PORTFOLIO MANAGEMENT

Introduction to Portfolio Management
Meaning of Portfolio Management:
Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize the returns to suit the objectives of the investor. This however requires financial expertise in selecting the right mix of securities in changing market conditions to get the best out of the stock market. In India, as well as in many western countries, portfolio management service has assumed the role of specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high net-worth clients, who have little time to manage their investments. The idea is catching up with the boom in the capital market and an increasing number of people are inclined to make the profits out of their hard earned savings. Portfolio management service is one of the merchant banking activities recognized by securities and exchange board of India (SEBI). The portfolio management service can be rendered either by the SEBI recognized categories I and II merchant bankers or portfolio managers or discretionary portfolio manager as defined in clause (e) and (f) of rule 2 SEBI (portfolio managers) Rules 1993. According to the definitions as contained in the above clauses, a portfolio manager means any person who pursuant to contract or arrangement with a client, advises or directs of undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be. A merchant banker acting as a portfolio manager shall also be bound by the rules and regulations as applicable to the portfolio manager. Realizing the importance of portfolio management services, the SEBI has laid down certain guidelines for the proper and professional conduct of portfolio management services. As per guidelines only recognized merchant bankers registered with SEBI are authorized to offer these services.

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PORTFOLIO MANAGEMENT

Portfolio management or investment helps investors in effective and efficient management of their investment to achieve this goal. The rapid growth of capital markets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man. But the need is to be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk. Hence this study on “Portfolio Management & Investment Decision “examines the role process and merits of effective investment management and decision.

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PORTFOLIO MANAGEMENT

Definition of Portfolio Management:
Portfolio means the totals holdings of the securities belonging to any person. Portfolio manager means any person who enters into a contract or arrangement with a client. Pursuant to such arrangement he advises the client or undertakes on behalf of such client management or administration of portfolio of securities or invests or manages the client’s funds. A discretionary portfolio manager means a portfolio manager who exercises or may under a contract relating to portfolio management, exercise any degree of discretion in respect of the investment or management of portfolio of the portfolio securities or the funds of the client, as the case may be. He shall independently or individually manage the funds of each client in accordance with the needs of the client in a manner which does not resemble the mutual fund. A non discretionary portfolio manager shall manage the funds in accordance with the directions of the client. A portfolio manager by virtue of his knowledge, background and experience is expected to study the various avenues available for profitable investment and advise his client to enable the latter to maximize the return on his investment and at the same time safeguard the funds invested.

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e. In choosing among different investment opportunities the following aspects risk management should be considered: a) The selection of a level or risk and return that reflects the investor’s tolerance for risk and desire for return.PORTFOLIO MANAGEMENT Scope of Portfolio Management: Portfolio management is an art of putting money in fairly safe. There are number of choices and decisions to be taken on the basis of the attributes of risk. The first preference normally goes to the necessities and comforts like purchasing a house or domestic appliances. i. The very risk-averse investor might choose to invest in mutual funds. liquid securities and performance of duties associated with keeping track of investor’s money. Portfolio management in India is still in its infancy. attributes and investor preferences. The more risk-tolerant investor might choose shares. personal preferences. b) The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. quite profitable and reasonably in liquid form. For most investors it is not possible to choose between managing one’s own portfolio. The professional managers provide a variety of services including diversification. return and tax benefits from these shares and debentures. The last choice goes to investment in company shares and debentures. active portfolio management. The next preference goes to short term investments such as UTI units and post office deposits which provide easy liquidity. The final decision is taken on the basis of alternatives. His second preference goes to some contractual obligations such as life insurance or provident funds. An investor has to choose a portfolio according to his preferences. 4 . An investor’s attempt to find the best combination of risk and return is the first and usually the foremost goal. The third preference goes to make a provision for savings required for making day to day payments. They can hire a professional manager to do it. if they offer higher returns.

5 . It is a dynamic and flexible concept and involves regular and systematic analysis. The evaluation of portfolio is to be done in terms of targets set for risk and returns. Diversification can be made by the investor either by having a large number of shares of companies in different regions. Portfolio theory concerns itself with the principles governing such allocation. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. Modern theory believes in the perspective of combination of securities under constraints of risk and returns. constraints. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. preferences for risk and returns and tax liability.PORTFOLIO MANAGEMENT Need For Portfolio Management: Portfolio management is a process encompassing many activities of investment in assets and securities. It involves construction of a portfolio based upon the investor’s objectives. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. in different industries or those producing different types of product lines. The changes in the portfolio are to be effected to meet the changing condition. The modern theory is the view that by diversification risk can be reduced. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. judgment and action.

3. By minimizing the tax burden.e. Capital Growth: This can be attained by reinvesting in growth securities or through purchase of growth securities. 2. Security/Safety of Principal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact. 5. 6. 7. Diversification: The basic objective of building a portfolio is to reduce risk of loss of capital and / or income by investing in various types of securities and over a wide range of industries. This is essential for providing flexibility to investment portfolio. Liquidity i. 6 . Marketability: It is the case with which a security can be bought or sold. Stability of Income: So as to facilitate planning more accurately and systematically the reinvestment consumption of income. 4. yield can be effectively improved. nearness to money: It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market. Favorable tax status: The effective yield an investor gets form his investment depends on tax to which it is subject.PORTFOLIO MANAGEMENT Objectives of Portfolio Management: 1.

Deciding about major weights/proportion of different assets/securities in the portfolio. 7 . Security selection within the asset classes as identified earlier.PORTFOLIO MANAGEMENT Activities in Portfolio Management: The following three activities are involved in an efficient portfolio management:  Identification of assets or securities. It is well known fact that portfolio manager balancing the risk and return in a portfolio investment.   The above activities are directed to achieve the sole purpose of maximizing return and minimizing risk on investment. allocation of investment and identifying asset classes. With higher risk higher return may be expected and vice versa.

PORTFOLIO MANAGEMENT

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

Specification of Investment Objectives & Constraints:
The typical objectives sought by investors are current income, capital appreciation, and safety of principle. The relative importance of these objectives should be specified further the constraints arising from liquidity, time horizon, tax and special circumstances must be identified.

Choice of the asset mix:
The most important decision in portfolio management is the asset mix decision very broadly; this is concerned with the proportions of ‘stocks’ (equity shares and units/shares of equity-oriented mutual funds) and ‘bonds’ in the portfolio. The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and investment horizon of the investor. Portfolio management is on-going process involving the following basic tasks:     Identification of the investor’s objectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy formulated. Review and monitoring of the performance of the portfolio. Finally the evaluation of the portfolio.

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PORTFOLIO MANAGEMENT

Techniques of Portfolio Management
As of now the under noted technique of portfolio management: are in vogue in our country.

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Equity Portfolio:
It is influenced by internal and external factors the internal factors effect the inner working of the company’s growth plan’s are analyzed with referenced to Balance sheet, profit & loss a/c (account) of the company. Among the external factor are changes in the government policies, Trade cycle’s, Political stability etc.

2.

Equity Stock Analysis:
Under this method the probable future value of a share of a company is determined it can be done by ratios of Earning Per Share (EPS) of the company and Price Earning (P/E) ratio.

EPS =

Profit after Tax No. of Equity Shares

Market Price P/E Ratio = EPS

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PORTFOLIO MANAGEMENT

One can estimate trend of earning by EPS, which reflects trends of earning quality of company, dividend policy, and quality of management. Price earning ratio indicate a confidence of market about the company future, a high rating is preferable.
The following points must be considered by portfolio managers while analyzing the securities.

1.

Nature of the Industry & its Product:
Long term trends of industries, competition with in, and out side the industry, Technical changes, labour relations, sensitivity, to Trade cycle. Industrial analysis of prospective earnings, cash flows, working capital, dividends, etc.

2.

Ratio analysis:
Ratio such as debt equity ratio’s current ratio’s net worth, profit earning ratio, return on investment, are worked out to decide the portfolio.

The wise principle of portfolio management suggests that “Buy when the market is low or BEARISH, and sell when the market is rising or BULLISH”.
Stock market operation can be analyzed by:
a) b)

Fundamental approach :- Based on intrinsic value of share’s Technical approach:- Based on Dow Jones theory, Random walk theory, etc.

Prices are based upon demand and supply of the market.
  

Objectives are maximization of wealth and minimization of risk. Diversification reduces risk and volatility. Variable returns, high illiquidity; etc.

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Hence. Most investors invest in a portfolio of assets. what really matters to them is not the risk and return of stocks in isolation. price of the security tends to move inversely with change in rate of interest. Interest rate risk vulnerability for different securities is as under: Types Cash Equivalent Long Term Bonds Risk Extent Less vulnerable to interest rate risk. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. A change in the interest rate establishes an inverse relationship in the price of the security i. Risk on the portfolio is different from the risk on individual securities.e. Following are the some of the types of Risk:  Interest Rate Risk: This arises due to the variability in the interest rates from time to time. More vulnerable to interest rate risk. These are two measures of risk in this context one is the absolute deviation and other standard deviation. because as to spread risk by not putting all eggs in one basket. Risk of the individual assets or a portfolio is measured by the variance of its return. long term securities show greater variability in the price with respect to interest rate changes than short term securities.PORTFOLIO MANAGEMENT Risk on Portfolio The expected returns from individual securities carry some degree of risk. The risk is reflected in the variability of the returns from zero to infinity. 11 . but the risk and return of the portfolio as a whole. Risk is mainly reduced by Diversification.

Inflation rates vary over time and investors are caught unaware when rate of inflation changes unexpectedly causing erosion in the value of realized rate of return and expected return. technological changes etc.  Business Risk: Business risk emanates from sale and purchase of securities affected by business cycles. It is also known as leveraged risk and expressed in terms of dept-equity ratio. Nominal return contains both the real return component and an inflation premium in a transaction involving risk of the above type to compensate for inflation over an investment holding period. It is not desirable to invest in such securities during inflationary periods.  Financial Risk: It arises due to changes in the capital structure of the company. 12 .PORTFOLIO MANAGEMENT  Purchasing Power Risk: It is also known as inflation risk also emanates from the very fact that inflation affects the purchasing power adversely. less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gains.e. Purchasing power risk is however. Although a leveraged company’s earnings per share are more but dependence on borrowings exposes it to risk of winding up for its inability to honor its commitments towards lender or creditors. Excess of risk vis-à-vis equity in the capital structure indicates that the company is highly geared. there is cheerful movement in boom due to bullish trend in stock prices whereas bearish trend in depression brings down fall in the prices of all types of securities during depression due to decline in their market price. Purchasing power risk is more in inflationary conditions especially in respect of bonds and fixed income securities. Business cycles affect all types of securities i. The risk is known as leveraged or financial risk of which investors should be aware and portfolio managers should be very careful.

The unsystematic risk stems from inefficiency magnitude of those factors different form one company to another. interest risk and financial risk). 13 . tax policy or government policy.  Unsystematic Risks: The unsystematic risks are mismanagement. increasing inventory.PORTFOLIO MANAGEMENT  Systematic Risk or Market Related Risk: Systematic risks affected from the entire market are (the problems. wrong financial policy. defective marketing etc. raw material availability. this is diversifiable or avoidable because it is possible to eliminate or diversify away this component of risk to a considerable extent by investing in a large portfolio of securities. It is managed by the use of Beta of different company shares. inflation risk.

Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that variability and thus reduce the risky by choosing an appropriate portfolio. losses of liquidity etc. the higher is the return. rate charged by the R. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. Normally. while the return over time is capital appreciation plus payout divided by the purchase price of the share. but are rewarded by the total return on the capital. the higher the risk that the investor takes. however. There is. Investment in shares of companies has its own risk or uncertainty. But other risks such as loss of liquidity due to parting with money etc. may however remain. a risk less return on capital of about 12% which is the bank.B. these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices. 14 . The risk over time can be represented by the variance of the returns.I or long term. yielded on government securities at around 13% to 14%.PORTFOLIO MANAGEMENT Risk – Return Analysis All investment has some risk..

from each of the securities.PORTFOLIO MANAGEMENT Traditional approach advocates that one security holds the better. appreciation. etc. his objectives of income. Thus the portfolio expected return is the weighted average of the expected return. it is according to the modern approach diversification should not be quantity that should be related to the quality of scripts which leads to quality of portfolio. would all be described under the caption of diversification. this pattern of investment in different asset categories. Returns on Portfolio: Each security in a portfolio contributes return in the proportion of its investments in security. with weights representing the proportions share of the security in the total investment.. liquidity and hedge against loss of value of money etc. which aims at the reduction or even elimination of non-systematic risks and achieve the specific objectives of investors 15 . safety. Experience has shown that beyond the certain securities by adding more securities expensive. types of investment. Why does an investor have so many securities in his portfolio? If the security ABC gives the maximum return why not he invests in that security all his funds and thus maximize return? The answer to this questions lie in the investor’s perception of risk attached to investments.

The theory derives its name from Charles H. If the long range behavior of market prices is seen.A. These phases are known as bull and bear phases. Although Dow never gave a proper shape to the theory. The Dow Jones theory classifies the movement of the prices on the share market into three major categories: 1. who established the Dow Jones & Co.PORTFOLIO MANAGEMENT Portfolio Theories • Dow Jones Theory: The Dow Jones Theory is probably the most popular theory regarding the behavior of stock market prices. Secondary Movements 3. Daily Fluctuations 1. it will be observed that the share markets go through definite phases where the prices are consistently rising or falling. Dow. and was the first editor of the Wall Street Journal – a leading publication on financial and economic matters in the U. Primary Movements 2.S. ideas have been expanded and articulated by many of his successors. P3 P2 P1 T2 T1 T3 Graph 1 16 . or sometimes even more. Primary Movements: They reflect the trend of the stock market and last from one year to three years.

if successive highs and low are successively lower. They rise for some time and after each rise. the falls are of a lower magnitude then earlier.e. there is a rise in prices. the basic trend is that of rising prices. the rise is not much as to take the prices higher than the previous peak. It states that if cyclical swings of stock market prices indices are successively higher. the basic trend is that of rise in prices. the market is on a 17 .PORTFOLIO MANAGEMENT During a bull phase. the bear phase in bound to start i. after each fall. This means that prices do not rise consistently even in a bull phase. On the contrary. Thus P2 is higher than P1 and T2 is higher than T1. The theory argues that primary movements indicate basic trends in the market. price will start falling. the market trend is up and there is a bull market. each peak that the prices reach is on a higher level than the earlier one. It means that each peak and trough is now lower than the previous peak and trough. prices reach higher levels with each rise. As can be seen from the graph that each trough prices reach. However. Once the prices have risen very high. Similarly. Graph 1 above shows the behavior of stock market prices in bull phase. is at a higher level than the earlier one. You would notice from the graph that although the prices fall after each rise. they fall. It would be seen that prices are not falling consistently and. However.. Graph 2 shows the typical behavior of prices on the stock exchange in the case of a P3 P2 P1 T1 T2 T3 Graph 2 Bear phase. As a result.

Timing of Investment Decisions on the Basis of Dow Jones Theory: Ideally speaking the investment manage would like to purchase shares at a time when they have reached the lowest trough and sell them at a time when they reach the highest peak. 3. Secondary Movements: We have seen that even when the primary trend is upward. An investment manger really is not interested in the short run fluctuations in share prices since he is not a speculator. this seldom happens. 2. there are also downward movements of prices. It may be reiterated that anyone who tries to gain from short run fluctuations in the stock market. It means that he should be able to identify exactly when the falling or the rising trend has begun. These movements normally last from three weeks to three months and retrace 1/3 to 2/3 of the previous advance in a bull market of previous fall in the bear market. he has to time his decision in such a manner that he buys the shares when they are on the rise and sells then when they are on the fall. even where the primary trend is downward. can make money only be sheer chance. Daily Movements: There are irregular fluctuations which occur every day in the market. Similarly. in practice. Therefore. Speculation is beyond the scope of the job of an investment manager. This theory thus relies upon a behavior of the indices of share market prices in perceiving the trend in the market. These fluctuations are without any definite trend. These movements are known as secondary movements and are shorter in duration and are opposite in direction to the primary movements. Thus is the daily share market price index for a few months are plotted on the graph it will show both upward and downward fluctuations. there is upward movement of prices also. He is not a speculator and should always resist the temptation of speculating. However. The investment manager should scrupulously keep away from the daily fluctuations of the market. These fluctuations are the result of speculative factor. 18 . Such a temptation is always very attractive but must always be resisted. Even the most astute investment manager can never know when the highest peak or the lowest through have been reached.PORTFOLIO MANAGEMENT downward trend and we are in bear market.

Whenever a new price of information is received in the stock market. even in a rising market. But the second fall in the price of a stock from Rs. when they come together immediately after each other show that the price is falling but each price fall is independent of the other price fall. a stock is selling at Rs. For example. the market will be efficient and prices will fluctuate randomly. 19 . if all available information is free to all interested parties. each price change is independent of the other because each information has been taken in. However. the market independently receives this information and it is independent and separate from all the other prices of information. Similarly even in a falling market prices keep on rising temporarily.” According to the Random Walk Theory. Afterwards. How to be certain that the rise in prices or fall in the same in due to a real turn in prices from a bullish to a bearish phase or vice versa or that it is due only to short run speculative trends? Dow Jones Theory identifies the turn in the market prices by seeing whether the successive peaks and troughs are higher or lower than earlier. and if all market participants and potential participants have the same horizons and expectations about prices. by the stock market and separately disseminated. 40 based on existing information known to all investors. 40 to Rs. Identification of this turn is difficult in practice because of the fact that. independent pieces of information. prices keep on falling as a part of the secondary movement. the news of a strike in that company will bring down the stock price to Rs. Thus. 25. 30 the next day. • Random Walk Theory: The first specification of efficient markets and their relationship to the randomness of prices for things traded in the market goes to Samuelson and Mandelbrot “Samuelson has proved in 1965 that if a market has zero transaction costs. 25 is due to additional information on the type of strike. the changes in prices of stock show independent behavior and are dependent on the new pieces of information that are received but within themselves are independent of each other. the first fall in stock price from Rs. 30 to Rs.PORTFOLIO MANAGEMENT This is technically known as identification of the turn in the share market prices. Therefore. 30 is caused because of some information about the strike. The stock price further goes down to Rs.

the price of each day is different. The theory further states that the financial markets are so competitive that there is immediate price adjustment. This speed of information determines the efficiency of the market. Thus. it may be said that the prices have an independent nature and therefore.PORTFOLIO MANAGEMENT The basic essential fact of the Random Walk Theory is that the information on stock prices is immediately and fully spread over that other investors have full knowledge of the information. The response makes the movement of prices independent of each other. 20 . It is due to the effective communication system through which information can be disturbed almost anywhere in the country.

21 . Watch out the highs and lows of the scripts for the past 2 to 3 years and their timing cyclical scripts have a tendency to repeat their performance. gross profit. it is futile to invest in such shares who’s daily movements cannot be kept track. journals and ledgers. bonus shares in the past 3 to 5 years .know about the promoters and their back ground.PORTFOLIO MANAGEMENT Rules To Be Followed Before Investing In Portfolio i. if you want to reap rich returns keep investment over along horizon and it will offset the wild intra day trading fluctuation’s. iii. this hypothesis can be true of all other financial. Compile the financials of the companies in the immediate past 3 years such as turn over. the minor movement of scripts may be ignored. compare the profit earning of company with that of the industry average nature of product manufacture service render and it future demand . net profit before tax. The higher the trading volume higher is liquidity and still higher the chance of speculation.reflects company’s commitment to share holders the relevant information can be accessed from the RDC(registrant of companies)published financial results financed quarters. we must remember that share market moves in phases and the span of each phase is 6 months to 5 years. ii. dividend track record.

I. The portfolio management seeks to strike a balance between risk’s and return. there fore in looked forward to resuming help from portfolio manager to do the job for him . Portfolio management is not a substitute to the inherent risk’s associated with equity investment 22 .update his knowledge.B. The portfolio manager carries out all the transactions pertaining to the investor under the power of attorney during the last two decades. The generally rule in that greater risk more of the profits but S. The relation ship between an investor and portfolio manager is of a highly interactive nature. advices or directs or undertakes on behalf of the clients. the management or distribution or management of the funds of the client as the case may be. and increasing complexity was witnessed in the capital market and its trading procedures in this context a key (uninformed) investor formed ) investor found him self in a tricky situation . yet stay in the capital market and make money . in its guidelines prohibits portfolio managers to promise any return to investor.E. to keep track of market movement .PORTFOLIO MANAGEMENT Persons Involved in Portfolio Management Investor: Are the people who are interested in investing their funds? Portfolio Managers: Is a person who is in the wake of a contract agreement with a client. Discretionary Portfolio Manager: Means a manager who exercise under a contract relating to a portfolio management exercise any degree of discretion as to the investment or management of portfolio or securities or funds of clients as the case may be.

5lakh’s every for two years and Rs.E. insider trading or creating false markets.I. The manager has to submit periodical returns and documents as may be required by the SEBI from time-to. The observance of the code of conduct and guidelines given by the S. He should not resort to rigging up of prices.I. From the fourth year onwards. 50lakh’s.I.E. These are subjected to change by the S.PORTFOLIO MANAGEMENT Who Can Be A Portfolio Manager? Only those who are registered and pay the required license fee are eligible to operate as portfolio managers.E. renewal fees per annum are Rs 75000.I.B. their books of accounts are subject to inspection to inspection and audit by S. honesty and should not have been convicted of any economic offence or moral turpitude. Fees payable for registration are Rs 2. The S. An applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of Rs. 23 .B. The certificate once granted is valid for three years.B. The portfolio manager should have a high standard of integrity.time. has imposed a number of obligations and a code of conduct on them. are subject to inspection and penalties for violation are imposed.E.B. etc.1lakh’s for the third year.

prospectus and strength. required for investment proposal he should also see the problem’s of the industry. securities etc or a mix of more than one type of proper mix ensures higher safety. individual policies etc further portfolio manager should take in to account the credit policy. their net worth future earnings. Decide the Type of Portfolio: Keeping in mind the objectives of portfolio a portfolio manager has to decide whether the portfolio should comprise equity preference shares. identification of objectives. Study of industry: He should study the industry to know its future prospects. industrial growth. Study of Stock Market: He should observe the trends at various stock exchange and analysis scripts so that he is able to identify the right securities for investment. foreign exchange possible change in corporate law’s etc. technical changes etc.PORTFOLIO MANAGEMENT Functions of Portfolio Managers Advisory Role: Advice new investments. Financial Analysis: He should evaluate the financial statement of company in order to understand. review the existing ones. yield and liquidity coupled with balanced risk techniques of portfolio management. non-convertibles or partly convertibles. 24 . debentures. convertibles. Conducting Market & Economic Service: This is essential for recommending good yielding securities they have to study the current fiscal policy. money market. budget proposal. recommending high yield securities etc.

Registered merchant bankers can act’s as portfolio managers.B.E. Investor’s must look forward. The one’s who use to manage the funds of portfolio. Insider trader. According to S. professional’s like MBA’s CA’s And many financial institution’s have entered the market in a big way to manage portfolio for their clients. helps the limited knowledge persons. for qualification and performance and ability and research base of the portfolio managers. now being managed by the portfolio of Merchant Bank’s.I.PORTFOLIO MANAGEMENT A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience. 25 . market trends. rules it is mandatory for portfolio managers to get them self’s registered.

investment in the securities of such companies has become quite attractive. The portfolio manager with his background and expertise meets the needs of such investors by rendering service in helping them to invest their fund/s profitably. At the same time. the stock market becoming volatile on account of various facts. a layman is puzzled as to how to make his investments without losing the same. 26 .PORTFOLIO MANAGEMENT Need & Role of Portfolio Manager With the development of Indian Securities market and with appreciation in market price of equity share of profit making companies. They have also to comply with the conditions specified by the RESERVE BANK OF INDIA under various schemes for investment by the non residents. He has felt the need of an expert guidance in this respect. Similarly non resident Indians are eager to make their investments in Indian companies.

he shall not indulge in speculative transactions. 1934. 27 . some of them are: He shall transact in securities within the limit placed by the client himself with regard to dealing in securities under the provisions of Reserve Bank of India Act. He shall not pledge or give on loan securities held on behalf of his client to a third person without obtaining a written permission from such clients. He shall not disclose to any person or any confidential information about his client. his records and his report to his clients should clearly indicate that such securities are held by him on behalf of his client.   While dealing with his client’s funds. He may hold the securities in the portfolio account in his own name on behalf of his client’s only if the contract so provides. which has come to his knowledge.   He shall not derive any direct or indirect benefit out of the client’s funds or securities.PORTFOLIO MANAGEMENT Portfolio Manager’s Obligation:   The portfolio manager has number of obligations towards his clients.  He shall deploy the money received from his client for an investment purpose as soon as possible for that purpose. In such a case.    He shall pay the money due and payable to a client forthwith. He shall not place his interest above those of his clients.

o Render the best possible advice to his clients relating to his needs and the own professional skills. o Ensure that the investors are made aware of the attendant risks before any investment decision is made by them. o Ensure that all professional dealings are affected in a prompt. efficient and cost effective manner.PORTFOLIO MANAGEMENT  He shall endeavor to: o Ensure that the investors are provided with true and adequate information without making any misguiding or exaggerated claims. environment and his 28 .

• Shall provide necessary guidance to and ensure compliance internally by the portfolio manager of all Rules. Contravenes any of the provisions of the SEBI act. Fails to comply with any conditions subject to which certificate of registration has been granted. Cancellation of registration. In such a case. its Rules and Regulations.PORTFOLIO MANAGEMENT Coordination with Relating Authorities The portfolio manager shall designate a senior officer as compliance offer: The senior officer: • Shall coordinate with regulating authorities regarding various matters.A portfolio manager is liable to penalties if he 1. Notifications etc. government of India and other regulating authorities. he shall be liable to any of the following penalties. Regulations guidelines. after enquirya) b) Suspension of registration for a specific period. issued by SEBI. • Shall ensure that observations made/ deficiencies pointed out by SEBI in the functioning of the portfolio manager do not recur. 29 . Defaults & Penalties: The following aspects must be kept in view: Liabilities for action in case of default. 2.

It is the commitment of funds which have been saved from current consumption with the hope that some benefits will receive in future. he can attempt the same by purchasing high risk shares. The manager of a provident fund portfolio has to look for security (low risk) and may be satisfied with none too high a return. Factors Affecting Investment Decisions: Given certain amount of funds. in which case there is high amount of risk that he may even lose his initial investment itself. Thus.PORTFOLIO MANAGEMENT Introduction to Investment Meaning of Investment: The concept of investment has many meanings. As aggressive investment company may. Higher the return that one wishes to have from the investment portfolio. Savings of the people are invested in assets depending on their risk and return. As already mentioned. higher could be the risk that one has to take. It is obvious. The objectives of an investment portfolio are normally expressed in terms of risk and return. however. it is a reward for waiting for money. Thus. the investment decision basically depends upon the following factors: • Objectives of Investment Portfolio: This is a crucial point that a finance minister must consider. How the objectives can affect in investment decision can be seen from the fact that the Unit Trust of India has two major schemes: Its capital units are meant for those who wish to have good capital appreciation and a moderate return. therefore. 30 . that the objectives must be clearly defined before an investment decision is taken. risk and return have direct relationship. if one wishes to double his investment in one year. will invest the moneys of the trust in different kinds of shares and securities. The ordinary units are meant to provide a steady return only. be willing to take high risk in order to have high capital appreciation. The investment manager. It is on the basis of the objectives that a finance manager decides upon the type of investment to be purchased. under both the schemes. There can be many objectives of making an investment. Investment is the employment of funds with the aim of getting return on it.

The decision ‘what to buy’ is crucial decision and has to be seen in the context of the following: What type of securities to buy or invest in? There is a wide variety of investment available. at this point to time. in whose shares and securities investments are to be made. Government securities and bonds. debentures. capital. the next step is to select the particular industries. the jute industry is no longer.e. units etc. considered as growth oriented industry and the likelihood of appreciation in the value of these shares is not considered to be high. which particular industries show a potential of growth? Industry wise analysis is important since various industries are not at the same level from investment point or view. It is important to recognize that at a particular point of time.PORTFOLIO MANAGEMENT • Selection of Investment: Having defined the objective of investment portfolio. a particular industry may have a better growth potential than other industries. What should be the proportion of investment in fixed interest dividend securities and variable dividend bearing securities? Obviously. preference shares. However. In case investments are to be made in shares and debentures of companies. convertible bonds. i. units. 31 . Once industries with high growth potential have been identified. For example there was a time when jute industry was in great favor with the investors because of its growth potential and high profitability. the fixed interest bearing securities ensure a definite return and thus a lower risk but the interest is usually not as higher as that from the variable dividend bearing shares. with the fall in profitability and the advent of substitute products. the next decision is to decide upon the kind of investment which should be purchased. equity shares.

The objective is to include in the portfolio a large number of securities so as to reduce risks specific to individual securities. the timing of investment decisions is crucial. Active strategy is based on the assumption that it is possible to beat the market.e. • Investment Strategy: Portfolio management can be practiced by following either an active or passive strategy.e. Thus. Speculation and short term trading: The objective is to gain capital profits. i. Investments are to be purchased at a time when prices are low and sold at a time when prices are high. the prices are rising consistently and sometimes in a bear phase. Unlike the active strategy. Aggressive security management: Aggressive purchasing and selling of securities to achieve high yields from dividend interest and capital gains. i. An investment manager has to view the problem of investment as one of buying and selling over a long period during which sometimes the markets are in a bull phase. The risk is high and the composition of portfolio is flexible. and at other times stagnant. there is no significant trend of rise of fall in prices.PORTFOLIO MANAGEMENT • Timing of Investment Decisions: As we have seen earlier. This requires identification of bullish and bearish trends in the prices of stocks in the share market. Active strategy is carried out as follows: 1.e. The passive strategy does not aim at outperforming the market. i. On the other hand the stocks could be randomly selected on the assumption of a perfectly efficient market. 32 . Success of active strategy depends on correct decisions as regard the timing of movement in the market as a whole. weight age of various securities in the portfolio and individual share selection. the prices are falling consistently. 2. he will have to make sales and purchases of investments at proper times. This is done by selecting assets that are viewed as under priced or by changing the asset mix or proportion of fixed income securities and shares. if an investment manager wishes to make the most profitable use of the investment opportunities.

The strategy can be implemented by investing in securities so as to duplicate the portfolio of a market index which is called indexing. speculation involves buying a security at low price and selling at a high price to make a capital gain. and rumors. It is a possibility of incurring a loss in a financial transaction.PORTFOLIO MANAGEMENT The characteristics of positive strategy are: 1. it does not mean that all investments are speculative by nature. There is an element of speculation involves in all investment decisions. The purchase of a security for earning a stable return over a period of time is an investment whereas the primary motive to earn high profits through price changes is termed as speculation. Investment involves longer term allocation of funds whereas speculation involves holding a security for a short term and trading quickly for earning higher gain. to achieve large capital gain. • Investment & Speculation: “Speculation is an activity. Long Term Investment Horizon 2. Genuine investment. Thus. in which a person assumes high risks. An investment can be distinguished from speculation in three ways – Risk. speculative investments are not carefully thought out decisions. The investor sacrifices some money today in anticipation a financial return in future. Investment involves limited risk while speculation is considered as an investment of funds with high risk. However. He indulges in a bit of speculation. “The time span in which the gain is sought to be made is usually very short. quite contrary to its literal meaning. Capital gain and time period. Risk has a definite financial meaning. Investment involves putting money into an asset which is not necessarily marketable in order to enjoy a series of returns. On the other hand. 33 . often without regard for the safety of his invested principal. Little Portfolio Revisions Thus it is basically a buy and hold strategy. They are based on tips. are carefully thought out decisions.

These factors generally relate to the strengths and weakness of the company under consideration. he would assess the various factors which influence the value of a particular share. The relative changes in the price index of each industry as compared with the changes in the average price index of the shares of all industries would show these industries which are having higher growth potential in the past few years. Fundamental Analysis: Fundamental Analysis of growth oriented companies: One of the first decisions that an investment manager faces is to identify the industries which have a high growth potential.PORTFOLIO MANAGEMENT Speculation involves a higher level of risk and a more uncertain expectation of returns. It may be noted that an industry may not remain a growth industry foe all the time. characteristics of the industry within which the company falls and the national and international economic scene. Two approaches are suggested in this regard. Investments are not risk free but the risk can be calculated. He can thus perceive industries having a higher growth in their share prices indices and examine whether the growth potential is still there or not. In other words. • Statistical analysis of past performance: A statistical analysis of the immediate past performance of the share price indices of the various industries and changes therein related to the general price index of shares of all industries should be made. he shall now have to make an assessment of the various characteristics of the industries to finalize a list of industries in which he will try to spread his investment. It is the job of the investment manager to examine 34 . The Reserve Bank of India index numbers of security prices published every month in bulletin may be taken to represent the behavior of share prices of the various industries in the past few years. The analysis of share prices indices over a number of years will enable the investment manager to identify the industries which are rated high by the investors at the time of analysis. • Assessing the intrinsic value of an industry/company: After an investment manager has identified statistically the industries in the share of which the investors show interest.

etc… Management experts identify five stages in the life of an industry. rapid growth. therefore. The major objective of this analysis is to determine the relative quality of the security and to decide whether or not is security is good at current markets prices. These are introduction. In order to know the future volume and the value of the output in the next ten years or so. • Demand/Supply pattern for the industry’s products and its growth potential: The main important aspect is to see the likely demand of the products of the industry and the gap between demand and supply. may analyze. specially return on investment. both qualitative and quantitative factors are to be considered. In India there are many industries which have a growth potential on account of good demand position. This would reflect the future growth prospects of the industry.PORTFOLIO MANAGEMENT and weigh the various factors and judge the quality of the share or the security under consideration. maturity or saturation and decline. the investment manager will have to rely on the various demand forecasts made by various agencies like the planning commission. The investment manager. As we have discussed earlier. Chambers of Commerce and institutions like NCAER. It is obvious that profitability in an industry is a vital consideration for the investor. cost structure of the industry and other economic and Government constraints on the same. an assessment will have to be made regarding all the conditions and factors relating to demand of the particular product. 35 . development. This approach is known as the intrinsic value approach. an appraisal of the particular industry’s prospects of the industry to which it belongs. the profitability ratios. This would give him an idea about the profitability of the industry as a whole. The following factors may particularly be kept in mind while assessing to factors relating to an industry. If an industry has already reached the saturation or decline stage. In this. its future demand potential is not likely to be high. since profit is both a measure of performance as well as source of earning of him. • Profitability: The cost structure of an industry as related to its sale price is an important consideration. Industry Analysis: First of all. gross profit ratio and net profit ratio of existing companies in the industry.

• Size and ranking: A rough idea regarding the size and ranking of the company within the economy. For example. It is obvious that in such industries technological obsolescence will take place at a fast rate. Hence. would help the investment manager in assessing the risk associated with the company. Similarly many other industries are characterized by high rates of profits and losses in alternate years. which must be studied in depth in order to understand their impact on the working of the industry. therefore. relevant information must be collected and properly analyzed. in particular. and the industry. Such cycles or fluctuations in earnings must be carefully studied. in general. the net profits. In this regard the net capital employed. Company Analysis: To select a company for investment purpose a number of qualitative factors have to be seen. see whether the industry under analysis has been maintaining a cordial relationship between labour and management. the return 36 . Before purchasing the shares of the company. However. An illustrative list of factors which help the analyst in taking the investment decision is given below. The investment manager should. the next stage would be to undertake and analyze all the factors which show the desirability of various companies within an industry group from investment point of view. the investment manager has to visualize the performance of the company in future by analyzing its past performance. certain industries have a fast changing technology. • Labour Management relations in the industry: The state of labour management relationship in the particular industry also has a great deal of influence on the future profitability of the industry. it must be emphasized that the past performance and information is relevant only to the extent it indicates the future trends.PORTFOLIO MANAGEMENT • Particular characteristics of the industry: Each industry has its own characteristics. Once the industry’s characteristics have been analyzed and certain industries with growth potential identified.

this is not so in practice due to many factors. proposed expansion and diversification plans and the nature of the company’s technology. This requires the analysis of the existing capacities and their utilization. The nature of technology of a company should be seen with reference to technological developments in the concerned fields. The existing capacity utilization levels can be known from the quantitative information given in the published profit and loss accounts of the company. Theoretically. A company may have a good record of profits and performance in the past. can be known from the directors reports the chairman’s statements and from the future capital commitments as shown by way of notes in the balance sheets. The following three growth indicators may be particularly looked into (a) price earning ratio (b) percentage growth rate of earnings per annum. Growth is the single most important factor in company analysis foe the purpose of investment management. The plans of the company. the possibility of its product being superseded of the possibility of emergence of more effective method of manufacturing. The price earnings ratio is an important indicator for the investment manager since it shows the number the times the earnings per share are covered by the market price of a share. net income. this ratio should be same for two companies with similar features. • Growth record: The growth in sales. It may also be useful to assess the position of the company in terms of technical know how. Hence.PORTFOLIO MANAGEMENT on investment and the sales figure of the company under consideration may be compared with similar data of other companies in the same industry group. However. research and development activity and price leadership. net capital employed and earnings per share of the company in the past few years must be examined. An evaluation of future growth prospects of the company should be carefully made. by a comparison of this ratio pertaining to different companies the investment manager can have an idea about the image of the company and can determine whether the share is under-priced or over-priced. in terms of expansion or diversification. and (c) percentage growth rate of net block. but if it does not have growth potential. 37 . its shares cannot be rated high from the investment point of view.

yield. operating efficiency and turnover efficiency of the company may also be calculated. etc. dividend and financial performance record of other companies in the same group. • Quality of Management: This is an intangible factor. Various other ratios to measure profitability. the most important figures are earnings per share.PORTFOLIO MANAGEMENT Financial Analysis: An analysis of financial for the past few years would help the investment manager in understanding the financial solvency and liquidity. The five elements may be calculated for the past ten years or so and compared with similar ratios computed from the financial accounts of other companies in the industry and with the average ratios of the industry as a whole. etc. This is perhaps the reason that an investment manager always gives a close look to the management of the company whose shares he is to invest. the efficiency with which the funds are used. book value and the intrinsic value of the share. liquidity ratio. The return on owner’s investment. Every investment manager knows that the shares of certain business houses command a higher premium than those of similar companies managed by other business houses. From the investment point of view. These ratios will provide an overall view of the company to the investment analyst. For this purpose certain fundamental ratios have to be calculated. The yield and the asset backing of a share are important considerations in a decision regarding whether the particular market price of the share is proper or not. To examine the financial solvency or liquidity of the company. debt equity ratio. He can analyze its strengths and weakness and see whether it is worth the risk or not. 38 . capital turnover ratio and the cost structure ratios may also be worked out. its policy vis-à-vis its relationship with the investors. the operating efficiency and operating leverages of the company. the profitability. price earnings ratios. Yet it has a very important bearing on the value of the shares. the investment manager may work out current ratio. the confidence that the investors have in a particular business house. This is because of the quality of management.

the residual company proposed a scheme whereby those shareholders.PORTFOLIO MANAGEMENT Quality of management has to be seen with reference to the experience. In the past few years. This would show the stake of various parties in the company. the investment manager has begun looking into the state of labor management relations in the company under consideration and the area where it is located. Mere listing of the share on the stock exchange does not automatically mean that the share can be sold or purchased at will. who wish to opt out. When the bank was nationalized. skilled labour and raw materials etc. Nearness to market is also a factor to be considered. who wished to out of the company. could receive certain amount as compensation in cash. • Pattern of Existing Stock Holding: An analysis of the pattern of the existing stock holdings of the company would also be relevant. of institutional investors that the compensation offered to the share holders. • Location & Labour Management Relations: The locations of the company’s manufacturing facilities determine its economic viability which depends on the availability of crucial inputs like power. was raised considerably. 39 . skill and integrity of the persons at the helm of the affairs of the company. The policy of the management regarding relationship with the share holders is an important factor since certain business houses believe in generous dividend and bonus distributions while others are rather conservative. It was only at the instance and the bargaining strength. • Marketability of the Shares: Another important consideration for an investment manager is the marketability of the shares of the company. An interesting case in this regard is that of Punjab National Bank in which the Life Insurance corporation and other financial institutions had substantial holdings.

In this regard. dispersal of share holding with special reference to the extent of public holding should be seen. It included an analysis of the macro economic and political factors which will have an impact on the performance of the firm.PORTFOLIO MANAGEMENT There are many shares which remain inactive for long periods with no transactions being affected. 40 . the investor is expected to decide whether he should buy or sell the securities. the particular stock exchange where it is traded and the volume of trading. Fundamental analysis thus is basically an examination of the economic and financial aspects of a company with the aim of estimating future earnings and dividend prospects. The other relevant factors are the speculative interest in the particular scrip. After having analyzed all the relevant information about the company and its relative strength vis-à-vis other firm in the industry. To purchase or sell such scrips is a difficult task.

(iv) Portfolio Management Services and (v) Securities related financing (NBFC).PORTFOLIO MANAGEMENT A Brief about HSBC InvestDirect (India) Limited: HSBC InvestDirect (India) Limited (HIDL) is listed on the Bombay Stock Exchange Limited and National Stock Exchange Limited. 41 . The business activities undertaken by HIDL through its subsidiaries include (i) Securities Broking. • Wealth Management: Portfolio Management Services. These services are offered across our network of over 240 offices across the country. HIDL through its Subsidiaries offer a comprehensive range of value-added products and services backed by a professional service orientation for retail and corporate customers. • Retail Broking: Equities & Derivatives. (iii) Distribution of financial products. Broadly the retail services are divided into two broad categories. (ii) Investment Advisory. execution and monitoring of the full range of investment services. Retail Business: Retail offerings of HSBC InvestDirect seek to cover all financial planning requirements of individuals. which include providing personalized investment management services including planning. Mutual Funds. IPOs. advisory.

financial About HSBC Group: Headquartered in London. New York. private banking.000 shareholders in 119 countries and territories. The company is now held by the HSBC Group. Hong Kong. the Americas. one of the world’s largest banking and services organizations. formerly known as IL&FS Investsmart Limited is one of India’s leading companies in the financial services industry. investment banking and markets. experts who will understand your needs and help you reach your financial goals. and other activities. HSBC's international network comprises around 8. shares in HSBC Holdings plc are held by around 220. including a rapidly growing ecommerce capability. The shares are traded on the New York Stock Exchange in the form of American Depositary Receipts. In short. Paris and Bermuda stock exchanges. one who will make your money work hard. corporate. HSBC is one of the largest banking and financial services organizations in the world. With listings on the London.500 offices in 86 countries and territories in Europe. the Asia-Pacific region. you need to partner with someone you trust. Portfolio Management Services (PMS): Accelerating your investments When it comes to investing your hard earned money. Through an international network linked by advanced technology. the Middle East and Africa. You need someone who can guide you through the complex maze of investment options with unbiased advice. 42 . commercial banking. HSBC provides a comprehensive range of financial services: personal financial services.PORTFOLIO MANAGEMENT Promoters: HSBC InvestDirect (India) Limited.

encompassing both debt as well as equity schemes. capital appreciation and preservation.PORTFOLIO MANAGEMENT Financial markets today offer enormous growth potential. keeping abreast of latest corporate developments and financial analysis all adds up. Conservative investment strategy aimed toward capital preservation plus some more. The primary objective of iPreserve is to manage investments in Mutual funds. 43 . Features: Investors have a choice of five schemes based on investor risk profile – High / Moderate / Low. a Discretionary Portfolio Management Service. HSBC InvestDirect Securities (India) Limited (HISL) offers you just the solution that allows you to relax as they put your money to work through the HISL-PMS. iPreserve takes care of complete execution of the investment and monitoring on your behalf. We offer a choice of two types of PMS schemes: iPreserve is a discretionary investment management scheme. About HISL-PMS Options: Every investor is unique and has unique investment preferences and risk appetites. Risk Type High Risk Moderate Risk Low Risk Details Pure Growth oriented investment strategy aimed at wealth creation. Managing one’s investments has become nearly a full-time affair that requires considerable time and expertise. Balanced investment strategy aimed at both. But managing your own investments can be an extremely challenging task. assessing the impact of socio-economic changes on your investments. Anticipating market trends. offering investment solutions in Mutual Funds that are aligned to suit your financial goals.

1 lakh or more Rs. Adequate diversification with an aim to optimize risk-adjusted returns.a on monthly folio values. 5 lakhs Rs. Product Features: Details Minimum portfolio value Additional investments Account Maintenance fees Billing frequency Rs. • Part Withdrawal is allowed only twice in a year. Proactive management of funds.000 p. Investment Strategy: • • • Adopt Model portfolios to guide investments across products.PORTFOLIO MANAGEMENT Benefits: • • • No management fee charged for managing the funds Asset allocation as per the client risk profile. • Partial withdrawal * Load for withdrawal after first year (full/part Nil withdrawal) * For Partial Withdrawal.a At the end of the year or termination whichever is earlier iPreserve Exit Load for withdrawal before expiry of one year 1% p. Convenience of investing in multiple funds through a single product. 44 . (first year) • Complete withdrawal 0.5% on the amount withdrawn. 1. following rules are applicable.

• Medium Risk: Combines growth/value styles of investing in long-term growth opportunities across sectors and market caps. 45 . iGrowth is a discretionary portfolio management scheme focusing on investments in equities and derivatives with an objective of growth. through judicious mix of defensive stocks. Features & Benefits: Investors have a choice of three schemes based on investor risk profile . Expect higher portfolio turnover. • High Risk: Dynamically managed product to capture medium term upsides from attractive business profiles. relative under-valuations. Emphasizes on quality of businesses and pricing. 1 lac. cyclical factors within sectors and technical factors. • Low Risk: Endeavors to minimize risk and yet offer stable and modest returns.High / Moderate / Low. Minimum account balance after such withdrawal should be more than the threshold limit of Rs. It aims at creating long-term wealth through judicious stock selection and asset allocation. 10 lacs.• • PORTFOLIO MANAGEMENT Amount should be more than Rs.

5% on amount withdrawn Nil 1.5% on amount withdrawn Nil * For Partial Withdrawal.PORTFOLIO MANAGEMENT Investment Strategy: • Adopt Model Portfolios to guide investments across products. 10 lakhs.5% on the portfolio value 1.a on monthly Plan B Rs.Complete withdrawal . 10 lakhs Rs. Domestic market focus with a global perspective. Amount should be more than Rs. following rules applicable. Minimum balance after such withdrawal should be more than the threshold limit of Rs.Partial withdrawal* Load for withdrawal after first year (full/ part withdrawal) Monthly Portfolio Values 1.a on monthly At the end of each quarter Calculations based on Load for withdrawal before expiry of one year (first year) . 46 . • • • Part Withdrawal can be done only twice a year.yearly or date of termination whichever is earlier Geometric Mean Method .If fully withdrawn before 1 yea Billing frequency 2% p. 1 lakh or more Part A -1% p.Quarterly for Part B . 1 lakh or more 2% p. 10 lakhs Rs. 1 lakh. • • Bottom-up approach to stock picking. Portfolio composition of 20-30 stocks to provide sharper sector focus while providing adequate diversification.15% annual performance linked fee to be charged over 8% returns same as above for Part A.a on monthly portfolio values (billed on quarterly basis) PLUS Part B .5% on the portfolio value 1. • Product Features: Details Minimum portfolio values Additional investments PMS fees Normal Plan A Rs.

(a) Security Selection: This means identifying groups of securities in each asset class and decides the optimal portfolio. Assets in this respect means group of security or type of investment. Asset allocation means different things to different people. bonds and cash. While selecting the assets the portfolio manager has to make asset allocation. PSU bonds 47 . To achieve this objective.PORTFOLIO MANAGEMENT Assets Allocation: Introduction: The portfolio manager has to invest in these securities that form the optimal portfolio. The following are the different asset classes: 1. the asset allocation decision is the most important determinant of investment performance. Preference Shares 4. Once a portfolio is selected the next step is the selection of the specific assets to be included in the portfolio. Debentures 5. Asset Allocation: In order to achieve long term success. the investor should look where the best bargains lie. It is the process of dividing the funds among different asset class portfolios. individual investors should concentrate on the allocation of their money among stocks. Equity shares-new issues 2. The portfolio manager has to complete the following stages before making asset allocation. The basic long term objective of any investor should be to maximize his real overall return on initial investment after investment. Equity shares-old issues 3. It means how much to invest in stocks? How much to invest in bonds? And how much to keep in cash reserves? Thus.

It is logical that the expected return of a portfolio should depend on the expected return of each of the security contained in it. Technical analysis assumes that the price of a stock depends on supply and demand in the capital market. 48 . Company Fixed Deposits Portfolio management is handling the fund on behalf of the company or institution in order to determine the suitable combination of different assets so that the total risk can be reduced to the minimum while the return can be achieved to the maximum extent. It is essential that every security be viewed in a portfolio context. Charts are drawn to identify price movements of a given security over a period of time. These charts enable us to predict the future movement of the security.PORTFOLIO MANAGEMENT 6. Moreover. Government Securities 7. This is a tricky job which needs efficiency of high caliber. the portfolio manager has to keep in mind the following factors while making asset allocation and design an efficient portfolio. a) b) c) d) e) f) g) Liquidity or marketability Safety of investment Tax Saving Maximization of return Minimization of return Capital appreciation or gain Funds requirements (b) Basis of selection of equity portfolio: A portfolio is a collection of securities. the amounts invested in each security should also be important. Therefore. One is technical analysis and the other is fundamental analysis. All financial and market information of given security is already reflected in the market price. There are two approaches to the selection of equity portfolio.

Diversification means shifting form one security to another security. financial and market risks (e) Behavior of price-earning ratio (f) High and low prices of the stock (g) Trend of share prices over the few months or weeks. investors cannot avoid the risk arising from them. To reduce risk of a portfolio investors resort to diversification. An investor should investigate the following factors about the stock to be included in his portfolio: (a) Earnings per share (b) Growth potential (c) Dividend and bonus records (d) Business. Diversible risk arises from company’s specific factors. Portfolio risk can be divided into two groups. prevailing mood in the market. Diversification: Investing funds in a single security is advisable only if the security’s performance is rewarding. or to follow others. such risk can be diversified by including stocks of other companies in the portfolio.diversible risk and non-diversible risk. sudden impulse. quality of management. past and present track record of the company.PORTFOLIO MANAGEMENT The fundamental analysis includes the study of ratio analysis.B High risk (Shares) `````````````````````````````````````` A Medium (Debent) Risk O Risk free (Bank Deposits) X 49 . Hence. The maximum benefits of risk reduction can be achieved by just having of 10 to 15 carefully selected securities. government policies etc… an efficient portfolio manager can obviously give more weight to fundamental analysis than technical analysis. Y C -------------------------------------. Often investors tend to buy or sell securities on casual tips. Non-diversible risk arises from the influence of economy wide factors which affect returns of all companies.

depending upon his preferences and income requirements. On the other hand people interested in investing in shares are 32%. If he takes some risk at B or C. This diversification can help to minimize risk and maximum the returns. The risk can be reduced by a proper diversification of scripts in the portfolio. Out of the total surveyed most of the people are interested in investing into banks (42%). the risk can be reduced if it is concerned with a specific company risk. but the market risk is outside his control. Primary Research Findings: Findings from Survey 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Series 1 Banks + Mutual Funds Insurances Above chart shows the interest of the people taken into consideration for survey. B and C positions in his portfolio so that he can have a diversified risk-return pattern. In case of mutual funds people interested in investing are 12%. whereas in debentures and insurance people interested in investing are 8% and 6% respectively 50 .PORTFOLIO MANAGEMENT We can observe from the above diagram that the strategy of an investor should be at A. There may be a combination of A. B or C respectively.

c) People belonging to income class of 12000-20000 are equally interested in shares and debentures but less interested in Mutual Funds. d) People belonging to income class of more than 20000 are more interested in shares and less in insurance. people belonging to income class of less than 8000 and those belonging to income class of 8000-12000 are very much interested in banking. 51 . b) People belonging to income class of 8000-12000 are also interested in Banks & Insurance but less in shares. banks & debentures.PORTFOLIO MANAGEMENT a) Out of the 50 people surveyed.

52 . the third consideration is given to the tax saving i.e. 42%. Secondary Research Findings: Portfolio Management by UTI Mutual Fund: UTI mutual fund provides a number of schemes and they decide the portfolio allocation of each scheme in a separate manner. A general tendency while making the investment decision particularly in shares is that the shares having the highest price should be purchased even if there is the bullish trend as people expect a further rise in the share price. 33%. while second consideration is given to the return that one gets from the investment i. But the portfolio manager takes the decision of investment only after studying the past performance and the future prospects of the company. 12% and the last consideration is the reputation of the concern i. More weight age is given to security aspect i. 13%.e. what factors do people consider while making the investment decision.PORTFOLIO MANAGEMENT 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % S ecurity Concern's R eturns R eputation Tax S aving Above chart shows.e.e.

UTI ULIP (Balanced with Income Tax) 8. UTI G-Sec fund (Debt) 2. UTI Money Market Fund (Liquid) 4. UTI US 2002 (Balanced) 12. UTI Nifty Index Fund (Equity Index) 15.PORTFOLIO MANAGEMENT The schemes offered by UTI mutual fund are namely: 1. UTI US 95 (Balanced) 11. UTI Master Index Fund (Equity-Index) 14. UTI Monthly Income Scheme (Predominantly debt) 6. UTI bond fund (Debt) 3. UTI Mahila Unit Scheme (Balanced) 7. UTI Retirement Benefit Plan (Balanced-with Income Tax Benefit) 10. UTI Index Select Fund (Equity Index Actively Managed) 53 . UTI CRTS-81 13. UTI Liquid fund 5. UTI Children’s Career Plan (Special Scheme for Children) 9.

Auto Sector. Mid Cap. Basic Industries. UTI Equity Tax Saving Plan (Equity with Income Tax Benefit) 25. UTI Growth Sectors fund software. 24. Pharma. Banking Sector. UTI Master share 86 17. UTI Grandmaster (Equity) 19. 54 .PORTFOLIO MANAGEMENT 16. Brand (Equity Sector Fund) 30. UTI MNC Fund 29. Services. UTI Unit Scheme 92 28. SUNDER 27. UTI Master Value Fund (Equity-Value Stocks) 18. UTI Master growth (Equity) 21. UTI Primary Equity fund (Equity) 23. UTI Master Plus (Equity) 22. UTI Thematic Funds – Large Cap. PSU fund. UTI Master Equity Plan Unit Scheme. Petro. UTI Master gain (Equity) 20. UTI Variable Investment Schemes (Equity-Asset Allocation) 26.

73% 27.62% 14.24% 13.23% 100.16% 5. 2009 Security GOI Securities Banks Housing and Finance companies NBFC’s Manufacturing and other companies Securitized Papers Total Percentage of Total 33. T 55 .PORTFOLIO MANAGEMENT Taking each fund individually let us see the portfolio allocation of these funds: 1) UTI Bond Fund: • Investment Objective: Open-end 100% pure debt fund. which invests in rates corporate debt papers and government securities with relatively low risk and easy liquidity. Portfolio composition as on 31st March.47% 5.00% • Asset Allocation: G-S : 34% EC CAS & EQUIVAL H ENT : 1% COR DEB : 65% P.

5 56 .81 2. Portfolio composition as on 31st March. Crores) 2.58 2.12 11.00% Market Value (Rs. The fund is designed to provide an enabler to adult female persons is pooling their own savings and/ or gifts into an investment vehicle so as to get periodic cash flow near to the time of any chosen festival/occasion or to allow income/ gains redeployed in the scheme and repurchase units partially or fully as and when desired. 2009 Security GOI Securities Corporate Debt Equity Net Current Assets Total Fund Size Percentage of NAV 24.48% 25.98% 31.99 3.14% 18.PORTFOLIO MANAGEMENT 2) UTI Mahila Unit Scheme: • Investment Objective: An open-ended scheme with a minimum 70% investment in Debt/G-Sec and a maximum 30% investment in equity.40% 100.

Portfolio composition as on 31st March. In addition the scheme also offers life insurance and accident insurance cover.PORTFOLIO MANAGEMENT 3) UTI ULIP (Unit Linked Insurance Plan): • Investment Objective: An open-ended balance fund with an objective of investing not more than 40% of the funds in equity and equity related instruments and balance in debt and money market instruments with low to medium risk profile.42% Bonds 35. 2009 Percentage of NAV Equity 34.00% Security 57 .57% Central Government Securities 13.92% Net Current Assets 16.09% Total 100. Investment by an individual in the scheme is eligible for exemption under section 88 of the IT Act 1961.

79 531. after they attain the age of 18 years. a means to receive scholarship to meet the cost of higher education and or to help them in setting up a profession.16 58 .00% Market Value (Rs. Portfolio composition as on 31st March.32 1210.PORTFOLIO MANAGEMENT 4) UTI Children’s Career Balanced Plan: • Investment Objective: An open-ended debt oriented fund with investment in Debt/G-Sec of minimum 60% and a maximum of 40% in Equity.19 51. 2009 Security GOI Securities Debt Equity Net Current Assets Total Fund Size Percentage of NAV 10.24% 100.85 494. Crores) 132. practice or business or enabling them to set up a home or finance the cost of other social obligation.97% 43.79% 4.95% 40. Investment can be made in the name of the children up to the age of 15 years so as to provide them.

00% Market Value (Rs.55% 45.79 328.33% 100.38 59 . 2009 Security GOI Securities Corporate Debt Top Equity Holdings Net Current Assets Total Percentage of NAV 6.01 137.50 149. This ensures to provide pension to investors particularly self-employed persons after they attain the age of 58 years.75% 6. in the form of periodical cash flow up to the extent of repurchase value of their holding through systematic withdrawal plan.09 20. Portfolio composition as on 31st March. Crores) 21.PORTFOLIO MANAGEMENT 5) UTI Retirement Benefit Plan: • Investment Objective: An open-ended balanced fund with a maximum equity allocation of 40% and the balanced in debt.38% 41.

PORTFOLIO MANAGEMENT Portfolio Management by State Bank of India State Bank of India: (000’s are omitted) 60 .

Debentures and Bonds 901.44 3864.94. Shares 4194.2009 (Current Year) Investment in India 1.60.94 1538.26.12 2.48 TOTAL 181684. Other Approved Securities 3.61 4. Subsidiaries and /or joint 202.38. Govt. Other investments (Shares and 276.03.90. Subsidiaries and /or joint 15874.61 1189. Others 1436.23 As on 31.38 1282.60 ventures abroad 3.12 216.94 172347.03.05 debentures) 3512.93.52.32.90.49.12.36.17 992.72 Conclusion: 61 .85 16166.42 381.26.PORTFOLIO MANAGEMENT Investments As on 31.29 4527.73.26.45.59.38 TOTAL GRAND TOTAL 3992.03.47. Securities 2.78 Investment outside India 1.75 5.56 ventures 6.07 185676.48.21 167885.28 4462.2008 (Previous Year) 143727.89.29.10. Government Securities 157738.79.

PORTFOLIO MANAGEMENT I can conclude from this project that portfolio management has become an important service for the investors to identify the companies with growth potential. Portfolio management role is still not identified in the recent time but due it expansion of investors market and growing complexities of the investors the services of the portfolio managers will be in great demand in the near future. Today the individual investors do not show interest in taking professional help but surely with the growing importance and awareness regarding portfolio’s manager’s people will definitely prefer to take professional help. Appendix Questionnaire 62 . Portfolio managers can provide the professional advice to the investors to make an intelligent and informed investment.

PORTFOLIO MANAGEMENT 1) Name: ________________________________ Age: __________________________________ Occupation: ______________________________ Service in which organization: _______________________ Nature of Business: ______________________________ Monthly Earnings: ______________________________ Monthly Savings: ________________________________ 2) 3) 4) 5) 6) 7) 8) Any Investment Made: Shares Mutual Fund Debentures Insurance Fixed Deposit Other (Specify) 9) Details of Investment: References 63 .

Jain Investment Analysis and Portfolio Management by Prasanna Chandra   http://www.Y. Khan .com/Aboutus/financials/Schemes_annual_report_2008-2009.sbimf.indiatimes.pdf  http://www.utiwms. P.com/ http://www.com/  64 .economictimes.PORTFOLIO MANAGEMENT  Management Accounting and Financial Analysis by M.K.com/  http://www.

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