V SEM BBA.

Degree Examination, November/ December2019

(CBSE)(Fresh)
(2016-17& Onwards)
BUSINESS ADMINISTRATION
5.3: Investment Management
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SECTION -A
Answer any 5 of the following sub questions. Each sub question carries 2 marks
1.
a) Define risk.
Risk implies future uncertainties about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain
from investment.
In simple terms, risk is the possibility of something bad happening. Risk involves
uncertainty about the effects / implications of an activity with respect to something that
human’s value, often focusing on negative, undesirable consequences

b) What are financial assets?

Financial asset is a liquid asset that gets its value from a contractual right or ownership
claim unlike land, property, commodities or other tangible physical assets, financial assets
do not necessarily have inherent physical worth or even a physical form.
Financial assets can be defined as an investment asset whose value is derived from a
contractual claim of what they represent. These are liquid assets as the economic
resources or ownership can be converted into something of value, such as cash.

c) What do you mean by liquidity?

Liquidity is the degree to which a security can be quickly purchased or sold in the
market at a price electing its current value.
Liquidity in finance refers to the ease with which a security or an asset can be
converted into cash at market price.

d) Expand ULIP? ULIP stands for Unit Linked Insurance Plans.

e) What is a warrant?
Warrants are a derivative that give the right, but not the obligation, to buy or sell a
security - most commonly an equity - at a certain price before expiration.
Warrants are a contract that gives the right, but not the duty, to buy or sell a security
- most usually, equity - before expiry at a certain amount. The price at which the
underlying security may be bought or sold is called the exercise price or the strike price.
f) What is portfolio management?
Portfolio management is the selection, prioritization and control of an organization’s
programmers and projects, in line with the strategic objectives and capacity to deliver.
The goal is to balance the implementation of change initiatives and the maintenance of
business as usual, while optimizing return on investment.
Portfolio management involves building and overseeing a selection of investments
that will meet the long term financial goals and risk tolerance of an investor. Active
portfolio management requires strategically buying and selling stocks and other assets in
an effort to beat the border market.

g) Mention any 2 types of mutual funds.

 Fixed Income Funds
 Equity Funds
 Balanced Funds
 Index Funds

SECTION-B
Answer any 3 of the following questions. Each question carries 6 marks.

2. Explain various characteristics of Investments.

Investment refers to a tool used by people for allocating their funds with the aim of
generating revenue. It is the one through which profit is created out of ideal lying
resources by deploying them into financial assets.
Investment simply refers to the purchase of assets by people not meant for immediate
consumption but for future use that is wealth creation.
The characteristics of Investment are outlined below:

 Risk Factor: Risk is an inherent characteristic of every investment. Risk refers to loss of
principal amount, delay or non-payment of capital or interest, variability of return etc.
 Every investment differs in terms of risk associated with them. However, less risky
investments are the most preferred ones by investors.
 Return: Return refers to the income expected from investment done. It is the key
objective for doing investment by investors. Investment provides benefits to peoples
either in the form of regular yields or through capital appreciation.
 Safety: It refers to the surety of return or protection of principal amount without any loss.
Safety is an important feature of every investment tool that is analysed before allocating
any fund in it.
 Income Stability: Income stability refers to the regularity of income without any
fluctuations. Every investor wants to invest in such assets which provide return
consistently.
 Liquidity: Liquidity refers to how quickly an investment can be sold or converted into cash.
It simply means easiness with which investment can be sold in the market without any
loss. Most of the investors want to invest in liquid assets.
 Marketability: Marketability is buying & selling of securities in market. Or other ways
transferability or stability of an asset
 Capital growth: Capital growth has become an important characteristic of investment
depends upon the industry growth. Capital growth refers to appreciation of investment.

3. Distinguish between Fundamental Analysis and Technical Analysis.

Fundamental Analysis refers to the detailed examination of the basic factors which
influence the interest of the economy, industry and company.
Technical Analysis is used to forecast the price of a share, which says that the price of
a share of the company is based on the interaction of demand and supply forces,
operating in the marketplace.
BASIS FOR
FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
COMPARISON

Meaning Fundamental Analysis is a practice Technical analysis is a method of

of analysing securities by determining the future price of the
determining the intrinsic value of stock using charts to identify the
the stock. patterns and trends.

Relevant for Long term investments Short term investments

Function Investing Trading

Objective To identify the intrinsic value of the To identify the right time to enter or
stock. exit the market.
 BASIS FOR
FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
COMPARISON

Decision making Decisions are based on the Decisions are based on market trends
information available and statistic and prices of stock.
evaluated.

Focuses on Both Past and Present data. Past data only.

Form of data Economic reports, news events and Chart Analysis

industry statistics.

Future prices Predicted on the basis of past and Predicted on the basis of charts and
present performance and indicators.
profitability of the company.

Type of trader Long term position trader. Swing trader and short term day
trader.

4. Explain securities trading procedure.

  Selection of a broker: A broker is a member of a stock exchange. A broker is an agent
of both the buyer and the seller of securities. If one wants to purchase or sell
securities, the first contacts a broker. DEMAT (Dematerialized) account refer to an
account which an Indian citizen must open with the depository participant (banks or
stock brokers) to trade in listed securities in electronic form. Second step in trading
procedure is to open a DEMAT account.
 Placing the order: After selecting a broker the investor places his order and specifies
the name and number of the security to be bought to sell. The order may be placed to
the broker in various ways.
 Executing the order: The broker or his authorized clear declared the purchase or sale
price of securities at that moment when the ordered price of the broker provides the
facilities for making a contract for the transaction.
 Trading procedure in stock exchange
 Preparing the contract note: The broker prepares a contract not stating the number
and price of securities bought or sold the names of the buyers and sellers, brokerage
payable by the client, etc. Thereafter, the contract paper is prepared and signed.
 Final settlement: The buyer deposits the estimated cost and the seller delivers the
securities in the same way in case of ready delivery contracts. But in the case of the
forward contract, the settlement is made within a fortnight.
 Executing the Order: As per the Instructions of the investor, the broker executes the
order i.e. he buys or sells the securities. The broker prepares a contract note for the
order executed. The contract note contains the name and the price of securities, the
name of parties, and the brokerage (Commission) charged by him. The contract note
is signed by the broker.
 Settlement: This means the actual transfer of securities. This is the last stage in the
trading of securities done by the broker on behalf of their clients. There can be two
types of settlement.

5. Explain personal financial planning process.

Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial situation.
Every person, family, or household has a unique financial position, and any financial
activity therefore must also be carefully planned to meet specific needs and goals.
Personal financial planning can help you construct the foundation on which to build a
secure financial future.
 PERSONAL FINANCIAL PLANNING PROCESS

1) Determine your Current Financial Situation: If you want to plan for the future, you
need to understand your current. The first step is to determine your current financial
position. What are incomes, expenses, assets and liabilities? This give an idea of to
what extend you need to manage in other to achieve your financial goal. Your financial
net worth indicates your capacity to achieve financial goals, such as buying a home,
paying for university education, and coping with unexpected expenses or loss of job.
Your net worth is simply total assets you owned minus liabilities you owed. Case: Amie
currently has a net income of D20, 000 per month, living cost of D16, 000, one car
valued at D110, 000, retirement fund balance of D25, 000 and savings account balance
of D60, 000. Outstanding on her Car loan is D75, 000. Let calculate Amie’s financial
position. Amie Net worth = 110,000+25,000+60,000 – 75000
i. = 120,000
And she currently saving 20% of her net income. Don’t be sad if your net is very low
compared to your goals or the number of years you have worked. This is what you
achieve in your past life. You now need to change for a better financial future.
2) Develop Your Financial Goals: Most people who have built wealth didn’t do it
overnight. They set financial goals and push themselves to reach them. You need
to identify your specific financial goals. A good financial goal should be SMART i.e.
 Specific, Measurable, Action-oriented, Realistic and Time-based. Your financial goals
can range from acquiring assets, saving for emergency as well as investment for your
future financial security. It is important you define your financial priorities based on
social and economic conditions. The purpose of this analysis is to differentiate your
needs from your wants. Accommodation is a need but buying a brand new car could
be considered as a want. Case: Assuming Amie have two major financial goals in the
next 2 years: 1. Study MBA in 2 years’ (D170, 000) and buy furniture (D30, 000) in the
next 1 year.
3) Identify Alternative Courses of Action: A financial goal without a realistic action plan
is just a wish. After assessing your current position and set your goals, you need to list
out the key actions needed to achieve your goals. There is more than one route to
Lagos, therefore Amie could also consider the followings options:
 Increase the savings amount to 25% or 30% of net income
 Move the balance in savings to bond or money market investments for higher
returns
 Consider additional sources of income ( be creative, I used to do weekend
lecturing)
 Consider education loan for any shortfall….and many more
4) Evaluate your Alternatives: You need to evaluate the possible courses of actions
identified in step 3. The evaluation process should consider your personal life, social
and the current economic conditions. In the case of Amie, we can evaluate the options
as follows:
 If you want to save 30% of your salary, it means you need to manage your spending.
This can be challenging when cost of living is sky rocketing (inflation).
 If you want to consider additional sources of income, such as weekend lecturing, it
means less time for party and more time to work hard. Your children, partner, parents
may need more time from you.
 You could lose your money if you invest in mutual funds compared to government
Treasury bills. Generally, the higher the return, the higher the risk of losing money.
 Whiles the interest on time deposit and savings may be subject to withholding tax,
government Treasury bills are not usually subjected to withholding tax.
 Consider the liquidity of your assets or investments. Liquidity is the characteristic of
an asset that can be converted readily to cash without loss of principal.
5) Create and Implement Your Financial Action Plan: This involves choosing and
developing best action plan (from step 3 and 4) that will help you to achieve your
goals. For example, you can increase your savings by reducing your spending or by
increasing your income through extra time on the job. It is important to note that you
may need others to implement your action plans. Example if you to want investment
in Treasury bill, you will need a broker.
 6) Review and Revise Your Plan: Like any other planning process, financial planning is a
dynamic process and the decision you make are not carved in stone. You need to
regularly assess your action plans through periodic financial net worth calculation.

6. Find out expected rate of return from the following:

Economic conditions Probability of occurrence % of Return
Boom 0.6 12
Normal 0.5 10
Recession 0.3 07

SECTION-C
Answer any 3 of the following questions. Each question carries 14 marks.

7. Discuss SEBI regulations on Mutual Funds.

The full form of the acronym is ‘Securities and Exchange Board of India’. Role of SEBI
is to lay out guidelines and regulations for smooth functioning of financial markets and
their instruments like Mutual Funds. Although SEBI was established in the year 1988, but
it was only in the year 1992, that it was given regulatory powers. The head quarter of SEBI
is located at Bandra Kurla complex in Mumbai. It also has offices in various other regions
of the country. Its main role is to develop and regulate security markets in such a way that
investors interest are taken care of.
SEBI is the designated regulatory authority in India for investment and financial
markets.
HIGHLIGHTS OF SEBI GUIDELINES
 Categorization of five schemes into five categories: Equity, Hybrid, Debt, Solution-
Oriented Schemes and others.
 There is lock-in-period specifically for solution-oriented schemes.
 To ensure uniformity — small, mid and large cap has been properly defined.
 Permission of only one scheme in every category (except for Exchange Traded
Funds/Index Funds, Funds of Funds, Thematic/Sectoral Funds).
SEBI GUIDELINES FOR MUTUAL FUNDS
 Accessing Personal Finances: Mutual funds carry the more diversified form of
investment along with some risk. Investors must be sure in their financial assessment
 and risk bearing capacity in the event of poor performance. Therefore, investors must
consider their risk-appetite related with the investment schemes.
 Diversifying the Portfolio: This allows investors to spread their investment over
different schemes, thus, increasing chances of mitigating risk or maximizing profits.
Diversification is crucial for sustainable financial advantage and gaining long-term.
 Depth of Information: Before venturing into the mutual fund, it is important as an
investor to gather detailed information about the mutual fund scheme you are opting
for. Having the rightful information is the key to making reliable investments.
 Avoiding the Portfolio Clutter: Choosing the right fund requires monitoring and
managing the fund schemes individually with care. The investor must avoid cluttering
the portfolio and also decide on the number of schemes to hold-on to avoid any sort
of overlapping.
 A Timely Dimension: It is advised for the investor(s) to assign a certain time-frame for
each mutual fund scheme. It may help in containing the fluctuations and volatility in
the market only if the plans are maintained stably over a time-period.
Protective Functions:
 Prohibits Insider Trading: Insider trading is the buying and selling of securities by the
insiders like promoters, employees, or directors of the company, having access to
confidential information or price that affects the securities. In order to avoid insider
trading, SEBI has locked employee welfare schemes and Trusts of listed companies
from purchasing their own shares from secondary markets.
 Price Rigging: It refers to malpractices which is related to securities, with the objective
of causing unnatural fluctuations in the price of securities by increasing/decreasing
the market price of stocks leading to huge losses for traders or investors. SEBI is strict
enough to prevent price riggings.
 Fair Trade Practices: SEBI prohibits unfair trade practices and frauds of securities by
establishing a code of conduct and regulations in the securities market.
 Financial Education: SEBI conducts offline and online seminars that help investors get
insights on the money management and financial market.
Developmental Functions
The following:
 Introducing an electronic platform for financial market
 Introducing discount brokerage
 DEMAT form of securities
 IPO – permitted through the exchange
 Training for financial intermediaries
 Buying/selling of mutual funds directly from AMC through a broker
Regulatory Functions
The following:
 SEBI has designed a code of conduct and guidelines that are enforced to corporates
and financial intermediaries.
  SEBI registers as well as regulates the functioning of mutual funds.
 Conducting an audit of exchanges and inquiries.
 Regulating the takeover of companies
 SEBI registers all share transfer agents, trustees, intermediaries and everything
associated with the stock exchange.

8. Discuss various Investment Avenues.

Investment is a process of allocating money to different financial instruments with the
goal of earning good returns in the future. There are numerous investment vehicles such
as mutual funds, equities, debt securities, etc. available in the market for investors. Some
of these investments are riskier as compared with others. Before investing in different
types of investment avenues, it is imperative for investors to know their financial goals
and assess risk appetite.

Fixed-rate Investment Instruments: These financial instruments give fixed returns over a
period of time. They are considered a low-risk investment as chances of default by the
issuer/bank/government are negligible.
Below is a list of some of the best fixed-income investment instruments:
 Bank Fixed Deposits The most common type of investment vehicle in India is
Bank Fixed Deposits (FDs). It offers fixed interest rate on your principal amount.
Almost all scheduled banks in India offer this investment option. You can visit a branch
of the bank or use net banking to open a FD account.
 Public Provident Fund: Public Provident Fund is another fixed income savings scheme
started by Government of India. Under this scheme, the interest on your principal
investment is paid by the government.
 Bonds: Bonds is another fixed-income instrument which yields returns at a fixed rate
of interest. In essence, it is a loan which an investor lends to the issuer of the bonds.
These issuers can be corporate firms or the Government of India. They issue bonds to
raise funds to finance their operations or expand their business. Bonds are another
 low-risk investment option as the chances of the issuer party to default on payments
are miniscule.
2. Market- Linked Investment Instruments: Returns from these instruments are directly
related to market fluctuations. If the company where any investment has been made
performs well, the returns will be significant. Being sensitive to movements in the market
makes them a relatively riskier investment compared to other investment avenues. Here is a
list of some popular market-linked investment instruments.
 Stocks: Stocks refer to equity investment made in any company. When you buy stocks
of a company, you are in essence taking partial ownership of that specific
company. An individual need to have in-depth knowledge of financial markets to
actually benefit from investment in equities. Since returns from this investment are
wholly dependent on market fluctuations, it is considered the riskiest investment
option compared to other alternatives. To invest in stocks, you need to have a demat
account which can be opened online or through a broker. Trading of stocks takes place
on various stock exchanges where an investor can buy and sell shares as per their
profit-maximising strategy.
 Mutual Funds: Mutual fund investment is one of the best investment
options available in the market right now. Mutual Funds pool in resources from
multiple investors and invests in various financial instruments including equities, debt
securities, venture capital etc. It is an apt investment option for those investors who
don’t have the required financial knowledge and sufficient time to study the market.
Investors can leverage the knowledge of professional and experienced fund managers
to earn significant returns from mutual fund investment. Investors who don’t have
enough money for lump-sum investment, can also opt for Systematic Investment Plan
(SIP) which involves regular payment in a mutual fund. This amount can be as low as
₹500.
 National Pension Scheme (NPS) : NPS is a savings scheme administered and regulated
by the Pension Fund Regulatory Authority of India (PFRDA). It pools in money from
numerous investors and then invests the corpus in various equity and debt securities.
This saving scheme is especially designed for building retirement corpus. Regular
investment throughout your working life is withdrawn partially at retirement and the
remaining amount is disbursed as regular pension. Any indian citizen between the age
of 18-60 years can open an NPS account. The maturity of the account happens at the
age of 60 years which can be extended till 70 years. Partial withdrawals upto 25% are
allowed after 3 years of opening the account.
 Exchange Traded Funds: Exchange Traded Funds are passively managed funds which
invest pooled funds in diversified securities taking an index fund as a benchmark. It is
a marketable security which can be traded on stock exchanges across the country. The
risk associated with ETFs depends on the type of underlying index. If it is a mid-
cap index, then it carries moderate risk. Also, compared to mutual funds, ETFs have a
 relatively lower asset management fee. These funds are highly liquid as they can be
traded on stock exchanges as per the wishes of the investor.
3. Alternative Investment Instruments: All those financial instruments that don’t feature
under fixed-rate and market-linked investment instruments come under alternative
investment instruments. Gold and Real Estate are the most common and profitable
alternative investment vehicles:
 Gold: Gold is a commodity whose price fluctuation over the years has made it the most
reliable investment vehicle. There has been a steady rise in the price of gold in the last
decade or two. It is considered a low-risk investment when viewed from a long-term
perspective. An investor should invest some percentage of their total investment
amount in gold to hedge themselves against any potential market risk.
 Real Estate: Real Estate Investment refers to any investment made in physical
properties such as land, buildings, shops, etc. It involves purchase, ownership and
management of the real estate property. An individual can earn from real estate in
two ways. One way is to buy a property and then sell it at a higher price after few
years. Another way to generate income on your real estate is to put it up on rent. An
investor should carefully analyse some key factors such as size and locality of the
investment property as these factors play a significant role in price appreciation of real
estate.

9. Explain in detail different types of Risks.

Risk implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain
from an investment.
 A) Systematic Risk: Systematic risk is due to the influence of external factors on an
organization. Such factors are normally uncontrollable from an organization's point of view.
It is a macro in nature as it affects a large number of organizations operating under a similar
stream or same domain. It cannot be planned by the organization.
The types of systematic risk are depicted and listed below.
 Interest rate risk: Interest-rate risk arises due to variability in the interest rates from time
to time. It particularly affects debt securities as they carry the fixed rate of interest.
Price risk arises due to the possibility that the price of the shares, commodity,
investment, etc. may decline or fall in the future.
Reinvestment rate risk results from fact that the interest or dividend earned from
an investment can't be reinvested with the same rate of return as it was acquiring
earlier.
 Market risk: Market risk is associated with consistent fluctuations seen in the trading price
of any particular shares or securities. That is, it arises due to rise or fall in the trading price
of listed shares or securities in the stock market.
Absolute risk is without any content. For e.g., if a coin is tossed, there is fifty
percentage chance of getting a head and vice-versa.
Relative risk is the assessment or evaluation of risk at different levels of business
functions. For e.g. a relative-risk from a foreign exchange fluctuation may be
higher if the maximum sales accounted by an organization are of export sales.
Directional risks are those risks where the loss arises from an exposure to the
particular assets of a market. For e.g. an investor holding some shares experience
a loss when the market price of those shares falls down.
Non-Directional risk arises where the method of trading is not consistently
followed by the trader. For e.g. the dealer will buy and sell the share
simultaneously to mitigate the risk
Basis risk is due to the possibility of loss arising from imperfectly matched risks.
For e.g. the risks which are in offsetting positions in two related but non-identical
markets.
Volatility risk is of a change in the price of securities as a result of changes in the
volatility of a risk-factor. For e.g. it applies to the portfolios of derivative
instruments, where the volatility of its underlying is a major influence of prices.
 Purchasing power or inflationary risk: Purchasing power risk is also known as inflation
risk. It is so, since it emanates (originates) from the fact that it affects a purchasing power
adversely. It is not desirable to invest in securities during an inflationary period.
The types of power or inflationary risk are depicted and listed below.
i. Demand inflation risk arises due to increase in price, which result from an excess
of demand over supply. It occurs when supply fails to cope with the demand and
hence cannot expand anymore. In other words, demand inflation occurs when
production factors are under maximum utilization.
 ii. Cost inflation risk arises due to sustained increase in the prices of goods and
services. It is actually caused by higher production cost. A high cost of production
inflates the final price of finished goods consumed by people.

B) Unsystematic Risk: Unsystematic risk is due to the influence of internal factors prevailing
within an organization. Such factors are normally controllable from an organization's point of
view. It is a micro in nature as it affects only a particular organization. It can be planned, so
that necessary actions can be taken by the organization to mitigate (reduce the effect of) the
risk. The types of unsystematic risk are depicted and listed below.
 Business or liquidity risk: Business risk is also known as liquidity risk. It is so, since it
emanates (originates) from the sale and purchase of securities affected by business
cycles, technological changes, etc.
Asset liquidity risk is due to losses arising from an inability to sell or pledge assets
at, or near, their carrying value when needed. For e.g. assets sold at a lesser value
than their book value.
Funding liquidity risk exists for not having an access to the sufficient-funds to
make a payment on time. For e.g. when commitments made to customers are not
fulfilled as discussed in the SLA (service level agreements).
 Financial or credit risk: Financial risk is also known as credit risk. It arises due to change
in the capital structure of the organization. The capital structure mainly comprises of
three ways by which funds are sourced for the projects. These are as follows:
Exchange rate risk is also called as exposure rate risk. It is a form of financial risk
that arises from a potential change seen in the exchange rate of one country's
currency in relation to another country's currency and vice-versa. For e.g. investors
or businesses face it either when they have assets or operations across national
borders, or if they have loans or borrowings in a foreign currency.
Recovery rate risk is an often neglected aspect of a credit-risk analysis. The
recovery rate is normally needed to be evaluated. For e.g. the expected recovery
rate of the funds tendered (given) as a loan to the customers by banks, non-
banking financial companies (NBFC), etc.
Sovereign risk is associated with the government. Here, a government is unable
to meet its loan obligations, reneging (to break a promise) on loans it guarantees,
etc.
Settlement risk exists when counterparty does not deliver a security or its value
in cash as per the agreement of trade or business.
 Operational risk: Operational risks are the business process risks failing due to human
errors. This risk will change from industry to industry. It occurs due to breakdowns in
the internal procedures, people, policies and systems. The types of operational risk
are depicted and listed below.
 Model risk is involved in using various models to value financial securities. It is due to
probability of loss resulting from the weaknesses in the financial-model used in
assessing and managing a risk.
People risk arises when people do not follow the organization’s procedures, practices
and/or rules. That is, they deviate from their expected behaviour.
Legal risk arises when parties are not lawfully competent to enter an agreement
among themselves. Furthermore, this relates to the regulatory-risk, where a
transaction could conflict with a government policy or particular legislation (law)
might be amended in the future with retrospective effect.
Political risk occurs due to changes in government policies. Such changes may have
an unfavourable impact on an investor. It is especially prevalent in the third-world
countries.

10. Explain Security Selection Process.

Process used to determine which securities will be included in a particular portfolio.
Certain factors, such as risk and return, are taken into consideration when selecting the
securities. The goal of security selection is to increase one's chances of making a profit on
all investments in the portfolio and to hedge against losses.
Securities selection is the process of determining which financial securities are
included in a specific portfolio. Proper security selection can generate profits during
market upswings and weather losses during market downturns. The process of security
selection can be administered on a scheduled basis or when market conditions warrant a
change.
SECURITY SELECTION PROCESS

STEP 1- UNDERSTANDING THE CLIENT

STEP 2- ASSET ALLOCATION DECISION

STEP 3- PORTFOLIO STRATEGY SELECTION

STEP 4- ASSET SELECTION DECISION

STEP 5- EVALUATING PORTFOLIO PERFORMANCE

Step 1- Understanding the client: The first and the foremost step of investment process is to
understand the client or the investor his/her needs, his risk taking capacity and his tax status.
After getting an insight of the goals and restraints of the client, it is important to set a
benchmark for the client’s portfolio management process which will help in evaluating the
performance and check whether the client’s objectives are achieved.
Step 2- Asset allocation decision: This step involves decision on how to allocate the
investment across different asset classes, i.e. fixed income securities, equity, real estate etc.
It also involves decision of whether to invest in domestic assets or in foreign assets. The
investor will make this decision after considering the macroeconomic conditions and overall
market status.
Step 3- Portfolio strategy selection: Third step in the investment process is to select the
proper strategy of portfolio creation. Choosing the right strategy for portfolio creation is very
important as it forms the basis of selecting the assets that will be added in the portfolio
management process. The strategy that conforms to the investment policies and investment
objectives should be selected.
There are two types of portfolio strategy-
o Active portfolio management process refers to a strategy where the objective of
investing is to outperform the market return compared to a specific benchmark by
either buying securities that are undervalued or by short selling securities that are
overvalued. In this strategy, risk and return both are high. This strategy is a proactive
strategy it requires close attention by the investor or the fund manager.
o Passive portfolio management process refers to the strategy where the purpose is to
generate returns equal to that of the market. It is a reactive strategy as the fund
manager or the investor reacts after the market has responded.
Step 4- Asset selection decision: The investor needs to select the assets to be placed in the
portfolio management process in the fourth step. Within each asset class, there are different
sub asset-classes. For example, in equity, which stocks should be chosen? Within the fixed
income securities class, which bonds should be chosen? Also, the investment objectives
should conform to the investment policies because otherwise the main purpose of
investment management process would become meaningless.
Step 5- Evaluating portfolio performance: This is the final step in the investment process
which evaluates the portfolio management performance. This is an important step as it
measures the performance of the investment with respect to a benchmark, in both absolute
and relative terms. The investor would determine whether his objectives are being achieved
or not.
Factors to consider for proper security selection.
*Risk
*Diversification
*Sector Fundamental Metrics
*Industries
*Using a Screener
The selection of securities depends upon the various objectives of the investor:
 If objective is to earn adequate amount of current income, then more of debt and less of
equity would be a good combination.
 If the investor wishes a certain percentage of growth in the income from his investment,
then he may more of equity shares (say more than 60 %) and less of debt in his portfolio.
Inclusion of debt (say 0-40 %) in his portfolio.
 If the investor wants to multiply his investment over the years, he may invest in land or
housing schemes. These investments offer faster rate of capital appreciation but lack
liquidity. In stock market, the value of shares multiplies at much higher rates but involve
risk.
 The investor’s portfolio may consist of more of debts instruments than equity shares with
a view to ensure more safety of the principal amount.

11. Following are the expected returns from the securities of two companies.
A ltd. B ltd under different conditions. Securities of the companies are quoted at Rs.100
each.
Conditions Probability Returns of Returns of
A ltd B ltd
Inflation 0.3 100 150
Deflation 0.4 110 130
Normal 0.2 120 90