whereas an investor with a shorter investment horizon should tilt the portfolio in favor of bonds. · Conventional wisdom on Asset Mix: The conventional wisdom on the asset mix is embodied in two propositions: ü Other things being equal. he may perhaps step up the stock component of his portfolio to say 60 to 70 percent. ü Other things being equal. On the other hand. of course. etc. In short and intermediate run however he may be inclined to deviate from long-term asset mix. Unfortunately. Suppose an investor‟s investible resources for financial assets are 100 and his normal (or strategic) stockbond mix is 50:50. the investor may go largely by his market sense. active portfolio strategy and passive portfolio strategy. This is because the expected rate of return from stocks is very sensitive to the length of the investment period. if he expects the bonds to outperform stocks. The forecast of the general market movement derived with the help of one or more of these tools are tempered by the subjective judgment of the investor. in general. art objects. Such an action. insurance. 3. If he expects stocks to out perform bonds.

unless it becomes inadequately diversified . there may be shift in long term bonds to medium term or even short-term bonds. sector rotation implies a shift in the composition of the bond portfolio in terms of quality. relative to their position in market portfolio. a possible way to enhance returns “is to develop a profound and valid insight into the forces that drive a particular group of companies or industries and systematically exploit that investment insight or concept. The changes in market may cast a shadow over the validity of the basic premise underlying the investment philosophy. used more commonly with respect to stock component of portfolio where it essentially involves shifting the weightings for various industrial sectors based on their assessed outlook. term to maturity and so on. It is however. one may overweight these sectors. ü Security Selection: Security selection involves a search for under priced securities. But we should remember that a long-term bond is more sensitive to interest rate variation compared to a short-term bond. Ellis words says. As Charles D. stocks that are perceived to be unattractive will be under weighted relative to their position in the market portfolio. he may employ fundamental and or technical analysis to identify stocks that seems to promise superior returns and overweight the stock component of his portfolio on them. · PASSIVE PORTFOLIO STRATEGY: The passive strategy rests on the tenet that the capital market is fairly efficient with respect to the available information. If an investor resort to active stock selection. Likewise. ü Hold the portfolio relatively unchanged over time. As far as bonds are concerned. For example. particularly with respect to investment in stocks. the great disadvantage of focusing on a specialized concept is that it may become obsolete. ü Use of a specialized Investment Concept: A fourth possible approach to achieve superior returns is to employ a specialized concept or philosophy. With respect to bonds.” Some of the concepts of investment practitioners are as follows: ü Growth stocks ü Value stocks ü Asset-rich stocks ü Technology stocks ü Cyclical stocks The advantage of cultivating a specialized investment concept or philosophy is that it will help you to: a) Focus efforts on a certain kind of investment that reflects ones abilities and talents b) Avoid the distractions of pursuing other alternatives c) Master an approach through sustained practice and continual self-critique.ü Sector Rotation: The concept of sector rotation can be applied to stocks as well as bonds. For example if it is assumed that cement and pharmaceutical sectors would do well compared to other sectors in the forthcoming period. security selection calls for choosing bonds that offer the highest yield to maturity at a given level of risk. As against these merits. if there is a rise in the interest rates. coupon rate. The passive strategy is implemented according to the following two guidelines: ü Create a well-diversified portfolio at a predetermined level of risk.

4. or sell is based on a comparison of the intrinsic value and the prevailing market price. 6.e. New securities may be added to the portfolio or some existing securities may be removed from the portfolio. However. examine relevant financial ratios (like debt-to-equity ratio. The objective of portfolio revision is similar to the objective of selection i. ü Liquidity: If the fixed income avenue can be converted wholly or substantially into cash at a fairly short notice. Portfolio revision involves changing the existing mix of securities. it possesses liquidity of a high order. growth prospects. maximizing the return for a given level of risk or minimizing the risk . Fundamental analysis focuses on fundamental factors like the earnings level. ü Tax Shield: In yesteryears. now very few do so. PORTFOLIO REVISION: In the entire process of portfolio management. it is an important practical step that has a significant bearing on the investment results. hold. and earning power) of the firm and assess the general prospects of the industry to which the firm belongs. Thus it leads to purchase and sale of securities.or inconsistent with the investor‟s risk-return preferences. 5. This is the phase of portfolio execution which is often glossed over in portfolio management literature. The recommendation to buy. three decision need to be made. Random selection approach is based on the premise that the market is efficient and securities are properly priced. If no credit rating is available. In the execution stage. and risk exposure to establish the intrinsic value of a share. SELECTION OF SECURITIES: The following factors should be taken into consideration while selecting the fixed income avenues: · SELECTION OF BONDS (fixed income avenues) ü Yield to maturity: The yield to maturity for a fixed income avenue represents the rate of return earned by the investors if he invests in the fixed income avenue and holds it till its maturity. portfolio revision is as important stage as portfolio selection. PORTFOLIO EXECUTION: The next step is to implement the portfolio plan by buying or selling specified securities in given amounts. times interest earned ratio. several fixed income avenues offered tax shield. This may be effected either by changing the securities currently included in the portfolio or by altering the proportion of funds invested in the securities. if the percentage holdings of various asset classes are currently different from the desired holdings. one may look at the credit rating of the bond. · SELECTION OF STOCK (Equity shares) Three board approaches are employed for the selection of equity shares: ü Technical analysis ü Fundamental analysis ü Random selection Technical analysis looks at price behavior and volume data to determine whether the share will move up or down or remain trend less. ü Risk of default: To assess the risk of default on a bond.

and foreign banks and UTI. The need for portfolio revision has aroused due to changes in the financial markets since creation of portfolio. Through portfolio evaluation the investor tries to find out how well the portfolio has performed. They have managed the funds of the . professional portfolio management. backed by competent research staff became the order of the day. Portfolio evaluation is really a study of the impact of such decisions. and the portfolio insurance policy. no other agency had professional portfolio management until 1987. It is essentially a „buy and hold‟ policy. This involves quantitative measurement of actual return realized and the risk born by the portfolio over the period of investment.e. if the initial portfolio has a stock-bond mix of 50:50 and after six months it happens to be say 70:50 because the stock component has appreciated and the bond component has stagnated. It provides a mechanism for identifying the weakness in the investment process and for improving these deficient areas. For example. After the success of the mutual funds in portfolio management. The portfolio insurance policy calls for increasing the exposure to stocks when the portfolio appreciates in value and decreasing the exposure to stocks when the portfolio depreciates in value. ü Portfolio Upgrading: While portfolio rebalancing involves shifting from stocks to bonds or vice versa. After the setting up of public sector mutual funds. The constant mix policy calls for maintaining the proportions of stocks and bonds in line with their target value. constant mix policy. For example. PORTFOLIO EVALUATION: Portfolio evaluation is the last step in the process of portfolio management. selling over-priced securities. Irrespective of what happens to the relative values. It is the process that is concerned with assessing the performance of the portfolio over a selected period of time in terms of return and risk. The basic idea is to ensure that the portfolio value does not fall below a floor level. the initial portfolio is left undisturbed. It may also entail other changes the investor may consider necessary to enhance the performance of the portfolio. no rebalancing is done. The portfolio needs to be revised to accommodate the changes in the investor‟s position. BASICS OF PORTFOLIO MANAGEMENT IN INDIA In India. the need to liquidate a part of the portfolio to provide funds for some alternative uses. The portfolio of securities held by an investor is the result of his investment decisions.for a given level of return. Barring a few Indian banks. change in the risk attitude. Portfolio Management is still in its infancy. a number of brokers and Investment consultants some of whom are professionally qualified have become portfolio managers. 7. portfolio-upgrading calls for re-assessing the risk return characteristics of various securities (stocks as well as bonds). There are three basic policies with respect to portfolio rebalancing: buy and hold policy. if the desired mix of stocks and bonds is say 50:50. the stock.bond mix). Under a buy and hold policy. than in such cases no changes are made. It has aroused because of many factors like availability of additional funds for investment. and buying under-priced securities. since 1987. so that the target proportions are maintained. the constant mix calls for rebalancing the portfolio when relative value of its components change. The evaluation provides the necessary feedback for designing a better portfolio next time. change investment goals. Portfolio Revision basically involves two stages: ü Portfolio Rebalancing: Portfolio Rebalancing involves reviewing and revising the portfolio composition (i.

including mutual funds have guaranteed a minimum return or capital appreciation and adopted all kinds of incentives that are now prohibited by SEBI. But the return in the form of output growth is as low as5 to 7% per annum. liquidity. It was found that many of them. which will enable them to have proper strategy for investment management. which included their registration. public provident fund. while another 12% is in government instruments and certificates like post office deposits. ASPECTS OF PORTFOLIO MANAGEMENT Basically. . capital appreciation. · Objectives of Investors: The return on equity investments in the capital market particularly if proper investment strategy is adopted would satisfy the above objectives and real returns would be higher than any other saving instruments. etc. despite the fact that India is labour rich and capital poor. The guidelines of SEBI are in the direction of making portfolio management a responsible professional service to be rendered by the experts in the field. satisfying all their objectives is capital market instruments. involving high capital output ratios. a code of conduct and minimum infrastructure. barring the 37% of population who are below the poverty line. the average Indian household saves around 60% in the financial form and 40% in the physical form. nearly 42% is held in cash and bank deposits. Secondly. safety. and high rates of obsolescence of capital. they also become less attractive to small and medium investors. Besides a proportion of 35% of financial savings is held in the form of insurance. pension funds. The use of capital in India is wasteful and inefficient. etc. and hedge against inflation and investment. One may ask why is it that high levels of investment could not generate comparable rates of growth of output? The answer is poor investment strategy. dealers and brokers in their portfolio operations. it is surprising that saving rate is high as 24% of GDP per annum and investment at 26% of GDP. national saving scheme. or retired person or self-styled consultant to engage in portfolio management without the SEBI‟s license. etc. In a poor country like this. The only investment. These objectives are income. low productivity of capital. the real returns on insurance and pension funds are low and many times lower than average inflation rates. it is no longer possible for any unemployed youth. The SEBI has then imposed stricter rules. Thus the portfolio managers in India lack the expertise and experience. certificates. portfolio management involves: ü A proper investment decision-making of what to buy and sell ü Proper money management in terms of investment in a basket of assets to satisfy the asset preferences of the investors. experience and expertise etc. as per RBI data and they have return less than inflation rates. Of those in the financial form. With the removal of many tax concessions from investments in Post Office Savings. ü Reduce the risk and increase the returns. · Investment Strategy: In India there are large number of savers. The recent CBI probe into the operations of many market dealers has revealed the unscrupulous practices by banks.client on both discretionary and non-discretionary basis.

If induced.All investment involves risk taking. 10%. This process of finding the present value for future money flow is called discounting. the return required by the savers is related to the waiting period. So. Savings are automatic or induced. Suppose. or liquidity and risk of loss of money or variance of returns. it is called Perpetuity. what is the future value of them and how much is he prepared to pay for them? If he deposits today Rs. C3. if interest rate is Rs. which is explained as follows: β = % change of Scrip return % change of Market return If β = 1. the returns on more risky investments are higher than that having risk premium. 110 at the end of one year and Rs. some risk free investments are available like bank deposits or post-office deposits whose returns are called risk free returns of about 5-12%. the risk of the company is the same as that of the market and if β > 1. The higher the risk taken. · Discounting: If the future flow of money is known as Cı. (1+ r)n It is necessary to know the amounts of cash flows (Fn). The former cannot be eliminated or managed with the help of Beta (β). · Compounding: Future Value Factor (FVF) is (1+ r) ⁿ where (r) is the rate of interest required and (n) is the period of years. · Risk and Beta: Risk is of two components – systematic market related risk and unsystematic risk. etc. time element and time value of money are very relevant. Risk varies directly with the return. C2. Present value of future amounts is: P = F (n) 1 (1+ r)n The multiplier 1 is called PVF or Present Value Factor. · Perpetuity: When we receive a fixed sum of money every year up to infinity. the company‟s risk is more than market risk and if β < 1. number of years (n) and the required rate of return (r). However. Risk is variability of return and uncertainty of payment of interest and repayment of principal. 121 at the end of 2 years. it requires a return enough to induce to part with liquidity. the higher is the return. the reverse is the position. if a person wants to receive Rs. · Time Value of Money: In portfolio management and investment decision-making. under normal market conditions. 100 he gets Rs. Fn = P (1+ r) ⁿ or Future value = present value x (Future Value Factor) So. Risk is measured by standard deviation of the returns over the mean for a given period. the investors will part savings and liquidity if only their time preference is satisfied by proper return. Thus. loss of consumption at present. 1000 and the equation is .

They should encompass risk free returns plus a reasonable risk premium. depending upon the risk taken on the instruments/ assets invested. · Application to Portfolio Management: Portfolio Management involves time element and time horizon. Examples of annuity are found in the case of lease rentals. These are called net real rates of returns. As and how development is done every sector will gain its place in this world of investment . proper management. PV is the present value of perpetuity. Portfolio Management should also take into account tax benefits and incentives. The present value of future returns/cash flows by discounting is useful for share valuation and bond valuation. CONCLUSION After the overall all study about each and every aspect of this topic it shows that portfolio management is a dynamic and flexible concept which involves regular and systematic analysis. to produce desired results of 20-30% return per annum. returns net of taxation and inflation are more relevant to tax paying investors. · Annuity: Annuity is the constant cash flow for a finite time period of say 5 years (n).PV = a r where. judgment. The investment strategy in portfolio construction should have a time horizon. Besides. I also help both an individual the investor and FII to manage their portfolio by expert portfolio mangers. and there is always an element of inflation. „a‟ is the fixed periodic cash flow and „r‟ is the rate of interest. etc. and actions and also that the service which was not so popular earlier as other services has become a booming sector as on today and is yet to gain more importance and popularity in future as people are slowly and steadily coming to know about this concept and its importance. say 3 to 5 years. Portfolio management service is very important and effective investment tool as on today for managing investible funds with a surety to secure it. which should be more than other returns. loan repayments. As the returns are taken by investors net of tax payments. recurring deposits. It protects the investor‟s portfolio of funds very crucially.