A

RESEARCH REPORT

A STUDY ON INVESTMENT
PORTFOLIO MANAGEMENT

Submitted for

THE PARTIAL FULLFILLMENT OF THE AWARD OF DEGREE OF

MASTER OF BUSINESS ADMINISTRATION (MBA)

SUBMITTED TO: SUBMITTED BY:

Ms. Anita Notani Name- VINAY KUMAR
ROLL NO-1815270133

MANGALMAY INSTITUTE OF MANAGEMENT & TECHNOLOGY

GREATER NOIDA (U.P.)

Dr. A.P.J. ABDUL KALAM TECHNICAL UNIVERSITY, LUCKNOW

1
 CERTIFICATE

This is to certify that VINAY KUMAR University Roll No. 1815270133 is

a regular student of MBA 2nd year, full time degree course at out institute.
His Research Report work titled, ‘DIVERSIFICATION APPLICATIONS
IN PORTFOLIO MANAGEMENT’ submitted as part of the curriculum
for the award of the degree of MASTER OF BUSINESS
ADMINISTRATION from Dr. A.P.J. ABDUL KALAM TECHNICAL
UNIVERSITY, LUCKNOW, is an original work done by him. This work
has not been submitted earlier in any form partially or fully to this or any
other Institute/University for any degree or diploma.

SUPERVISOR Dr. AMIT GUPTA

Ms.Anita Notani (HEAD OF DEPARTMENT)

2
 PREFACE

Many people consider investing to be a daunting activity. They are

bewildered by the profusion and proliferation of investment alternatives,
rattled by the fluctuations in financial prices, overwhelmed by the presence
of mighty institutional investors, confused by exotic instruments and
complicated investment strategies, confused by the intricacies of the tax
system, and exasperated by the financial scams that periodically rock
market.

Notwithstanding these concerns, investing can be fairly manageable,

rewarding, and enjoyable experience, if we adhere to certain principles and
guidelines. By this we can expect and hope to maximize our returns by
diversifying our investments into suitable portfolios. For this, each and every
investor has to be well educated about economy, investment options, market
conditions and its consequences.

The main objective is to select the suitable investment criteria like if we

want better returns, or consider risk factors, or liquidity or safety of
principal. By this we can set our portfolio objectives and construct our
portfolio according to our needs and manage it with respect to the market
conditions and the securities fairing in the market.

3
 CONTENTS

Chapter number Title Page number

I  Introduction to topic 5-10

 Objectives 11
 Methodology 12
 Need and scope of study 13-14
 Limitations 15
II  Industry profile 16-43
 Company profile 44-52
III Literature Survey 53-75
IV Data collection 76-78
V Data analysis 79-91
VII Findings 92-94
VIII Suggestions 95
VIII Conclusion 96

IX Bibliography 97

4
INTRODUCTION

Investment management

Investment management is the professional management of various

securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified
investment goals for the benefit of the investors. Investors may be
institutions (insurance companies, pension funds, corporations etc.) or
private investors (both directly via investment contracts and more commonly
via collective investment schemes e.g. mutual funds or Exchange Traded
Funds) .

The term asset management is often used to refer to the investment

management of collective investments.whilst the more generic fund
management may refer to all forms of institutional investment as well as
investment management for private investors. Investment managers who
specialize in advisory or discretionary management on behalf of (normally
wealthy) private investors may often refer to their services as wealth
management or portfolio management often within the context of so-
called "private banking".

The provision of 'investment management services' includes elements of

financial analysis, asset selection, stock selection, plan implementation and
ongoing monitoring of investments. Investment management is a large and
important global industry in its own right responsible for caretaking of
trillions of dollars, euro, pounds and yen. Coming under the remit of
financial services many of the world's largest companies are at least in part
investment managers and employ millions of staff and create billions in
revenue.

5
Fund manager (or investment adviser in the U.S.) refers to both a firm that
provides investment management services and an individual who directs
fund management decisions.

Asset allocation

The different asset class definitions are widely debated, but four common
divisions are stocks, bonds, real-estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within
each asset class) is what investment management firms are paid for. Asset
classes exhibit different market dynamics, and different interaction effects;
thus, the allocation of monies among asset classes will have a significant
effect on the performance of the fund. Some research suggests that
allocation among asset classes has more predictive power than the choice of
individual holdings in determining portfolio return. Arguably, the skill of a
successful investment manager resides in constructing the asset allocation,
and separately the individual holdings, so as to outperform certain
benchmarks (e.g., the peer group of competing funds, bond and stock
indices).

LONG TERM RETURNS:

It is important to look at the evidence on the long-term returns to different

assets, and to holding period returns (the returns that accrue on average over
different lengths of investment). For example, over very long holding
periods (eg. 10+ years) in most countries, equities have generated higher
returns than bonds, and bonds have generated higher returns than cash.
According to financial theory, this is because equities are riskier (more
volatile) than bonds which are themselves more risky than cash.

6
Diversification

Against the background of the asset allocation, fund managers consider the
degree of diversification that makes sense for a given client (given its risk
preferences) and construct a list of planned holdings accordingly. The list
will indicate what percentage of the fund should be invested in each
particular stock or bond. The theory of portfolio diversification was
originated by Markowitz and effective diversification requires management
of the correlation between the asset returns and the liability returns, issues
internal to the portfolio (individual holdings volatility), and cross-
correlations between the returns.

Investment styles

There are a range of different styles of fund management that the institution
can implement. For example, growth, value, market neutral, small
capitalisation, indexed, etc. Each of these approaches has its distinctive
features, adherents and, in any particular financial environment, distinctive
risk characteristics. For example, there is evidence that growth styles
(buying rapidly growing earnings) are especially effective when the
companies able to generate such growth are scarce; conversely, when such
growth is plentiful, then there is evidence that value styles tend to
outperform the indices particularly successfully.

Performance measurement:

Fund performance is the acid test of fund management, and in the

institutional context accurate measurement is a necessity. For that purpose,
institutions measure the performance of each fund (and usually for internal
purposes components of each fund) under their management, and
performance is also measured by external firms that specialize in
performance measurement. The leading performance measurement firms
(e.g. Frank Russell in the USA) compile aggregate industry data, e.g.,
showing how funds in general performed against given indices and peer
groups over various time periods.

In a typical case (let us say an equity fund), then the calculation would be
made (as far as the client is concerned) every quarter and would show a
percentage change compared with the prior quarter (e.g., +4.6% total return
in US dollars). This figure would be compared with other similar funds
managed within the institution (for purposes of monitoring internal
7
controls), with performance data for peer group funds, and with relevant
indices (where available) or tailor-made performance benchmarks where
appropriate. The specialist performance measurement firms calculate
quartile and decile data and close attention would be paid to the (percentile)
ranking of any fund.

Generally speaking, it is probably appropriate for an investment firm to

persuade its clients to assess performance over longer periods (e.g., 3 to 5
years) to smooth out very short term fluctuations in performance and the
influence of the business cycle. This can be difficult however and, industry
wide, there is a serious preoccupation with short-term numbers and the
effect on the relationship with clients (and resultant business risks for the
institutions).

An enduring problem is whether to measure before-tax or after-tax

performance. After-tax measurement represents the benefit to the investor,
but investors' tax positions may vary. Before-tax measurement can be
misleading, especially in regimens that tax realised capital gains (and not
unrealised). It is thus possible that successful active managers (measured
before tax) may produce miserable after-tax results. One possible solution is
to report the after-tax position of some standard taxpayer.

Risk adjusted performance measurement:

Institutions often control huge shareholdings. In most cases they are acting
as fiduciary agents rather than principals (direct owners). The owners of
shares theoretically have great power to alter the companies they own via the
voting rights the shares carry and the consequent ability to pressure
managements, and if necessary out-vote them at annual and other meetings.

In practice, the ultimate owners of shares often do not exercise the power
they collectively hold (because the owners are many, each with small
holdings); financial institutions (as agents) sometimes do. There is a general
belief that shareholders - in this case, the institutions acting as agents—could
and should exercise more active influence over the companies in which they
hold shares (e.g., to hold managers to account, to ensure Boards effective
functioning). Such action would add a pressure group to those (the
regulators and the Board) overseeing management.

8
However there is the problem of how the institution should exercise this
power. One way is for the institution to decide, the other is for the institution
to poll its beneficiaries. Assuming that the institution polls, should it then:

(i) Vote the entire holding as directed by the majority of votes cast?

(ii) Split the vote (where this is allowed) according to the proportions
of the vote

(iii) Respect abstainers and only vote the respondents' holdings?

The price signals generated by large active managers holding or not holding
the stock may contribute to management change. For example, this is the
case when a large active manager sells his position in a company, leading to
(possibly) a decline in the stock price, but more importantly a loss of
confidence by the markets in the management of the company, thus
precipitating changes in the management team.

Some institutions have been more vocal and active in pursuing such matters;
for instance, some firms believe that there are investment advantages to
accumulating substantial minority shareholdings (i.e. 10% or more) and
putting pressure on management to implement significant changes in the
business. In some cases, institutions with minority holdings work together to
force management change. Perhaps more frequent is the sustained pressure
9
that large institutions bring to bear on management teams through persuasive
discourse and PR. On the other hand, some of the largest investment
managers—such as Barclays Global Investors and Vanguard—advocate
simply owning every company, reducing the incentive to influence
management teams. A reason for this last strategy is that the investment
manager prefers a closer, more open and honest relationship with a
company's management team than would exist if they exercised control;
allowing them to make a better investment decision.

The national context in which shareholder representation considerations are

set is variable and important. The USA is a litigious society and
shareholders use the law as a lever to pressure management teams. In Japan
it is traditional for shareholders to be low in the 'pecking order,' which often
allows management and labor to ignore the rights of the ultimate owners.

Whereas US firms generally cater to shareholders, Japanese businesses

generally exhibit a stakeholder mentality, in which they seek consensus
amongst all interested parties (against a background of strong unions and
labour legislation).

10
OBJECTIVES:

Primary objectives:

 To study how an investment can be managed.

Secondary Objectives:

 To study security analysis.

 To know how to construct a portfolio.
 To know how to evaluate the performances of different portfolios.
 To know in which investment we get more returns.
 Too know in which investment we have less risk.

11
METHOLOGY

Methodology:

Data collection: - in the present project work the data has been collected
from readily available sources i.e. secondary data. Like websites, news
papers and magazines.
The websites visited are
www.nse India.com
www.bse india.com

Data analysis: - the present project work has been analysed using time series
analysis with graphical presentations.

The formulas applied in the calculations are follows:

Returns =closing price-opening price /opening price*100

Risk:-

Formula:
 =(X-X)2/n

12
NEED AND SCOPE

NEED FOR THE STUDY

Portfolio management is a process encompassing many activities of

investment in assets and securities. It is a dynamic and flexible concept and
involves regular and systematic analysis, judgments and actions. The
objective of this service is to help the unknown investors with the expertise
of professionals in investment portfolio management. It involves
construction of a of a portfolio bases upon the investors objectives,
constraints, preferences for risk and return and tax ability. The portfolio is
reviewed and adjusted from time to time in tune with the market conditions.
The evaluation of portfolio is to be done in terms of targets set for a risk and
return. The changes in the portfolio are to be effected to meet the changing
conditions.

Portfolio construction refers to the allocation of surplus funds in hand among

a variety of financial assets open for investments. Portfolio theory concerns
itself with the principles governing such allocations. The modern view of
investments is oriented more towards the assembly of proper combinations
of individual securities to form investment portfolios. A combination of
individual securities to form investments portfolios. A combination of
securities held together will give a beneficial result if they are grouped in a
manner to secure higher return after taking into consideration the risk
elements

13
 SCOPE OF THE STUDY

This study covers the Markowitz model. Here in, the study covers the
calculation of correlations between the different securities in order to find
out at what percentage of funds should be invested among the companies in
the portfolio. Also the study includes the calculation of weights of individual
securities involved in the portfolio. These percentages help in allocation the
funds available for investments based on the risky portfolios.

14
 LIMITATIONS

Limitations of the study

The study has certain constrains which has limited to its scope and objects of
the study.

 The fulfillment of project to 45 days.

 From BSE and NSE listing – a very few and randomly

selected scripts are analyzed.

 Construction of portfolio restricted to two- assets based in

Markowitz model.

 Limited industries are only covered in the study.

15
INDUSTRY PROFILE

Evolution

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
meagre 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 American Civil War 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.

Ahmedabad gained importance next to Bombay with respect to cotton textile

industry. After 1880, many mills originated from Ahmedabad and rapidly
16
forged ahead. As new mills were floated, the need for a Stock Exchange at
Ahmedabad was realised and in 1894 the brokers formed "The Ahmedabad
Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmedabad, the jute
industry was to Calcutta. Also tea and coal industries were the other major
industrial groups in Calcutta. After the Share Mania in 1861-65, in the
1870's there was a sharp boom in jute shares, which was followed by a boom
in tea shares in the 1880's and 1890's; and a coal boom between 1904 and
1908. On June 1908, some leading brokers formed "The Calcutta Stock
Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on

the way in India with the Swadeshi Movement; and with the inauguration of
the Tata Iron and Steel Company Limited in 1907, an important stage in
industrial advancement under Indian enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all
companies generally enjoyed phenomenal prosperity, due to the First World
War.

In 1920, the then demure city of Madras had the maiden thrill of a stock
exchange functioning in its midst, under the name and style of "The Madras
Stock Exchange" with 100 members. However, when boom faded, the
number of members stood reduced from 100 to 3, by 1923, and so it went
out of existence.

In 1935, the stock market activity improved, especially in South India where
there was a rapid increase in the number of textile mills and many plantation
companies were floated. In 1937, a stock exchange was once again
organized in Madras - Madras Stock Exchange Association (Pvt) Limited.
(In 1957 the name was changed to Madras Stock Exchange Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was
merged with the Punjab Stock Exchange Limited, which was incorporated in

17
 1936. Growth Pattern of the Indian Stock Market

As on 31st 1946 1961 1971 1975 1980 1985 1991 1995

Sl.No.
December
No. of 7 7 8 8 9 14 20 22
1
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
4
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 110279 478121
5 Capital of Listed
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
6 Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
7
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358 170 148 126 170 260 344 803
of Capital per
8
Listed Cos. (Lak
Rs.)

18
Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression.

Lahore Exchange was closed during partition of the country and later
migrated to Delhi and merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized

in 1963.

Most of the other exchanges languished till 1957 when they applied to the
Central Government for recognition under the Securities Contracts
(Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad,
Delhi, Hyderabad and Indore, the well established exchanges, were
recognized under the Act. Some of the members of the other Associations
were required to be admitted by the recognized stock exchanges on a
concessional basis, but acting on the principle of unitary control, all these
pseudo stock exchanges were refused recognition by the Government of
India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in
India (mentioned above). The number virtually remained unchanged, for
nearly two decades. During eighties, however, many stock exchanges were
established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange
Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited
(1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati
Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at
Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),
Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange
Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at
Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and
recently established exchanges - Coimbatore and Meerut. Thus, at present,
there are totally twenty one recognized stock exchanges in India excluding
the Over The Counter Exchange of India Limited (OTCEI) and the National
Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock
markets since independence. It is quite evident from the Table that Indian
stock markets have not only grown just in number of exchanges, but also in
number of listed companies and in capital of listed companies. The
remarkable growth after 1985 can be clearly seen from the Table, and this

19
was due to the favouring government policies towards security market
industry.

HISTORY:

The working of stock exchanges in India started in 1875. BSE is the oldest
stock market in India. The history of Indian stock trading starts with 318
persons taking membership in Native Share and Stock Brokers Association,
which we now know by the name Bombay Stock Exchange or BSE in short.
In 1965, BSE got permanent recognition from the Government of India.
National Stock Exchange comes second to BSE in terms of popularity. BSE
and NSE represent themselves as synonyms of Indian stock market. The
history of Indian stock market is almost the same as the history of BSE.

The 30 stock sensitive index or Sensex was first compiled in 1986. The
Sensex is compiled based on the performance of the stocks of 30 financially
sound benchmark companies. In 1990 the BSE crossed the 1000 mark for
the first time. It crossed 2000, 3000 and 4000 figures in 1992. The reason for
such huge surge in the stock market was the liberal financial policies
announced by the then financial minister Dr. Man Mohan Singh.

The up-beat mood of the market was suddenly lost with Harshad Mehta
scam. It came to public knowledge that Mr. Mehta, also known as the big-
bull of Indian stock market diverted huge funds from banks through
fraudulent means. He played with 270 million shares of about 90 companies.
Millions of small-scale investors became victims to the fraud as the Sensex
fell flat shedding 570 points.

20
To prevent such frauds, the Government formed The Securities and
Exchange Board of India, through an Act in 1992. SEBI is the statutory body
that controls and regulates the functioning of stock exchanges, brokers, sub-
brokers, portfolio managers investment advisors etc. SEBI oblige several
rigid measures to protect the interest of investors. Now with the inception of
online trading and daily settlements the chances for a fraud is nil, says top
officials of SEBI.

Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000
mark was crossed in June and the 8000 mark on September 8 in 2005. Many
foreign institutional investors (FII) are investing in Indian stock markets on a
very large scale. The liberal economic policies pursued by successive
Governments attracted foreign institutional investors to a large scale.
Experts now believe the sensex can soar past 14000 mark before 2010.

The unpredictable behavior of the market gave it a tag – ‘a volatile market.’

The factors that affected the market in the past were good monsoon,
Bharatiya Janatha Party’s rise to power etc. The result of a cricket match
between India and Pakistan also affected the movements in Indian stock
market. The National Democratic Alliance led by BJP, during 2004 public
elections unsuccessfully tried to ride on the market sentiments to power.
NDA was voted out of power and the sensex recorded the biggest fall in a
day amidst fears that the Congress-Communist coalition would stall
economic reforms. Later prime minister Man Mohan Singh’s assurance of
‘reforms with a human face’ cast off the fears and market reacted sharply to
touch the highest ever mark of 8500.

India, after United States hosts the largest number of listed companies.
Global investors now ardently seek India as their preferred location for
investment. Once viewed with skepticism, stock market now appeals to
middle class Indians also. Many Indians working in foreign countries now
divert their savings to stocks. This recent phenomenon is the result of
opening up of online trading and diminished interest rates from banks. The
stockbrokers based in India are opening offices in different countries mainly
to cater the needs of Non Resident Indians. The time factor also works for
the NRIs. They can buy or sell stock online after returning from their work
places.

The recent incidents that led to growing interest among Indian middle class
are the initial public offers announced by Tata Consultancy Services, Maruti

21
Udyog Limited, ONGC and big names like that. Good monsoons always
raise the market sentiments. A good monsoon means improved agricultural
produce and more spending capacity among rural folk.

The bullish run of the stock market can be associated with a steady growth
of around 6% in GDP, the growth of Indian companies to MNCs, large
potential of growth in the fields of telecommunication, mass media,
education, tourism and IT sectors backed by economic reforms ensure that
Indian stock market continues its bull run.

1875 1875 - The Indian Stock Market Writen by William Berg The
working of stock exchanges in India started in 1875. BSE is
the oldest stock market in India. The history of Indian stock
trading starts with 318 persons taking membership in Native
Share and Stock Brokers ...
Show more

From Sphere | Why India's Economy Will Keep Growing |

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 1998 May 13, 1998 - The Indian stock market in Bombay has fallen
four percent on what analysts say is nervous reaction to the
threat of sanctions, particularly those of Japan and the United
States. Dealers are describing the situation as a bloodbath.
Prices had already started falling when Japan announced ...
From Nuclear tests hit India stock market   - Related
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22
3

 2000 Jun 2000 - Options and futures trading in India commenced

from June, 2000 on National Stock Exchange and Bombay
Stock Exchange in stock index futures, stock futures, stock
index option and stock option. It was a welcome step on the
part of the government since it was ...
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 2001 Dec 31, 2001 - ... ... on the age old carry forward trading and
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Accompanying them were a host of other market reforms ...
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 2004 May 17, 2004 - BOMBAY, India — India's stock market took
the biggest plunge in its 129-year history Monday as investors
panicked over how communist parties would influence the
policy of the incoming coalition government of Sonia Gandhi.
Stock market regulators halted trading twice during the day

23
 and ...
From India's stock market plunges   - Related web pages
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 2005 Apr 18, 2005 - While bulls and bears may be the buzzwords on
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From Want to invest? Know your zoology first!   -
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 2006 May 23, 2006 - A longer drawn-out fall would have appeared as
a bear phase and softened investor interest in what remains a
very exciting growth market. Last Thursday, the Sensex shed
826.38 points, the previous biggest fall in the history of Indian
stock markets while it lost 887.36 points intraday. ...
From Biggest crash in stock market   - Related web
pages
www.hindu.com/2006/05/23/stories ...

 2008 Jun 30, 2008 - The worst 6 months in the history of Indian
Stock Market" by Arum Prabhudesai was published on June
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comments via the RSS Feed | Leave a comment | Trackback
URL Tags: , benchmark, BSE, FII, foreign ...
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...

10

24
  2015 In 2015, SEBI was merged with the Forward Markets
Commission (FMC) with the aim of strengthening regulation of
the commodities market, facilitating domestic and foreign
institutional participation, and launch of new products.

11

2019 Today, the BSE is measured as the world’s 11th largest stock
exchange and the market capitalization is likely to be around
$1.7 trillion. The market capitalization of the NSE is estimated to
be over $1.65 trillion.

In India there are mainly 2 stock exchange where the stocks are traded
namely BSE (Bombay Stock Exchange)and NSE(National Stock
Exchange)Apart from these 2 exchange there are 23 other exchange,they are
on regional levels. In NSE there are around 5000 stocks are traded and in
BSE 3000 stocks are traded.But the NIFTY index is 50 and SENSEX is 30
stocks are representing.in these index the top performing companies and
sector stocks are present.
Indian investors had seen the Up's and Down's of the market.
10 biggest falls in the Indian stock market history:

Jan 21, 2008: The Sensex saw its highest ever loss of 1,408 points at the end
of the session on Monday. The Sensex recovered to close at 17,605.40 after
it tumbled to the day's low of 16,963.96, on high volatility as investors
panicked following weak global cues amid fears of the US recession.

Jan 22, 2008: The Sensex saw its biggest intra-day fall on Tuesday when it
hit a low of 15,332, down 2,273 points. However, it recovered losses and

25
closed at a loss of 875 points at 16,730. The Nifty closed at 4,899 at a loss of
310 points. Trading was suspended for one hour at the Bombay Stock
Exchange after the benchmark Sensex crashed to a low of 15,576.30 within
minutes of opening, crossing the circuit limit of 10 per cent.

May 18, 2006: The Sensex registered a fall of 826 points (6.76 per cent) to
close at 11,391, following heavy selling by FIIs, retail investors and a
weakness in global markets. The Nifty crashed by 496.50 points (8.70%)
points to close at 5,208.80 points.

December 17, 2007: A heavy bout of selling in the late noon deals saw the
index plunge to a low of 19,177 - down 856 points from the day's open. The
Sensex finally ended with a huge loss of 769 points (3.8%) at 19,261. The
NSE Nifty ended at 5,777, down 271 points.

October 18, 2007: Profit-taking in noon trades saw the index pare gains and
slip into negative zone. The intensity of selling increased towards the closing
bell, and the index tumbled all the way to a low of 17,771 - down 1,428
points from the day's high. The Sensex finally ended with a hefty loss of 717
points (3.8%) at 17,998. The Nifty lost 208 points to close at 5,351.

January 18, 2008: Unabated selling in the last one hour of trade saw the
index tumble to a low of 18,930 - down 786 points from the day's high. The
Sensex finally ended with a hefty loss of 687 points (3.5%) at 19,014. The
index thus shed 8.7% (1,813 points) during the week. The NSE Nifty
plunged 3.5% (208 points) to 5,705.

November 21, 2007: Mirroring weakness in other Asian markets, the

Sensex saw relentless selling. The index tumbled to a low of 18,515 - down
766 points from the previous close. The Sensex finally ended with a loss of
678 points at 18,603. The Nifty lost 220 points to close at 5,561.

August 16, 2007: The Sensex, after languishing over 500 points lower for
most of the trading sesion, slipped again towards the close to a low of
14,345. The index finally ended with a hefty loss of 643 points at 14,358.

April 02, 2007: The Sensex opened with a huge negative gap of 260 points
at 12,812 following the Reserve Bank of India decision to hike the cash
26
reserve ratio and repo rate. Unabated selling, mainly in auto and banking
stocks, saw the index drift to lower levels as the day progressed. The index
tumbled to a low of 12,426 before finally settling with a hefty loss of 617
points (4.7%) at 12,455.

August 01, 2007: The Sensex opened with a negative gap of 207 points at
15,344 amid weak trends in the global market and slipped deeper into the
red. Unabated selling across-the-board saw the index tumble to a low of
14,911. The Sensex finally ended with a hefty loss of 615 points at 14,936

CURRENT SCENARIO:

Jun 09, 2008 – The Indian Equity Markets remained subdued

throughout the week with indices losing by nearly 5% over the week
(June 1st week). The selling pressure from FIIs& NRIs - non resident
Indians was seen in heavyweight stocks. At the same time some
consolidation was also seen in some selective stocks across the Bombay
and national stock exchange indexes like the nifty and sensex.

The week started with the important support levels of 16000/4750

getting breached. As mentioned in our previous equity report, the
Indian markets saw massive sell-off after this development. The indices
reached near the next target support level of 4500. Though markets
have fallen sharply there are no clear indication of bottoming out and
further downside cannot be ruled out. We feel the next important
support level is seen at 14700/4280. But before that big investors like
person of India origin and overseas citizen of india can start investing in
small quantity in selective stocks, they have to really time the market
really well, and they need to diversify their investments between mutual
funds and stocks. The support for the week is seen near 15100/4475
while the resistance for the week is seen near 16100/4800. In high
volatility this band can stretch further to 14900/4400 and 16400/4850.

We advise our clients to invest in indian stock markets with caution and
with a long term view with a portfolio diversification view across
various financial products like: stocks, mutual funds, commodities and
futures. Oints. This is the third biggest loss

27
 iThursday, March 20, 2008

Current Indian Stock Market Scenario vs US Recession.

Indian Stock Market including both NSE-National Stock Exchange and the
BSE-Bombay Stock Exchange have certainly taken a tremendous beating in
the past few weeks. We are sure most of us here knew that the correction in
the trading curve was round the corner which would be healthy, and the
markets would bounce back from 18k levels with the help of mutual fund
investments & buying of Indian stocks again. However the anticipation went
wrong, and the US recession story along with global and Indian commodity
prices have added fuel to the global equity market turmoil on a whole.

Do we have to worry our Indian investments in stocks & mutual funds?

What would happen next in the stock markets of India?
Whether investors should make more investments in India?
Well we have to realize a fact that we all are NO astrologers here, rather we
are investors taking calculated risks, and we should take into account the
probability of us being wrong as well. Things have gone certainly worse in
the Indian trading context, but we at NriInvestIndia.com hope that in the
coming months the same wouldn't be the case.

We at NriInvestIndia.com would like to bring a couple of things into

picture:

1. Federal Reserve (US head banking institution, like RBI in India) is

looking forward to make more rate cuts (interest rate cuts) in the coming
future to ease out the credit crunch that has evoked since this subprime
crisis. Its effect would take 6-8 months to reflect in the global economies
28
 including markets of India: Derivatives Trading Market, Futures Trading
Market, and Commodities Trading Market of India. This reflection in
trading and investment sentiment could take some time to happen, but it
would be definitely witnessed with an increment in local business, FII
investment in India and NRI Investment Services in India. Good news

2. Indian Shares/Stocks market are not performing great in the gone weeks,
but institutions still have abundant money on the table to invest; but with the
coming rate cuts, the debt market would not look any good to them either (in
the US).
So would they put money into commodities (mainly: gold, oil, silver)?
Commodity prices have risen up real fast, not giving many investors the
room or time to switch from equities or debt market into commodities
market. All this brings the investors, institutions, banks & hedge funds in the
land of uncertainty. They have to rethink their strategy and that is where
the emerging markets look attractive to these investors (because these
investors would still want to invest their money. US recession doesn't mean
people would stop investing for their future, or hedge funds/banks would
stop investing/speculating money). Thus bringing such investors to look for
good valuations and a very positive side for the Asian stock markets. Good
news

3. Nothing bad is happening in the Asian markets. We look pretty strong,

and all this major blood is on the street is a result of short-term panic we are
witnessing. The momentum would soon pick up once the US recession
worries ease a little with fed pumping in more money (bailout) into the
subprime cycle. Thus we would see lot more buy orders coming into demat
accounts to buy the Indian stocks. Good news

4. India story has not changed at all. We still believe that our economy has
lot of potential with great fuel to shoot up. However we still believe that this
is not going to happen in short-term, and we might not see too much
purchase orders coming into the Online Dmat Accounts of Indians as well as
NRI, PIO or OCIs (non resident Indians). There is a lot of room for
expansion in India, and there is huge demand for credit consumption. We are
just waiting for the liquidity to pour-in. That liquidity is definitely on the
table, but all big institutions are looking for some good indicators, and when
this happens we would be crawling back on the curve. Good news

29
5. We all believe that the markets are majorly falling due to the US worries
that are coming in and not because of the performances exhibited by the
Indian corporates. Earning results of the company are expected to be out in
April (when companies declare their quarterly/annual performances to the
public). Everyone out here expects these numbers to be good, which could
thus decide the turn of the market sentiments. Good News

Important: Our idea is not to put a very rosy picture in front of you, but to
ease out some tension by highlighting certain macro & micro economic
points that are still in our favour. We know investors not only with us, but
also with other brokers are loosing their portfolio strength in terms of capital
and valuations. However, keeping all the above notes in mind along with
strong/stable Indian fundamentals that are still pretty attractive we advise
our clients to stay strong and very importantly increase their time frame
from 2 years to a minimum of 3-4 years now. This is especially for clients
who have invested heavily in mutual funds, as mutual funds are supposed to
be long term financial instruments and not short-term trading products. To
conclude we would advise clients to stay calm and hold onto the positions
with a long term perspective (3-4 years now) and lets take this opportunity
to build our portfolios even stronger by adding good positions(especially in
mining, commodity, energy & infrastructure sectors) at lowers prices as
well.

I am impressed by your rational analysis of the current global scenario.

- Ramkumar, a 5 Minute Wrapup Subscriber. Sign Up Now... it's Free!

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 BSE-30! 13,894  (-19)    NSE-50! 4,218  (-19)

Top May 26, 2009 Top May 26, 2009
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30
HDFC 2,138.0 2.42% HDFC 2,135.0 2.34%
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In the Indian market scenario, the large FMCG companies reached the top
line with a double-digit growth, with their shares being attractive for
investing in the Indian Stock Market. Such company like the Tata Tea,
Britannia, to name a few, has been providing a bustling business for the
Indian share market. Other leading houses offering equally beneficial stocks
for investing in Indian Stock Market, of the SENSEX chart are the two-
wheeler and three-wheeler maker Bajaj Auto
second largest software exporter Infosys Technologies, top private sector
telecoms service provider Bharti Airtel, major pharmaceuticals Ranbaxy
Laboratories, housing finance company HDFC, state-owned heavy electrical
equipment maker BHEL, steel maker Tata Steel and second largest lender
private sector ICICI Bank.

The Indian Stock Market – Continued Boom or Impending Bust?

Date: 04.04.2008 - 12:28
Category: Business, Economy, Finances, Banking & Insurance
31
Press release from: Evalueserve
During 2003–07, India’s economy grew at an average annual rate of 8.6%
and reached US $1,030 billion in the calendar year2007. However, during
the last 16 years (1991–2006), the annual inflation (as measured by the
average wholesale price index[WPI]) has been approximately 6.67%. Given
the savings rate and liquidity in the system, Evalueserve’s analysis shows
that the annual inflation Indias likely to hover around 5% during the next 14
years. Assuming a constant exchange rate, where
one US Dollar equals 40 Indian Rupees, India’s economy is likely to be
$1,490 billion in 2010 and around $5,040 billion in
2020 (in nominal terms). This implies that even after accounting for
inflation, there will be more than a five-fold increase in
India’s economy between 2007 and 2020, which will make India the fourth
largest economy in the world after the United
States, China, and Japan.
During the last 42 months, the Indian stock market, and in particular the two
indices—Sensex (Sensitive Index) and
BSE-100, have grown by approximately 290%, corresponding to a
cumulative annual growth rate of 36%. This can be
attributed partly to the growth of the Indian economy and partly to the
enormous inflow of foreign currency in the Indian stock
market, particularly by Foreign Institutional Investors (FIIs). Given this
backdrop, Evalueserve, a global research & analytics
firm, recently conducted a study regarding the rise of the Indian stock
market. This study was quite challenging for us because
the Indian market is rather unique with almost no parallels. Nevertheless, we
compared it to other booms and busts in
emerging markets and also used backtesting and related analysis. Our study
resulted in the following three scenarios:
Making stock market predictions is always a very risky business. However,
comparing and contrasting arguments by bulls
and bears, we have arrived at three likely scenarios, which are briefly
discussed below:
First Scenario – Stock Market Crash
This scenario is likely to occur if, because of a sudden crisis of confidence
(e.g., because of a sudden collapse of the current
coalition government in India), there was a flight of FII money out of the
country. According to Evalueserve’s models and
analysis, if US$ 12 billion of FII money were to leave within a quarter, the
stock market would drop by approximately 30%
32
and the Indian Rupee would depreciate by about 6%. This would imply a
level of 14,000 for Sensex, which was the level of
Sensex around a year ago, when it was already causing anxiety among
market participants, regulators, and the Indian
government. Fortunately, an immediate 6% depreciation of the Indian
currency would not be catastrophic for the economy,
although it would lead to a bout of inflation and have a short-term negative
impact on the current account deficit. This could
potentially lead to a vicious cycle whereby more FII money leaves India,
which in turn would lead to further losses in Sensex,
the depreciation of the Rupee, and even higher inflation. Alternatively, a
depreciated Rupee would make Indian exports more
competitive and would help close the current trade deficit in the long run.
Second Scenario – Stock Market Bubble
This scenario is likely to occur if the RBI and the Indian government are
unable to curb the massive inflow of FII money for
another year or two. This would send the Sensex and the BSE-100 even
higher, and more retail investors would jump in,
thereby pushing the P/E ratios of listed companies even higher. This
situation would be somewhat akin to the contemporary
example of the Chinese stock market, where companies are trading at P/E
ratios of 50. So, despite the current anxiety, there is
clearly room for the Indian stock market to double in the next year or two.
Of course, in this scenario, such an “irrational
exuberance” of the Indian stock market may continue for some time,
reminiscent of what happened in the US from the time
when Alan Greenspan made his comments in December 1996 to the time
when the US market crashed in April 2000.
Third Scenario – A Reasonable Market Rise
The stock market continues to rise although at a “snail’s pace” (of 0–10%
per year). Since the companies listed in the Sensex
and the BSE-100 are likely to grow in revenue at 15–17% annually (in
nominal terms) and probably more with respect to
profit margins, this system might self-adjust within the next 2–4 years.
However, during this period, the stock market may
remain stagnant or go “sideways”, and could even have high levels of
volatility. Indeed, this scenario may be the least
disruptive for the Indian economy, and particularly, for the Indian stock
market.

33
According to Dr. Alok Aggarwal, co-founder and chairman of Evalueserve,
“The first scenario (i.e. the Sensex dropping to
14,000 in the near future) has the highest probability of approximately 50%,
whereas the other two scenarios have an equal
probability of approximately 25% each. In other words, the risk is skewed
on the downside.”
Seite 1 / 2
Disclaimer
Although the information contained in this article has been obtained from
sources believed to be reliable, the author and
Evalueserve disclaim all warranties as to the accuracy, completeness or
adequacy of such information. Evalueserve shall have
no liability for errors, omissions or inadequacies in the information
contained herein or for interpretations thereof.
Evalueserve
Cyberpark, Unitech World,
Sector-39, Gurgaon,
Haryana, India.
Phone: +91 124 4124000
prcc@evalueserve.com
About Evalueserve
Evalueserve provides custom research and analytics services to companies
worldwide including Business Research, Market
Research, Data & Financial Analytics, Investment Research, Intellectual
Property and Legal Process Services, and access to a
global network of domain experts through Evalueserve Circle of Experts.
The firm was founded by IBM and McKinsey
alumni, and has completed over 12,000 client engagements. The firm
currently has over 2,100 professionals located in
research centers in Chile, India, China, and New York. Evalueserve’s “in-
country” Client Executives are located in most
major business and financial centers worldwide—from Silicon Valley to
Sydney,
.

34
FUTURE OUTFLOW

Current Indian Stock Market Scenario for Nris in Nse & Bse Trading

Author: Aditya Sharma

The Indian Equity Markets remained subdued throughout the week with
indices losing by nearly 5% over the week (June 1st week). The selling
pressure from FIIs& NRIs - non resident Indians was seen in heavyweight
stocks. At the same time some consolidation was also seen in some selective
stocks across the Bombay and national stock exchange indexes like the nifty
and sensex.

 The week started with the important support levels of 16000/4750 getting
breached. As mentioned in our previous equity report, the Indian markets
saw massive sell-off after this development. The indices reached near the
next target support level of 4500. Though markets have fallen sharply there
are no clear indication of bottoming out and further downside cannot be
ruled out. We feel the next important support level is seen at 14700/4280.
But before that big investors like person of India origin and overseas citizen
of India can start investing in small quantity in selective stocks, they have to
really time the market really well, and they need to diversify their
investments between mutual funds and stocks. The support for the week is
seen near 15100/4475 while the resistance for the week is seen near
16100/4800. In high volatility this band can stretch further to 14900/4400
and 16400/4850.
 
 We advise our clients to invest in Indian stock markets with caution and
with a long term view with a portfolio diversification view across various
financial products like: stocks, mutual funds, commodities and futures.     
 
   Source:   http://www.nriinvestindia.com/
NriInvestIndia.com is an emerging NRI, PIO and OCI focused Investment
Broker & Mutual fund Distributor Company from India, offering NRI
Services to do Investment in India. Our goal is to guide Non Resident
Indians to Trade in Indian Stock Market & Invest in top Mutual Funds of
India.

35
Article Source: http://www.articlesbase.com/investing-articles/current-
indian-stock-market-scenario-for-nris-in-nse-bse-trading-443020.html

About the Author:

Myself Aditya Sharma (Sr.Investment Advisor), and I work for a  NRI
Investment company  (  www.NriInvestIndia.com  ) that helps NRIs, PIOs
and OCIs to invest in India's top mutual funds.
 
Here at NriInvestIndia.com we focus in delivering value service to our NRI
clients when it comes to their investments in the Indian stock markets – NSE
& BSE. Our equity & mutual fund investment advising is structured to suit
the investment objectives of the non resident Indian investor in a long run
(including PIOs and OCIs).
 
We at NriInvestIndia.com advise our clients to invest across various
financial products viz: Mutual funds, RBI bonds, Portfolio Management
Services for NRIs, Stocks & Shares, Trading Account, Dmat Account, SIPs
– systematic investment plans, etc, based on your risk-return profile.

Present Scenario

The current conditions of Indian markets have drastically improved. There is

absolute transparency and instant transactions. All Indian Stock markets are
now computerized and Internet Trading has become a common
phenomenon. Indian stock markets have also developed a dynamic nature
and can change from a bullish temperament to a bearish slide. Any small bit
of information or even a rumour from any part of the country can affect the
market and is a fairly accurate indicator of the prevalent atmosphere in the
region or country. People from across the country and globe get in touch
with minute wise readings on the stock market and gain a lot of trading
aptitude after daily seeing BSE Stock Gainers
(http://www.paisawaisa.com/stocks/top-gainers.aspx) or BSE top losers
(http://www.paisawaisa.com/stocks/top-loosers.aspx) list which does a
world of good to their investment portfolio.

What is Indian Stock Market ?

Indian Stock Market contains more then 20 Stock Exchanges, some of which
are popular nationally as well as regionally. The first stock market
36
(http://www.paisawaisa.com/stocks/) started in the country was the Bombay
Stock Exchange (BSE). Its the oldest stock market in Asia and was
established as “the Native Share and Stock Broker's Association” in the year
1875.It has around 5000 listings and a volume of more than US$ 1 Trillion.
The other most popular Stock Exchange is the National Stock Exchange
(NSE). Its also the largest Stock Exchange in the country and third in the
world. These two exchanges constitute a major part of the Indian Capital
Market.

The Indian Stock Market is a collection of various regional and national

level stock exchanges in India. It is platform for the masses of the country to
invest their savings and also as a source of funds for various organizations
and institutions that feature in business category.

Indian stock market

In order to appreciate the emerging role of stock exchanges in India it is apt

to start with the historical perspective and a comparative picture with other
stock exchanges in the world. The stock exchange is an association of
member brokers for the purpose of facilitating and regulating trading in
securities. It is thus, a self regulating organization, be it a company or
association. As the securities trading developed in India since 1875, it was a
private enterprise of an unregulated nature. The first attempt at regulation
was by Securities Contracts Control Act of Bombay 1925, passed by the
erstwhile Bombay Presidency. There was resistance from the stock
exchanges for government control even at that time. These exchanges had a
mushroom growth during the war time of forties as private clubs. There were
as many as 21 exchanges in 1945. At that time securities trading were a state
subject but with the adoption of Indian Constitution in 1951, it became a
Central subject. It took nearly six years after that to pass the necessary
central legislation in 1956 in the form of Securities Contracts (Regulations)
Act.

In the socialistic patter of society adopted by the government for planned

development of the economy in 1951, the role of stock exchange received no
significant attention and they were left with the minimum government
regulation under the above Act and the rules made there under. The
traditional emphasis was on self regulation by the stock exchanges
themselves with the result that the government had rarely used the full range
of powers bestowed on them except for one or two occasions in war time. So
37
the history of the growth of stock market movement in India was
characterized by three main features.

1. Resistance to government control and regulation.

2. Growth of stock exchanges as private associations with a modicum of
government interference.

3. Emphasis on self regulation and semi-autonomous nature of these private

organizations. The government and broking community worked in close
coordination and occasions resulting in friction few and far between. The
volume of trade and funds raised from the capital market were small and the
investor interest was at ebb.

Latest Phase in Stock Markets: It was only since 1985 with the entry of
banks and their subsidiaries into the stock and capital marks, facilitated by
the passage of the Banking Laws Amendment Act 1983 that the idea of
better services in these markets arose. The Seventh Five Year Plan 1985-90
contained the first elements of a new economic policy leading to the opening
up of the economy, industrial liberalization and a growing role for the
private sector. These changes necessitated greater attention to the growth of
capital market and protection of investors as public interest in these markets
began to grow.

Existing Regulation:

Indian stock market activity is regulated by a variety of laws as diverse as

Companies Act of 1956, Indian Contracts Act, Stamp Act, Negotiable
Instruments Act and Securities Contract (Regulation) Act etc. The first
requirement of well knit reforms is to have a consolidated law incorporating
all the provisions to regulate investment activity as financial Services Act of
1986 in United Kingdom. Management Perspectives: The government
formed The Securities and Exchange Board of India Act in 1992. The SEBI
is the statutory body that controls and regulates the functioning of stock
exchanges, brokers, intermediaries, and portfolio managers investment
advisors and obliges several rigid measures to protect the interest of
investors. The era of management by lapses, mismanagement has ostensibly
ended and a new concept of management by rules has started. Various
38
Departments have been formed which perform the functions of listing,
regulation of trading, provision of settlement and clearance etc basically
keeping the services to be rendered to the members and the public in mind.
The decisions are sometimes taken by the committees appointed by the
governing board for specific purposes. The Operations Department observe
that daily trading takes place, collect quotation and make them available to
members and public by the evening of every day. The Computer Department
collects and compiles the corporate data quotations of scripts and turnover of
trade, member-wise and script-wise for better investment decision making.
The EDP work of building up the information base on companies for
members and investors to make their investment decisions.

Future Role of Exchanges:

The future role of stock exchanges will be radically difference from the
present, as their developmental role will be increasing much faster than their
regulatory role. Not only the stock exchanges but all the players in the
market namely companies, brokers, intermediaries and public would have to
play a greater role in the functioning of stock market. Along with
increasing self regulation and a stricter enforcement of a code of conduct on
the members, the stock exchanges will have to emerge as public service
institutions catering to increasing demands of investors in the country.
Listed companies have also a role in this process to collaborate and extend
all help for more efficient functioning of exchange. To improve the quality
and efficiency of service, trained and professional category of intermediaries
and brokers is also necessary. Education, training and research would be the
hall mark of future stock brokers and other intermediaries.

Communication Technology:

39
Efficient marks require the flow of quick and correct information, an
efficient communication system, a system of fair and just practices and
procedures accompanied by a strict enforcement of a code of conduct on all.
A national market system, if it is to be developed, would vitally depend on
the efficient satellite telecommunication system in India and a proper
linkage of all stock exchanges.

Information Technology:

Investment to increase the level of explicit coordination with outside agents

have generally resulted in increased risk to the firm; firms have traditionally
avoided this increased risk by becoming vertically integrated or by under
investing in coordination. Information Technology has the ability to lower
coordination cost without increasing the associated transactions risk, leading
to more outsourcing and less vertically integrated firms. Lower association
specificity of Information Technology investments and a better monitoring
capability mean that firms can more safely spend in information technology
for inter firm coordination than in customary investments for open
coordination such as co-located facilities or specialized human resources;
firms are therefore more likely to coordinate with suppliers without
requiring ownership to reduce their risk. This enables them to benefit from
production economies of large specialized suppliers. Moreover, rapid
reduction in the cost of information technology and reduction in the
transactions risk of explicit coordination makes possible substantially more
use of explicit coordination with suppliers.

Conclusion:

40
Although the present stock market scenario appears dismal, it was due to
the transitional phase, it was going through. The policy reforms were adhoc
and unplanned, but the trend appears irreversible. The growing strong
investor base, entry of middle class as investors and public awareness of the
stock and capital markets have made it imperative for the reforms to
continue. The offshoot of the economic and financial reforms is the greater
responsibility thrust on the companies to improve their competitive
efficiency and productivity. The greater role given to the private sector and
increasing dependence on the capital market for both private and public
sectors would force the companies to prove their ability through
performance and stock exchanges to be better windows and transparent
media of measuring the corporate and industrial performance. The
regulatory framework of Securities and Exchange Board of India is
increasing and spreading its tentacles in quantitative terms instead of
confining to qualitative aspects, as in foreign markets. The ultimate
objective of all regulations is maintenance of standards and quality and if
that is to be achieved, deregulation can succeed and all the moves of the
government and stock exchanges should be in that direction.

FOR IMMEDIATE RELEASE

PRLog (Press Release) – Jul 09, 2008 – Ever since markets slid
precipitously in January and continued on the downward turn, one has been
wondering if the market has fallen enough to see a sustainable trend reversal.
Amidst around 7,000 point fall in Sensex from January peak till date, there
have been as many as four 1,000-point rallies, including a 20 percent rise
from mid-March low to end-April high.
Thus, there have been a few bottoms so to speak, and bottom hunting so far
has been a rather unprofitable enterprise with many false starts. Continuing
the risky pursuit even then, there are multiple ways to approach this question
of bottom.
For most of us though, given the odds of getting peaks and troughs right, the
best way, of course, is to evolve an approach that does not effectively
depend on searching for tops and bottoms. From a fundamental perspective,

41
trajectory in corporate earnings is the most significant variable that will
decide the long-term direction of the market.
Corporate earnings in India have grown at almost twice the pace of GDP in
the last five years, and the market's expectations are that earnings growth
trend is intact; only the extent of growth in the medium-term is made
uncertain by recent macro-economic developments. The most important
such development is the change in short-term inflation expectations in the
recent past, and which has resulted in a change in the direction of interest
rate movement.
To what levels inflation could rise and when it might start showing declining
trend is in some way linked to trend in prices of global commodities, chiefly
oil. As things stand today, there are reasons to believe that inflation is likely
to cool down towards the last quarter and may take a little longer to come
within the policymakers' tolerance band.
We believe that for clarity to emerge on the impact of the macro-economic
challenges on aggregate corporate earnings it will take another 3-6 months.
Some clarity will emerge in the upcoming first quarter results, but for more
we may have to wait till second quarter?s earnings reports to come.
While the macroeconomic news flow could remain mixed in the near future,
one need not wait for the last of the bad news to come out of the bag, as in
any case one can never be completely sure, a priori, to make an investment.
The most important lesson from history one can learn about equities is that
one should not base one’s investment decisions based on prevailing
sentiment, feel good factor or lack of it. There is ample evidence in history
to show that market bottoms out much before bad news ends, as markets
discount future news into current prices or valuations.
Of the many amongst us who wish to time the bottom, only a few will
succeed and even fewer on a consistent basis, while almost all of us need to
save for future and on a regular basis.
So instead of trying to time the bottom, a better approach would be to
systematically invest in a combination of assets that gives us the best chance
of meeting our financial goals, which must also include outperforming long-
term inflation to protect real value of savings as one of the key objectives.
For the reasons discussed above, this is clearly an opportune time to be
buying equities for the long-term.

42
PRLog (Press Release) – Jul 09, 2008 – Ever since markets slid
precipitously in January and continued on the downward turn, one has been
wondering if the market has fallen enough to see a sustainable trend reversal.
Amidst around 7,000 point fall in Sensex from January peak till date, there
have been as many as four 1,000-point rallies, including a 20 percent rise
from mid-March low to end-April high.
Thus, there have been a few bottoms so to speak, and bottom hunting so far
has been a rather unprofitable enterprise with many false starts. Continuing
the risky pursuit even then, there are multiple ways to approach this question
of bottom.
For most of us though, given the odds of getting peaks and troughs right, the
best way, of course, is to evolve an approach that does not effectively
depend on searching for tops and bottoms. From a fundamental perspective,
trajectory in corporate earnings is the most significant variable that will
decide the long-term direction of the market.
Corporate earnings in India have grown at almost twice the pace of GDP in
the last five years, and the market's expectations are that earnings growth
trend is intact; only the extent of growth in the medium-term is made
uncertain by recent macro-economic developments. The most important
such development is the change in short-term inflation expectations in the
recent past, and which has resulted in a change in the direction of interest
rate movement.
To what levels inflation could rise and when it might start showing declining
trend is in some way linked to trend in prices of global commodities, chiefly
oil. As things stand today, there are reasons to believe that inflation is likely
to cool down towards the last quarter and may take a little longer to come
within the policymakers' tolerance band.
We believe that for clarity to emerge on the impact of the macro-economic
challenges on aggregate corporate earnings it will take another 3-6 months.
Some clarity will emerge in the upcoming first quarter results, but for more
we may have to wait till second quarter?s earnings reports to come.
While the macroeconomic news flow could remain mixed in the near future,
one need not wait for the last of the bad news to come out of the bag, as in
any case one can never be completely sure, a priori, to make an investment.
The most important lesson from history one can learn about equities is that
one should not base one’s investment decisions based on prevailing
sentiment, feel good factor or lack of it. There is ample evidence in history
to show that market bottoms out much before bad news ends, as markets
discount future news into current prices or valuations.
Of the many amongst us who wish to time the bottom, only a few will
43
succeed and even fewer on a consistent basis, while almost all of us need to
save for future and on a regular basis.
So instead of trying to time the bottom, a better approach would be to
systematically invest in a combination of assets that gives us the best chance
of meeting our financial goals, which must also include outperforming long-
term inflation to protect real value of savings as one of the key objectives.
For the reasons discussed above, this is clearly an opportune time to be
buying equities for the long-term.

COMPANY PROFILE

COMPANY PROFILE

Cholamandalam DBS is a pan-Indian, composite financial services provider.

It comprises the parent company, Cholamandalam DBS Finance Limited
(CDFL) and its subsidiaries. The shares of CDFL are listed in the Madras
(MSE), Bombay (BSE) and National (NSE) Stock Exchanges.

44
CHOLAMANDALAM DBS FINANCIAL SERVICES GROUP
Cholamandalam DBS is a pan-Indian, composite financial services
provider. It comprises the parent company, Cholamandalam DBS Finance
Limited (CDFL), and its subsidiaries and associates DBS Cholamandalam
Distribution Limited, DBS Cholamandalam Securities Limited. The shares
of CDFL are listed in the Madras (MSE), Mumbai (BSE) and National
(NSE) Stock Exchanges.
Cholamandalam DBS Finance Limited (CDFL)
Cholamandalam Investment & Finance Company Limited (CIFCL) was
incorporated in 1978 as the financial services arm of the Murugappa Group.
In 2005, post the joint venture partnership between the Murugappa Group
and DBS Bank Limited, Singapore, the Company was renamed as
Cholamandalam DBS Finance Limited (CDFL). The Company that
commenced business as an equipment financing company has now emerged
as a comprehensive financial services solution provider that offers vehicle
finance, business finance, home equity loans, mutual funds, stock broking
and distribution of financial products to its customers. The Company
operates from over 140 branches across India with an asset under
management of about Rs.8546 Crores. The subsidiaries of Cholamandalam
DBS include DBS Cholamandalam Securities Limited (DCsec) and DBS
Cholamandalam Distribution Limited (DCDL).
DBS Cholamandalam Distribution Limited (DCDL)
Is in the business of providing wealth management services with enhanced
focus on larger product basket and unbiased investment advice. Products
offered include mutual funds, life and general insurance, equities, real
estate, private equity and fixed income products. The

45
company has a rich base of loyal clients and ranks among the top 30
distributors in the country with an asset size of Rs.1368 crores as on March
31, 2008.
DBS Cholamandalam Securities Limited (DCSec)
Is a securities broking company offering stock broking and equity advisory
services to institutional investors, including many of the largest mutual
funds in India and individual clients across the country. DCsec is a member
of Bombay Stock Exchange Limited and National Stock Exchange of India
Limited. It is also a depository participant with National Securities
Depository Limited (NSDL) and Central Depository Services (India)
Limited (CDSL)
Murugappa Group
Headquartered in Chennai, the Rs. 15,907 crores (USD 3.14 billion)
Murugappa Group is one of India's leading business conglomerates. Market
leaders in diverse areas of business including Engineering, Abrasives,
Finance, General Insurance, Cycles, Sugar, Farm Inputs, Fertilizers,
Plantations, Bio-products and Nutraceuticals, its 29 companies have
manufacturing facilities spread across 13 states in India. The organization
fosters an environment of professionalism and has a workforce of over
32,000 employees. The Group has forged strong joint venture alliances
with leading international companies like DBS Bank, Mitsui Sumitomo,
Foskor, Cargill and Groupe Chimique Tunisien has consolidated its status
as one of the fastest growing diversified business houses in India.
DBS Bank
DBS Bank Ltd., Singapore is a 100% subsidiary of DBS Group Holdings
Ltd. (DBS). DBS is one of the largest financial services groups in Asia with

46
operations in 16 markets. Headquartered in Singapore, DBS' "AA-" and
"Aa1" credit ratings are among the highest in the Asia-Pacific region. As a
bank that specialises in Asia, DBS leverages its deep understanding of the
region, local culture and insights to serve and build lasting relationships
with its clients. DBS provides the full range of services in corporate, SME,
consumer and wholesale banking activities across Asia and the Middle
East. The bank is committed to

expanding its pan- Asia franchise by leveraging its growing presence in

mainland China, Hong Kong and Taiwan to intermediate the increasing
trade and investment flows between these markets. Likewise, DBS is
focused on extending its end-to-end services to facilitate capital within fast-
growing countries in Indonesia and India. DBS acknowledges the passion,
commitment and can-do spirit in each of its 15,000 staff, representing over
30 nationalities. For more information, please visit www.dbs.com.

A Walk Down History 

Owing to Murugappa Group's pre-eminent position in the industry and the
consumer equity that it had painstakingly built, the horizon offered
opportunities in the financial sector. To harness this, the group set up
Cholamandalam DBS Finance Limited (CDFL) incorporated as
Cholamandalam Investment and Finance Company Ltd (CIFCL) in 1978
with the primary objective of offering asset finance through leasing and
hire purchase to corporates and then to retail customers. It has since
evolved itself into a large, composite financial services organization.

47
Today, Cholamandalam DBS offers stock broking, mutual fund and
investment advisory services through its subsidiaries. Ever since its
inception and all through its growth, the company has kept a clear sight of
its values. The basic tenet of these values is a strict adherence to ethics and
a responsibility to all those who come within its corporate ambit -
customers, shareholders, employees and society.
Board Of Directors
Mr. M.A. Alagappan
Chairman

Is a graduate in Commerce and has undergone a course in Management at

University of Aston, U.K.

Holds an honorary doctorate bestowed upon by Birmingham city University,

UK.

Is the Chairman of the Murugappa Corporate Board.

Is a Committee member of FICCI and SICCI and Honorary Consul of

Hungary in India (Southern Region).

Has been associated with the Company since its inception in various
capacities including as

Managing Director between 1994-99

Mr. Indresh Narain
Non-executive Director

Banker with wide experience at regional and head office level in personal
and corporate banking, wealth management, currency markets, asset
48
recovery, corporate finance and human resources.

Retired as Head of Compliance & Legal, HSBC India.

Was also member of the Assets & Liabilities committee (ALCO), the Apex
Management Committee and a member of the corporate governance and
audit committees of HSBC, India.

Is also a director on the Boards of Dhanuka Agritech Limited , Mindteck

(India) Ltd and Intex Technologies (India) Ltd.
Mr. R Krishnamurthy
Non-executive Director

Holds a masters degree in Commerce from the university of the Madras

besides being an associate of the Institute of Bankers.

Holds a diploma in Industrial Finance Management Education program at

IIM, Ahmedabad and is a Lord Aldington Banking Research Fellow in UK.
Attended a course on Banking Policy at Harvard University, USA.

Has over three decades of experience in banking in various positions in State

bank of India.

Is a visiting faculty at IIM Ahmedabad and a few other management

institutions?

Mr. V P Mahendra
Non-executive Director
Is a graduate in engineering from the University College of Engineering,

49
Is an MBA (Hons) from IMD, Switzerland?
Is the Chairman and Managing Director of Kanoria Chemicals & Industries
Ltd. and is also on the boards of various other companies.
Former Vice President of Federation of Indian Chamber of Commerce
Bangalore.
(FICCI), and has headed several joint-business councils.
Is the Managing Director of VST Tillers Tractors Limited, Bangalore and is
Is the managing committee member of PHD Chamber of Commerce &
also on the boards of several other companies.
Industry.
Has participated in a number of management programmes in Japan.
Is a keen sportsman and is a member of several philanthropic institutions.
Mr. R V Kanoria
Non-executive Director

Mr. N Srinivasan
Non-executive Director
Is a member of the Institute of Chartered Accountants of India and the
Institute of Company Secretaries of India.
Has over 25 years of experience in the areas of Corporate Finance, Legal,
Projects and General Management.
Was the President and Chief operating officer of Thiru Arooran Sugars Ltd.

LITERATURE

50
 SURVEY

INTRODUCTION TO PORTFOLIO MANAGEMENT

PORTFOLIO
A portfolio is a collection of securities. Since it is rarely desirable to invest
the entire funds of an individual or an institution in a single security, it is
essential that every security be viewed in the portfolio context. Thus it
seems logical that the expected return of each of the security contained in the
portfolio.
Portfolio analysis considers the determination of future risk and return in
holding various blends of the individual securities. Portfolio expected return
is a weighted average of the expected return of individual securities but
portfolio variances, inshort contrast, can be something less then a weighted
average of security variance. As a result an investor can sometimes reduce
portfolio risk by adding security with greater individual risk than any other
security in the portfolio. This is because risk depends greatly on the co-
variance among returns of individual security. Portfolio which is
combination of securities may or may not take an aggregate characteristic of
their part.

Since portfolios expected return is a weighted average of the expected return

of its securities, the contribution of each security to the portfolio’s expected

51
returns depends on its expected returns and its proportionate share of the
initial portfolio’s market value. It follows that an investor who simply wants
the greatest possible expected return should hold one security; the one’
which is considered to have a greatest, expected return. Very few investors
do this, and very few investments advisors would counsel such an extreme
policy. Instead, investors should diversify, meaning that their portfolio
should include more than one security.

OBJECTIVES OF PORTFOLIO MANAGEMENT

The objectives of investments/portfolio management can be classified as

follows

Basic objectives
The basic objectives of investment/portfolio management are
 To Maximize Yield, and
 To Minimize risk

Secondary objectives
The following are the other ancillary objectives are

52
  Regular return

 Stable income

 Appreciation of capital

a) More liquidity

b) Safety of investments, and

c) Tax benefits.

Need for portfolio management

Portfolio management is a process encompassing many activities of

investment in assets and securities. It is a dynamic and flexible concept and
involves regular and systematic analysis, judgments and actions. The
objective of this service is to help the unknown investors with the expertise
of professionals in investment portfolio management. It involves
construction of a of a portfolio bases upon the investors objectives,
constraints, preferences for risk and return and tax ability. The portfolio is
reviewed and adjusted from time to time in tune with the market conditions.

53
The evaluation of portfolio is to be done in terms of targets set for a risk and
return. The changes in the portfolio are to be effected to meet the changing
conditions.
Portfolio construction refers to the allocation of surplus funds in hand among
a variety of financial assets open for investments. Portfolio theory concerns
itself with the principles governing such allocations. The modern view of
investments is oriented more towards the assembly of proper combinations
of individual securities to form investment portfolios. A combination of
individual securities to form investments portfolios. A combination of
securities held together will give a beneficial result if they are grouped in a
manner to secure higher return after taking into consideration the risk
elements.
The modern theory is of the view that by diversifications, risk can be
reduced. The investor can make diversification either by having a large
number of shares of companies in different region, in different industries or
those producing different types products lines. Modern theory believes in the
perspective of combination of securities under constraints of risk and return.

Elements of portfolio management

54
Portfolio management is an on-going process involving the following the
following basic tasks:

 Identification of the investor’s objectives, constraints and

preferences.

 Strategies are to be developed and implemented in tune with

investments policy formulated.

 Review and monitoring of the performance of the portfolio.

 Finally the evaluation of the portfolio

PORTFOLIO ANALYSIS

Portfolio analysis is needed for the selection of optimal portfolio by rational

risk adverse investors. Portfolio analysis is essential for portfolio
construction. The objective of the portfolio or maximize the risk subject to
the desired level of return on the portfolio or maximize the return subject to
the constraint of a tolerable level of risk. It enables the investors to identify
the potential securities, which will maximize the following objectives such
as security of the principle, stability of income, capital growth marketability,
liquidity & diversification

55
Concept of Risk

Investment in shares has its own risk or uncertainty, which arises out of
variability of returns, yields and uncertainty of appreciation or depreciation
of shares prices, loss of liquidity etc. this risk over time, is capital
appreciation. This risk is measured statistically by the degree of variance or
standard deviation of returns. Normally higher the risk that the investor taker
higher is the return.

Diversification of Risk:

The process of combining securities in a portfolio is known as

diversification. The aim of diversification is to reduce total risk without
sacrificing portfolio. The risk in a portfolio can be reduced by a proper
diversification into a number of strips. The efforts to spread and minimizes
portfolio risk takes the form of diversification. Most investors prefer to hold
several assets rather than putting all their eggs into one basket with hope that
if one goes bad, the other will provide some protection from the extreme
loss.

PORTFOLIO SELECTION
The determination and selection of a portfolio is a complicated affair as
there is a possibility of infinite number of combinations of various securities
that can enter a portfolio. The securities available to an investor can be
combined in any proportion hence any number of portfolios can be built.
Each such portfolio can be described in terms of return and risk.

56
Portfolio construction refers to the allocation of funds among a variety of
financial assets open for investment. The objectives of the theory is to
elaborate the principle in which the risk can be minimized, subject to desired
level of return on the portfolio or maximized the return, subject to constrain
of tolerable level of risk.

The most popular models used for portfolio selection are:

Markowitz model
Capital assets pricing model

Markowitz model
According to markowitz, the portfolio theory establishes a relationship
between portfolios expected return and its level of risk as the criteria for
selecting the optimal portfolio. Thus two measures were suggested for
evaluating the merits of portfolio.

 The expected return from the portfolio.

 The level of risk exposure associated with the portfolio.

57
 This theory believes in asset correlation and combining assets so as to
lower the risk. From the efficient set of portfolios the best one would
be selected on the basis of the risk and returns. These risk and returns
are calculated using standard deviations and the coefficient of
variations. It is also called as the “full co-variance model”. The
expected return on the portfolio is calculated by using the following;

N
Rp = ∑ RiXi
I=1
Where, Rp = expected return on portfolio
Ri = expected return on security ‘i’
Xi = the proportion of portfolio investment in security ‘i’
N = total number of securities in the portfolio.

The risk of a portfolio comprising of shares A and B van be expressed using

variance as the measures of risk. σ
Covariance of AB = X2 Aσ2 A +X2 Bσ2 B + 2XAXBrAB σA σ B

Cov.AB = the variance between the rates of return on shares A and B,

Where,

rAB = Coefficient of correlation between A and B shares

58
X2 A = Proportion invested in shares A

2
X B = proportion invested in shares B

σ2 A = Variance of the rate of return on share A.

σ2 B = Variance of the rate of return on share B.

The term covariance explains the relationship between the movements

in the rates of return from shares A and B; it is derived from the following
formula:

Cov.AB = rAB σA σ B

Capital asset pricing model

59
The Capital Asset Pricing Model (CAPM) attempts to measure the risk of a
security in the portfolio. It considers the required rate of return of a security
on the basis of its contribution to total portfolio risk. It provides that in a
well-functioning efficient market, the risk premium varies indirect
proportion to risk. It also provides a measure of risk premium and method of
estimating market risk return line. The risk of well-diversified portfolio
depends on the market risk of the securities included in portfolio. The
market risk of the security is measured in terms of its sensitivity to the
market movements. The core idea of CAPM is that only non-diversifiable
risk is relevant to the determination of the expected return on any asset.

Capital Market Line (CMP)

The portfolio theory states that rational investors would chose a combination
of “efficient frontier” but in capital market line relationship of total risk and
expected return is reflected.

Security Market Line (sml)

For all well diversified portfolios nonsystematic risk tend to go to zero, and
the only relevant risk measured by beta SML describes the expected return
for all assets and portfolios of assets, efficient or not. The higher the beta the
higher must be the return. The relationship between expected return and beta
is linear.

Portfolio revision

60
Irrespective of how well a portfolio is constructed, it soon tends to change
and hence needs to be monitored and revised periodically. Portfolio once
constructed undergoes changes in the market prices; reassessment of
companies, the portfolio risk and the proportion in each asset class will
change to bring back the portfolio to the targeted level of beta or risk and
duration. Overtime several things are likely to happen.
This usually involves two things:

1) Portfolio rebalancing.

It involves reviewing and revising the portfolio compositions. There are

three basic policies with respect to portfolio rebalancing.

By and hold policy,

Constant asset mix, and
Portfolio insurance policy.

2) Portfolio upgrading.

While portfolio rebalancing involves shifting from stocks to bonds or vice

versa, it calls for reassessing the risk return characteristics of various
securities, selling over priced securities and buying under priced
securities. It may also involve the other changes the investor may consider
necessary to enhance the performance of portfolio.

61
Portfolio evaluation
The performance of the portfolio should be evaluated periodically. The key
dimensions of a portfolio performance evaluation are risk and return and the
key issue is whether the portfolio return is commensurate with its risk
exposure. Such a review may provide useful to improve the quality of
portfolio management process on a continuing basis.

For evaluating the performance of a portfolio it is necessary to consider both

risk and return. The following are the models for evaluating performance of
a portfolio.

 Treynor Measure.
 Sharpe measure.
 Jensen measure.

Investment Decision

Definition of investment

According to F. Amling “Investment may be defined as the purchase by an

individual or institutional investor of a financial or real asset that produces a
return proportional to the risk assumed over some future investment period”.

62
According to D.E. Fisher and R.J. Jordan, “investment is a commitment of
funds made in the expectation of some positive rate of return. If the
investment is properly undertaken, the return will be commensurate with the
risk the investor assumes”.

Concept of investment

Investment will be generally be used in its financial sense and as such

investment is an allocation of monetary resources to assets that are expected
to yield some gain or positive return over a given period of time. Investment
is a commitment of person’s funds to drive future income in the form of
interest, dividends rent, premiums, pension benefits or the appreciation of
the value of his principle capital

Any Investors would like to know the media or range of investment so that
he can use his discretion and save in those investments, which will give him
both security and stable return. The ultimate objective of the investor is to
derive a variety of investments that meets his preference for risk and
expected return. The investor will select the portfolio, which will maximize
his utility. Another important consideration is the temperament and
psychology of the investor. It is not only the construction of a portfolio that
will promise the highest expected return, but it is the satisfaction of the need
of the investor.

63
Many types of investment media or channels for making investment are
available. Securities ranging from risk free instruments to highly speculative
shares and debentures are available for alternative investments.

All investments are risky, as the investor parts with his money. An efficient
investor with proper training, can reduce the risk and maximize returns, he
can avoid pitfalls and protect his interests.

There are different methods of classifying the investment avenues. A

physical, if savings are used to acquire physical assets, useful for
consumption or production. Some physical assets like ploughs, tractors or
harvesters are useful in agriculture production. A few useful physical assets
like cars, jeeps etc., are useful in business. Among different types of
investments some are marketable and transferable and other are not.
Example of marketable assets are shares and debentures of public ltd
companies particularly the listed companies on stock exchange, bonds of
P.S.U. Government securities etc. non marketable securities of investments
are bank deposits, provident and pension funds, insurance certificates,
company deposits, private Ltd Company shares etc.,

Investment process
The investment process may be described in the following stages.

64
Investment Policy: The first state determines and involves personal
financial affairs and objectives before making investment. It can also be
called the preparation of the investment policy stage. The investor has to see
that he should be able to create an emergency fund, an element of liquidity
and quick convertibility of securities into cash. This stage may, therefore, be
called the proper time for identifying investment assets and considering the
various features of investment.
Investment Analysis: After arranging a logical order of type of investment
preferred, the next step is to analyze the securities available for kind of
securities etc. the primary concerns at this stage would be to form beliefs
regarding future behavior of prices and stocks, the expected return and
associated risks.

Investment Valuation: Investment value, in general is taken to be the

present worth to the owners of future benefits from investments. The
investor has to bear in mind the value of these investments. An appropriate
set of weights have to be applied with the use of forecasted benefits to
estimate the value of investment assets such as stocks, debentures and bonds
and other assets. Comparison of the value with the current market price of
the asset allows a determination of the relative attractiveness of the asset
must be valued on its individual merit.

Portfolio Construction and Feedback: Portfolio construction required a

knowledge of the different aspects of securities in relation to safety and
growth of principal, liquidity of assets etc, in this stage, we study
determination of diversification level, consideration of investment timing,

65
selection of investment assets, allocation of ingestible wealth to different
investment, evaluation of portfolio feedback.

Investment Decisions – guidelines for the equity investment

Equity shares are characterized by price fluctuations, which can produce

substantial gains or inflict severe losses. Given the volatility and dynamism
of the stock market, investor requires greater competence and skill along
with a touch of good luck to invest in equity shares. Here are some general
guidelines to play equity game, irrespective whether you are aggressive or
conservative.
 Adopt a suitable formula plan

 Establish value anchors.

 Assess market psychology

 Combine fundamental and technical analysis.

 Diversify sensibly

 Periodically review and revise your revise portfolio.

66
Requirement of portfolio
 Maintain adequate diversification when relative values various
securities in the portfolio change.
 Incorporate new information relevant for risk return assessment.
 Expand or contract the size of portfolio to absorb funds or
withdraw funds and,
 Reflect changes in investor risk disposition.

Factors influencing investors decision and type of investors

There are four types of investors in a market. They are as follows.

Types of Investors:

Type A Investors: No market timing and no stock picking skills.

If the investor does not believe that he has any special skills in picking
undervalued stocks or in predicting the movement of the market, then the
portfolio design problem becomes relatively simple. The investor simply
chooses a diversified portfolio and then adjusts its beta to the desired level.
If he weights the chosen security in proportion to the market capitalization,
he can expect to get a portfolio beta close to one. To achieve a higher or
lower beta, he can shift the weights towards high or low beta stocks. He can

67
achieve the same effects by increasing or decreasing the allocation to the
equity portfolio in the overall portfolio.

The type A investor would hold a passive, diversified portfolio with the
constant beta equal to the target beta. He may also prefer to invest his money
in a mutual fund and let it do the portfolio management for him.

Type B Investor: Only stock-picking skills

An investor who has and wishes to exploit his stock picking skills should
start with a base portfolio to that of type A investor. He should then adjust
the weights of the stocks, which are in his opinion mispriced. Specifically,
he should overweight the stocks that are over valued and underweighted
those which are under value. For example, the base portfolio may have 2%
in stock X and 1.5% in stock Y. the investor who finds X under valued and
Y over valued may change the weights to 3% to X, he may have a portfolio.
This may not be legally or practically possible. The investor than has to raise
the weight X to 4%, eliminate Y from the portfolio and reduce the weight of
some other stocks by 0.5%.

The investor can deal with this problem in a slightly different manner. He
can put, say 90% of his equity investment in the diversified portfolio and
reserve the remaining 10% for the mispriced stocks. How large a fraction he
should devote to mispriced scripts depends on how good analyst may choose
a larger fraction. What we are doing in this decision is to balance to profit
potential of investing is undervalued stocks against the benefits of

68
diversification. Unless we are confident about our analysis, we should give
privacy to the need for diversification.

Since the average beta of the undervalued and overvalued stocks is likely to
be closed to one, the overall beta is likely to remain close to the target value,
unless the target beta is substantially different from one and the percentage
of the portfolio devoted to mispriced stocks is large. If, for some reason, this
is not so, the investor would have to take future action to maintain to the
beta at the largest value. The portfolio of the type B investor is concentrated
but has a constant beta.

Type C Investor: Only market – timing skills

The type C investor holds a well-diversified portfolio but switches actively

between defensive and offensive portfolios to take advantage of the market
timing. If the expects the market to rise, he should push his portfolio beta
above his target level by any of the techniques described in the section on
market timing. The converse should be done if the investor is bearish about
the market. In either case, the portfolio would remain diversified all through.
The portfolio of this investor diversified, but its beta is managed and not
constant.

69
Type D Investor: Both stock picking and market timing skills

This type of investor would use the techniques used by both the type B and
type C investor. These investors would have the most active and aggressive
portfolio management strategies. Using their superior ability to predict boom
and busts in the markets as a whole and their skills in identifying
undervalued scrips, they should hold highly concentrated portfolios and let
the beta fluctuate quiet sharply around the long run target value.

A pitfall be a very strenuously avoided is that of assuming that one has a

skill, which one in reality does not have. For example, an investor who does
not have very good abilities in script selection may still think that he does
not have suck stills. He would then end up with an ill-diversified portfolio,
which earns mediocre returns: he would have been better off with a passive
portfolio.

Qualities for successful investing

 Contrary thinking

 Patience

 Composure
70
  Flexibility and

 Openness

Discounted cash flow (DCF) method of time adjusted technique

An important technique used by Karvy Stock Broking Limited for evaluating

their shares for trading purpose. The discounted cash flow technique is an
improvement on the pay-back period method. It takes into account both the
interest factor as well as the return after pay-back period. The method
involves three stages:

1. Calculation of cash flow, i.e. both inflows and out flows (preferable after
tax) over the full life of the asset.
2. Discounting the cash flow so calculated by a discount factor.
3. Aggregating of discounted cash inflows and out comparing the total with
discounted cash out flow

71
Discounted cash flow thus recognizes that Re1 of day (the cash out flow) is
worth more than Re1 received at a future date (cash inflow). Discounted cash
flow method s for evaluating capital investment proposal is of three types as
explained below:
(a) NPV method.
(b) Excess present value index
(c) Internal rate of return.

(a) The net present value (NPV) method:

In this method cash inflow and cash outflows associated with each project
are first worked out. The present value pt these cash inflows and outflows
are then calculated at the rate of return acceptable to the management. This
rate of return is considered as the cut-off rate and is generally determined on
the basis of cost of capital suitable adjusted to allow for the risk element
involved in the project. Cost outflows represent the investment and
commitments of cash in the project at various point of time. The working
capital is taken as a cash outflow in the year the project starts. Commercial
production profit after tax but before depreciation represents cash inflow.
The Net Present Value (NPV) is the difference between the total present
value of future cash inflows and the total present value of future cash
outflows.

(b) Excess present value index:

This is refinement of the net present value index method. Instead of

working out the net present value, a present index is found out by comparing
72
the total of present value of future cash inflows and the total of the present
value of future cash outflows.

(c) Internal Rate of Return:

IRR is that at which the sum of discounted cash inflows equals the sun of
discounted cash outflows. In other words, it is the rate which discounts their
dash flows to zero. It can be started in the form of a ratio as follows.

Cash inflows
Cash outflows =1

As for the technique followed shows only for the present value or an limited
time period where as the technique followed in analysis for portfolio
building takes into account all he long term capital gains.

73
DATA COLLECTION

Average
s.no Company name returns
1 Aarti drugs 0.322183
2 Cipla 0.071068
3 Auropharma -0.1066
4 Dabur LTD 0.092167
5 Bombay dyeing -0.28042
Bharath
6 Electronics -0.0695
7 Zuari agro 4.399807
8 Asian piants -0.04419
Wipro software
9 LTD 0.050623
Infosys
10 technology 0.091005
California
11 software 0.851843
12 Satyam software -0.69821
13 Tata motors -0.66907
14 Maruthi suzuki 0.263014
15 Hero honda 0.378643
16 Apollo tyres -0.3366
17 Indian bank -0.35878
18 Axis bank -0.11781
19 IDBI -0.25518
20 Andhra bank -0.24001

74
 Average returns

2 Average returns

0
1 3 5 7 9 11 13 15 17 19 21
-1

s.no Company name Risk

21.3755
1 Aarti drugs 5
8.06631
2 Cipla 7
28.1338
3 Auropharma 8
4 Dabur LTD 9.37357
5 Bombay dyeing 4.97147
Bharath 11.4895
6 Electronics 4
48.1294
7 Zuari agro 8
7.62226
8 Asian piants 8
18.4177
9 Wipro software 1
Infosys
10 technology 9.26264
California
11 software 33.4764
Satyam 68.2486
12 software 6
4.09379
13 Tata motors 2

75
 14.8300
14 Maruthi suzuki 2
8.94402
15 Hero honda 7
3.77309
16 Apollo tyres 8
23.5065
17 Indian bank 6
28.5526
18 Axis bank 5
16.7270
19 IDBI 4
12.7734
20 Andhra bank 8

Risk

80
70
60
50
40 Risk
30
20
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Correlation co-efficient ®:

S.no Company name r

1 Aurobindho & Dabur 0.025055
2 Cipla & Aatrti drugs 0.073908
Bombay dyeing & Bharath
3 electronics 0.334968
Zuari industries & Asian 0.007998
4 piants 5
76
 0.571896
5 Wipro & Infosys technologies 3
California & Satyam 0.063175
6 software 5
7 Tata motors & Maruti suzuki 0.346822
8 Hero honda & Apollo tyres 0.068575
9 Indian bank & Axis bank 0.553998
0.001597
10 IDBI & Andhra bank 4

DATA ANALYSIS

CIPLA AND AARTI DRUGS LTD.

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = 0.071068
Avg Returns (r2) = 0.322183

FORMULA:

Returns =x1.r1+x2.r2
= 0.5*0.071068+0.5*0.322183
=0.17253995.

77
Risk (∑1) = 8.066317
Risk (∑2) = 21.37555
Co-relation coefficient® =0.073907739

Formula:

Risk of portfolio =√(x1)2.(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12

=√0.25*65.065+0.25*456.912+1.59291010
=√16.26625+114.228+1.59291010
=√132.0871601
=11.4929

AUROBINDHO AND DABUR LTD.

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = -0.1066
Avg Returns (r2) = 0.092167

FORMULA:

Returns =x1.r1+x2.r2
= 0.5*-0.1066+0.5*0.092167
=.0.3934+0.04605
=0.43945

Risk (∑1) = 28.13388

Risk (∑2) = 9.37357

Co-relation coefficient® =0.025054819

Formula:

78
Risk of portfolio =√(x1)2.(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12

=√ (0.5)2.(28.13388)2+(0.5)2.
(9.37357)2+2*0.5*0.5*28.1388*9.37357*0.025054819
=√0.25*791.465+0.25*87.8638+3.303556
=√197.866+21.96595+3.303556
=√223.135506
=14.937720

BOMBAY DYEING AND BHARAT ELECTRONICS LTD

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = -0.28042
Avg Returns (r2) = -0.0695

FORMULA:

Returns =x1.r1+x2.r2
= 0.5*(-0.28042) +0.5*(-0.0695)
=.-0.14021+ (-0.03475)
=-0.17685

Risk (∑1) = 4.971474

Risk (∑2) = 11.48954

Co-relation coefficient® = 0.334968434

Formula:

Risk of portfolio =√(x1)2.(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12

79
 =√ (0.5)2.
(4.971474)2+(0.5)2(11.48954)2+2*0.5*0.5*4.971474*11.48954*0.3349684
34
=√6.1788884+32.9992+9.5633
=√48.74138
=6.98150

ZUARI CEMENT AND ASIAN PAINTS.

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = 4.399807
Avg Returns (r2) = -0.04419

FORMULA:

Returns =x1.r1+x2.r2
= 0.5* 4.399807+0.5*(-0.04419)
=2.19990+ (-0.022095)
=2.177805

Risk (∑1) = 48.12948

Risk (∑2) = 7.622268

Co-relation coefficient® = 0.007998496

Formula:

Risk of portfolio =√(x1)2. (∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12

80
 =√ (0.5)2(48.12948)2+ (0.5)2(7.622268)2+2*0.5*0.5*48.12948*
7.622268* 0.0079
=√579.100+14.5237+1.4655
=√595.0892
= 24.3944

WIPRO AND INFOSYS SOFTWARE LTD.

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = 0.050623
Avg Returns (r2) = 0.091005

FORMULA:

Returns =x1.r1+x2.r2
= 0.5*0.050623+0.5*0.091005
=.0.0253115+0.0455025
= 0.070814

Risk (∑1) = 18.41771

Risk (∑2) = 9.26264

Co-relation coefficient® =0.571896264

Formula:
81
Risk of portfolio =√(x1)2.(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12
=√ (0.5)2(18.41771)2+(0.5)2.
( 9.26264)2+2*0.5*0.5*18.41771*9.26264*0.571896
=√84.8029+21.44912+24.376472
=√130.62862
=11.42928

CALIFORNIA AND SATYAM SOFTWARE LTD.

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = 0.851843
Avg Returns (r2) = -0.69821

FORMULA:

Returns =x1.r1+x2.r2
= 0.5*0.851843+0.5*-0.69821
=0.4259215+-0.19821
=0.2277115.

Risk (∑1) = 33.4764

Risk (∑2) = 68.24866

Co-relation coefficient® = 0.063176

82
 Formula:
Risk of portfolio =√(x1)2.(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12

=√0.25*1120.24+0.25*4656.69+18.03
=√280.06+1164.17+18.03
=√1462.26
=38.23

TATA MOTORS AND MARUTI SUZUKI CO. LTD

Weight (x1) =0.5

Returns (r1) =-0.66907
Weight (x2) =0.5
Returns (r2) =0.263014

Formula:

Returns =x1.r1+x2.r2
=0.5*0.66907+0.5*0.263014
=0.219494

Risk (∑1) =4.093792

Risk (∑2) =14.83002

Co-relation coefficient ® = 0.346822496

Formula:

83
Risk of portfolio =√(x1)2. (∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12
=√0.25*16.759+0.25*219.92+10.5277
=√4.189+54.98+10.5277
=8.3484.

HERO HONDA AND APOLLO TYRES LTD

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = 0.378643
Avg Returns (r2) = -0.3366

FORMULA:

Returns =x1.r1+x2.r2
= 0.5* 0.378643+0.5* -0.3366
=0.18932+ (-0.1683)
= O.02102

Risk (∑1) = 8.944027

Risk (∑2) = 3.773098

Co-relation coefficient® = 0.068575483

Formula:

84
Risk of portfolio =√(x1)2(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12
=√ (0.5)2(8.944027)2+ (0.5)2(3.773098)2+2*0.5*0.5*
8.944027*3.773098*0.0685
=√19.9987+3.55888+1.15697
=√24.71455
=4.971373

INDIAN BANK AND AXIS BANK

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = -0.35878
Avg Returns (r2) = -0.11781

FORMULA:

Returns =x1.r1+x2.r2
= 0.5* -0.35878+0.5* -0.11781
=-0.17939+(-0.058905)
=-0.238295

Risk (∑1) = 23.50656

Risk (∑2) = 28.55265

Co-relation coefficient® = 0.553998

FORMULA
Risk of portfolio =√(x1)2.(∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12

85
 =√ (0.5)2.
( 23.50656)2+(0.5)2(28.55265)2+2*0.5*0.5*23.50656*28.55265* 0.553998
=√138.104+203.813+185.81
=√527.727
=22.9723

IDBI BANK AND ANDHRA BANK

Weight (x1) =0.5

Weight (x2) =0.5
Avg Returns (r1) = -0.25518
Avg Returns (r2) = -0.24001

FORMULA:

Returns =x1.r1+x2.r2
= 0.5*(-0.25518) +0.5*( -0.24001)
=-0.12759-0.120005
=-0.247595

Risk (∑1) = 16.72704

Risk (∑2) = 12.77348

Co-relation coefficient® =0.001597363

FORMULA:

86
Risk of portfolio =√(x1)2. (∑1)2+(x2)2(∑2)2+2x1x2∑1∑2 r12
= √ (0.5)2(16.72704)2+ (0.5)2(12.77348)2+2*0.5*0.5*
16.72704*12.77348*0.001597
=√69.9481+40.7899+0.16986
=√110.90786
=10.5312800

PORTFOLIO RETURNS

Portfolio
s.no set of companies returns rank
1 Aurobindho & Dabur 0.43945 2
2 Cipla & Aatrti drugs 0.172539 6
Bombay dyeing & Bharath
3 electronics -0.17685 9
Zuari industries & Asian
4 piants 2.177805 1
Wipro & Infosys
5 technologies 0.070814 7
California & Satyam
6 software 0.2277115 4
Tata motors & Maruti
7 suzuki 0.219494 5
8 Hero honda & Apollo tyres 0.02102 8
9 Indian bank & Axis bank 0.238295 3
10 IDBI & Andhra bank -0.247595 10

87
 Portfolio returns

2.5

1.5

1 Portfolio returns

0.5

0
1 2 3 4 5 6 7 8 9 10
-0.5

PORTFOLIO RISKS:

Portfolio
s.no set of companies risk
1 Aurobindho & Dabur 14.93772
2 Cipla & Aatrti drugs 11.4929
Bombay dyeing & Bharath
3 electronics 6.9815
Zuari industries & Asian
4 piants 24.3944
Wipro & Infosys
5 technologies 11.42928
6 California & Satyam 38.23
88
 software
7 Tata motors & Maruti suzuki 8.3484
8 Hero honda & Apollo tyres 4.971373
9 Indian bank & Axis bank 22.9723
10 IDBI & Andhra bank 10.53128

Portfolio risk

45
40
35
30
25
Portfolio risk
20
15
10
5
0
1 2 3 4 5 6 7 8 9 10 11

89
FINDINGS

FINDINGS:

AUROBINDHO AND DABUR :

The returns of portfolio comprising two companies (Aurobindho and Dabur
LTD) are. 0.43945. The individual returns of Aurobindho are -0.1066and
Dabur is 0.092167 where as risk of portfolio of two companies (Aurobindho
and Dabur) is. 14.937720 And the risk of individual companies is 28.13388
and 9.37357

CIPLA AND AARTI DRUGS:

The returns of portfolio comprising two companies (Cipla and Aarti drugs
LTD) are. 0.17253995. The individual returns of Cipla are 0.071068 and
Aarti is 0.322183 where as risk of portfolio of two companies (Cipla and
Aarti drugs) is. 11.4929 And the risk of individual companies is 8.066317
and 21.37555.

BOMBAY DYEING AND BHARATH ELECTRINICS:

The returns of portfolio comprising two companies (Bombay dyeing $
Bharath electronics) is -0.17685 The individual returns of Bombay dyeing
are -0.28042and Bharath electronics is -0.0695 risk of where as risk of
portfolio of two companies (Bombay dyeing & Bharath electronics) is
6.98150.and the risk of individual companies are 4.971474 And 11.48954.

ZUARI INDUSTRIES AND ASIAN PIANTS:

The returns of portfolio comprising two companies (Zuari cement and Asian
paints) are. 2.177805. The individual returns of Zuari are 4.399807and Asian
paints is -0.04419 where as portfolio of two companies (Zuari and Asian

90
paints) is 24.3944 and the risk of individual companies is. 48.12948 And
7.622268.

WIPRO AND INFOSYS:

The returns of portfolio comprising two companies (Wipro and Infosys) are.
0.070814. The individual returns of Wipro are 0.050623 and Infosys is
0.091005 where as risk of portfolio of two companies (Wipro and Infosys) is
11.42928 And the risk of individual companies is 18.41771and 9.26264.

CALIFORNIA AND SATYAM SOFTWARE:

The returns of portfolio comprising two companies (California and Satyam
software LTD) are. 0.2277115. The individual returns of California are
0.851843 and Satyam is -0.69821 where as risk of portfolio of two
companies (California and sat yam) is 38.23. And the risk of individual
companies is 33.4764 and 68.24866.

TATA MOTORS AND MARUTI SUZUKI:

The returns of portfolio comprising two companies (TATA Motors $ Maruti
Suzuki co. LTD) is 0.219494. The individual returns of TATA Motors are
0.66907 and Maruti Suzuki is 0.263014 where as risk of portfolio of two
companies (TATA Motors & Maruti Suzuki) is 8.3484.and the risk of
individual companies are
4.093792 And 14.83002.

HERO HONDA AND APOLLO TYRES:

The returns of portfolio comprising two companies (Hero Honda and
Apollo tyres) are. O.02102. The individual returns of Hero Honda are
0.378643And Apollo tyres is -0.3366 where as risk of portfolio of two
companies (Hero Honda and Apollo tyres) is 4.971373 and the risk of
individual companies is 8.944027 and 3.773098

91
INDIAN BANK AND AXIS BANK:

The returns of portfolio comprising two companies (Indian bank and Axis
bank) are -0.238295. The individual returns of Indian bank are -0.35878 and
Apollo tyres is
-0.11781 where as risk of portfolio of two companies (Indian bank and Axis
bank) is 22.9723 and the risk of individual companies is 23.50656 and
28.55265

IDBI AND ANDHRA BANK

The returns of portfolio comprising two companies (IDBI and Andhra
bank) is
-0.247595. The individual returns of IDBI are -0.247595 and Andhra bank is
-0.24001.
Where as risk of portfolio of two companies (IDBI and Andhra bank) is
10.5312800.and the risk of individual companies are 16.72704 and 12.77348

92
SUGGESTIONS

SUGGESTIONS:

The present project work has been undertaken to identify a best portfolio
using different sets of securities using their returns and risk along with
correlation co-efficient on the basis of analysis and findings , the following
suggestions can be made the investors.

1) The best portfolio consists of the two companies Zuari industries and
Asian paints with a portfolio return of 2.177805 and portfolio risk 24.3944.

2) The best portfolio consists of the two companies Aurobindho pharmacy

and Dabur
With a portfolio return of 0.43945 and portfolio risk 14.93772

3) The best portfolio consists of the two companies’ Indian bank and axis
bank with a portfolio return of 0.238295 and portfolio risk 22.9723

4) The best portfolio consists of the two companies California and Satyam
software with a portfolio return of 0.2277115 and portfolio risk 38.23

5) The best portfolio consists of the two companies Tata motors and Maruti
Suzuki with a portfolio return of 0.21949 and portfolio risk 8.3484.

93
CONCLUSION:

The present project work has been undertaken to study the investment
opportunities available to investors. These avenues are different for different
profiles of investors. How ever it is very important for an investor to
identify the risk associated with the returns of various securities. In order to
manage the risk associated with the returns one has to construct the
portfolio .A portfolio is a set of securities which by adding reduces the risk
in whole. In this project work it is seen how the securities can be constructed
as a portfolio. By using Markowitz theory a portfolio is constructed and the
returns and risks are calculated .the entire project work is done to identify
the best portfolio and it is found the results are satisfactory.

94
Bibliography

Books

1. Stock Investing For Dummies by Paul J. Mladjenovic

2. The Intelligent Investor: The Definitive Book on Value Investing. by

Benjamin Graham, weig and Warren E. Buffett

3. Managing Investment PortfoJason Zlios: A Dynamic Process (CFA

Institute Investment Series) by John L.

4. Investment Analysis and Portfolio Management (with Thomson ONE

- BusinessSchool Edition) by Frank K.

5. Indian Stock Market by Bishnupriya Mishra and Sathya Swaroop

Debasish

Web Site

1. www.moneycontrol.com

2. www.nseindia.com

3. www.bseindia.com

4. www.sebi.gov.in

5. http://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_Indi
a

95
96