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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.
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.
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.
The more risk-tolerant investor might choose shares. attributes and investor preferences. liquid securities and performance of duties associated with keeping track of investor’s money. b) The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level.PORTFOLIO MANAGEMENT Scope of Portfolio Management: Portfolio management is an art of putting money in fairly safe. return and tax benefits from these shares and debentures. The final decision is taken on the basis of alternatives. For most investors it is not possible to choose between managing one’s own portfolio. The first preference normally goes to the necessities and comforts like purchasing a house or domestic appliances. The professional managers provide a variety of services including diversification. The next preference goes to short term investments such as UTI units and post office deposits which provide easy liquidity. An investor has to choose a portfolio according to his preferences. There are number of choices and decisions to be taken on the basis of the attributes of risk. 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. The very risk-averse investor might choose to invest in mutual funds. They can hire a professional manager to do it. The third preference goes to make a provision for savings required for making day to day payments. if they offer higher returns. i.e. The last choice goes to investment in company shares and debentures. His second preference goes to some contractual obligations such as life insurance or provident funds. 4 . personal preferences. Portfolio management in India is still in its infancy. active portfolio management. quite profitable and reasonably in liquid form. An investor’s attempt to find the best combination of risk and return is the first and usually the foremost goal.
The evaluation of portfolio is to be done in terms of targets set for risk and returns. 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. Portfolio theory concerns itself with the principles governing such allocation.PORTFOLIO MANAGEMENT Need For Portfolio Management: Portfolio management is a process encompassing many activities of investment in assets and securities. 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. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. It is a dynamic and flexible concept and involves regular and systematic analysis. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. It involves construction of a portfolio based upon the investor’s objectives. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. constraints. in different industries or those producing different types of product lines. judgment and action. preferences for risk and returns and tax liability. Diversification can be made by the investor either by having a large number of shares of companies in different regions. Modern theory believes in the perspective of combination of securities under constraints of risk and returns. 5 .
4. Marketability: It is the case with which a security can be bought or sold. Capital Growth: This can be attained by reinvesting in growth securities or through purchase of growth securities. Stability of Income: So as to facilitate planning more accurately and systematically the reinvestment consumption of income. yield can be effectively improved.PORTFOLIO MANAGEMENT Objectives of Portfolio Management: 1. 5. Favorable tax status: The effective yield an investor gets form his investment depends on tax to which it is subject. Liquidity i. nearness to money: It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market. 6. Security/Safety of Principal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact. By minimizing the tax burden. 7.e. 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. 2. 3. This is essential for providing flexibility to investment portfolio. 6 .
7 . It is well known fact that portfolio manager balancing the risk and return in a portfolio investment.PORTFOLIO MANAGEMENT Activities in Portfolio Management: The following three activities are involved in an efficient portfolio management: Identification of assets or securities. With higher risk higher return may be expected and vice versa. The above activities are directed to achieve the sole purpose of maximizing return and minimizing risk on investment. Security selection within the asset classes as identified earlier. allocation of investment and identifying asset classes. Deciding about major weights/proportion of different assets/securities in the portfolio.
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.
Techniques of Portfolio Management
As of now the under noted technique of portfolio management: are in vogue in our country.
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.
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.
Profit after Tax No. of Equity Shares
Market Price P/E Ratio = EPS
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.
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.
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:
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.
what really matters to them is not the risk and return of stocks in isolation. long term securities show greater variability in the price with respect to interest rate changes than short term securities. Most investors invest in a portfolio of assets. A change in the interest rate establishes an inverse relationship in the price of the security i. price of the security tends to move inversely with change in rate of interest. but the risk and return of the portfolio as a whole. Hence. The risk is reflected in the variability of the returns from zero to infinity. Interest rate risk vulnerability for different securities is as under: Types Cash Equivalent Long Term Bonds Risk Extent Less vulnerable to interest rate risk.e. The expected return depends on the probability of the returns and their weighted contribution to the risk of the portfolio. More vulnerable to interest rate risk. 11 . Risk of the individual assets or a portfolio is measured by the variance of its return. Risk is mainly reduced by Diversification.PORTFOLIO MANAGEMENT Risk on Portfolio The expected returns from individual securities carry some degree of risk. These are two measures of risk in this context one is the absolute deviation and other standard deviation. 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. because as to spread risk by not putting all eggs in one basket. Risk on the portfolio is different from the risk on individual securities.
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. 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. 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. Purchasing power risk is more in inflationary conditions especially in respect of bonds and fixed income securities. It is also known as leveraged risk and expressed in terms of dept-equity ratio. 12 . 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. Business Risk: Business risk emanates from sale and purchase of securities affected by business cycles. Business cycles affect all types of securities i. It is not desirable to invest in such securities during inflationary periods. 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. 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. Financial Risk: It arises due to changes in the capital structure of the company. The risk is known as leveraged or financial risk of which investors should be aware and portfolio managers should be very careful. Excess of risk vis-à-vis equity in the capital structure indicates that the company is highly geared. technological changes etc.e.
defective marketing etc. It is managed by the use of Beta of different company shares.PORTFOLIO MANAGEMENT Systematic Risk or Market Related Risk: Systematic risks affected from the entire market are (the problems. 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. 13 . The unsystematic risk stems from inefficiency magnitude of those factors different form one company to another. increasing inventory. tax policy or government policy. Unsystematic Risks: The unsystematic risks are mismanagement. wrong financial policy. raw material availability. inflation risk. interest risk and financial risk).
The risk over time can be represented by the variance of the returns. however. Normally. may however remain.. these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices.PORTFOLIO MANAGEMENT Risk – Return Analysis All investment has some risk.B. 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. 14 . the higher is the return. There is. but are rewarded by the total return on the capital. losses of liquidity etc. But other risks such as loss of liquidity due to parting with money etc. yielded on government securities at around 13% to 14%. a risk less return on capital of about 12% which is the bank. rate charged by the R. Investment in shares of companies has its own risk or uncertainty. This risk less return refers to lack of variability of return and no uncertainty in the repayment or capital. the higher the risk that the investor takes.I or long term. while the return over time is capital appreciation plus payout divided by the purchase price of the share.
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. 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. Returns on Portfolio: Each security in a portfolio contributes return in the proportion of its investments in security. 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. appreciation.. liquidity and hedge against loss of value of money etc. with weights representing the proportions share of the security in the total investment. his objectives of income. etc. Thus the portfolio expected return is the weighted average of the expected return. from each of the securities.PORTFOLIO MANAGEMENT Traditional approach advocates that one security holds the better. types of investment. this pattern of investment in different asset categories.
P3 P2 P1 T2 T1 T3 Graph 1 16 . Primary Movements: They reflect the trend of the stock market and last from one year to three years. and was the first editor of the Wall Street Journal – a leading publication on financial and economic matters in the U. Daily Fluctuations 1. it will be observed that the share markets go through definite phases where the prices are consistently rising or falling.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. Dow. or sometimes even more.A. The theory derives its name from Charles H. The Dow Jones theory classifies the movement of the prices on the share market into three major categories: 1. Primary Movements 2. ideas have been expanded and articulated by many of his successors. If the long range behavior of market prices is seen. Although Dow never gave a proper shape to the theory. These phases are known as bull and bear phases. who established the Dow Jones & Co.S.
PORTFOLIO MANAGEMENT During a bull phase. the falls are of a lower magnitude then earlier. They rise for some time and after each rise.e. Once the prices have risen very high. It would be seen that prices are not falling consistently and. You would notice from the graph that although the prices fall after each rise. Graph 1 above shows the behavior of stock market prices in bull phase. However. Thus P2 is higher than P1 and T2 is higher than T1. On the contrary. However. 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. after each fall. the rise is not much as to take the prices higher than the previous peak. there is a rise in prices. price will start falling. if successive highs and low are successively lower. the bear phase in bound to start i. As can be seen from the graph that each trough prices reach. the market is on a 17 . they fall. the basic trend is that of rising prices. It states that if cyclical swings of stock market prices indices are successively higher. 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. This means that prices do not rise consistently even in a bull phase. The theory argues that primary movements indicate basic trends in the market. is at a higher level than the earlier one. the basic trend is that of rise in prices. As a result. Similarly. prices reach higher levels with each rise.. It means that each peak and trough is now lower than the previous peak and trough.
there is upward movement of prices also. 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. can make money only be sheer chance. even where the primary trend is downward. These fluctuations are the result of speculative factor. 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. This theory thus relies upon a behavior of the indices of share market prices in perceiving the trend in the market. there are also downward movements of prices. These movements are known as secondary movements and are shorter in duration and are opposite in direction to the primary movements. 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. this seldom happens. The investment manager should scrupulously keep away from the daily fluctuations of the market. Daily Movements: There are irregular fluctuations which occur every day in the market. 18 . It may be reiterated that anyone who tries to gain from short run fluctuations in the stock market. Such a temptation is always very attractive but must always be resisted. 3. However. Speculation is beyond the scope of the job of an investment manager. 2. Similarly. Even the most astute investment manager can never know when the highest peak or the lowest through have been reached. These fluctuations are without any definite trend. 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.PORTFOLIO MANAGEMENT downward trend and we are in bear market. Therefore. It means that he should be able to identify exactly when the falling or the rising trend has begun. An investment manger really is not interested in the short run fluctuations in share prices since he is not a speculator. Secondary Movements: We have seen that even when the primary trend is upward. He is not a speculator and should always resist the temptation of speculating. in practice.
by the stock market and separately disseminated. if all available information is free to all interested parties. Whenever a new price of information is received in the stock market. a stock is selling at Rs. independent pieces of information. 30 the next day. the market independently receives this information and it is independent and separate from all the other prices of information. The stock price further goes down to Rs. But the second fall in the price of a stock from Rs.” According to the Random Walk Theory. 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 news of a strike in that company will bring down the stock price to Rs. the first fall in stock price from Rs. For example. However. Therefore. 25. 30 to Rs. the market will be efficient and prices will fluctuate randomly. each price change is independent of the other because each information has been taken in. 25 is due to additional information on the type of strike. • 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.PORTFOLIO MANAGEMENT This is technically known as identification of the turn in the share market prices. and if all market participants and potential participants have the same horizons and expectations about prices. Identification of this turn is difficult in practice because of the fact that. Similarly even in a falling market prices keep on rising temporarily. 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. 30 is caused because of some information about the strike. Thus. 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. 40 based on existing information known to all investors. prices keep on falling as a part of the secondary movement. 19 . 40 to Rs. even in a rising market.
it may be said that the prices have an independent nature and therefore. It is due to the effective communication system through which information can be disturbed almost anywhere in the country. the price of each day is different. The response makes the movement of prices independent of each other.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. 20 . This speed of information determines the efficiency of the market. Thus. The theory further states that the financial markets are so competitive that there is immediate price adjustment.
PORTFOLIO MANAGEMENT Rules To Be Followed Before Investing In Portfolio i. journals and ledgers. we must remember that share market moves in phases and the span of each phase is 6 months to 5 years. gross profit. this hypothesis can be true of all other financial. ii. net profit before tax. it is futile to invest in such shares who’s daily movements cannot be kept track. 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. Compile the financials of the companies in the immediate past 3 years such as turn over. The higher the trading volume higher is liquidity and still higher the chance of speculation. dividend track record. compare the profit earning of company with that of the industry average nature of product manufacture service render and it future demand . if you want to reap rich returns keep investment over along horizon and it will offset the wild intra day trading fluctuation’s. 21 .reflects company’s commitment to share holders the relevant information can be accessed from the RDC(registrant of companies)published financial results financed quarters. the minor movement of scripts may be ignored. bonus shares in the past 3 to 5 years .know about the promoters and their back ground. iii.
yet stay in the capital market and make money .I. there fore in looked forward to resuming help from portfolio manager to do the job for him .update his knowledge. The portfolio manager carries out all the transactions pertaining to the investor under the power of attorney during the last two decades.E. the management or distribution or management of the funds of the client as the case may be. The portfolio management seeks to strike a balance between risk’s and return. The relation ship between an investor and portfolio manager is of a highly interactive nature. Portfolio management is not a substitute to the inherent risk’s associated with equity investment 22 .B. advices or directs or undertakes on behalf of the clients. 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 . in its guidelines prohibits portfolio managers to promise any return to investor. 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. to keep track of market movement . The generally rule in that greater risk more of the profits but S.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.
5lakh’s every for two years and Rs. 23 . etc.E. The manager has to submit periodical returns and documents as may be required by the SEBI from time-to. has imposed a number of obligations and a code of conduct on them. honesty and should not have been convicted of any economic offence or moral turpitude. The observance of the code of conduct and guidelines given by the S.time. their books of accounts are subject to inspection to inspection and audit by S. 50lakh’s.I. The portfolio manager should have a high standard of integrity. renewal fees per annum are Rs 75000.B. 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. are subject to inspection and penalties for violation are imposed.I. Fees payable for registration are Rs 2.B. He should not resort to rigging up of prices. From the fourth year onwards.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.B. The S.B.E.1lakh’s for the third year. The certificate once granted is valid for three years.E.E. These are subjected to change by the S.I.I. insider trading or creating false markets.
technical changes etc. Study of industry: He should study the industry to know its future prospects. their net worth future earnings. convertibles. debentures. 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. 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. review the existing ones. foreign exchange possible change in corporate law’s etc. money market. recommending high yield securities etc. identification of objectives. 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. budget proposal. prospectus and strength.PORTFOLIO MANAGEMENT Functions of Portfolio Managers Advisory Role: Advice new investments. yield and liquidity coupled with balanced risk techniques of portfolio management. 24 . Financial Analysis: He should evaluate the financial statement of company in order to understand. non-convertibles or partly convertibles. Conducting Market & Economic Service: This is essential for recommending good yielding securities they have to study the current fiscal policy. individual policies etc further portfolio manager should take in to account the credit policy. industrial growth.
rules it is mandatory for portfolio managers to get them self’s registered. According to S. now being managed by the portfolio of Merchant Bank’s.B. market trends. 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. Investor’s must look forward. helps the limited knowledge persons. Insider trader. for qualification and performance and ability and research base of the portfolio managers. The one’s who use to manage the funds of portfolio. 25 . Registered merchant bankers can act’s as portfolio managers.E.PORTFOLIO MANAGEMENT A portfolio manager in the Indian context has been Brokers (Big brokers) who on the basis of their experience.I.
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. He has felt the need of an expert guidance in this respect.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. 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 . investment in the securities of such companies has become quite attractive. Similarly non resident Indians are eager to make their investments in Indian 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. At the same time.
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. his records and his report to his clients should clearly indicate that such securities are held by him on behalf of his client. He shall not place his interest above those of his clients.PORTFOLIO MANAGEMENT Portfolio Manager’s Obligation: The portfolio manager has number of obligations towards his clients. He shall pay the money due and payable to a client forthwith. He shall not disclose to any person or any confidential information about his client. he shall not indulge in speculative transactions. He shall deploy the money received from his client for an investment purpose as soon as possible for that purpose. He shall not derive any direct or indirect benefit out of the client’s funds or securities. 27 . which has come to his knowledge. While dealing with his client’s funds. 1934. 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. 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. In such a case.
o Ensure that all professional dealings are affected in a prompt. o Render the best possible advice to his clients relating to his needs and the own professional skills. environment and his 28 . o Ensure that the investors are made aware of the attendant risks before any investment decision is made by them. 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.
2. after enquirya) b) Suspension of registration for a specific period. 29 . Defaults & Penalties: The following aspects must be kept in view: Liabilities for action in case of default. he shall be liable to any of the following penalties. Notifications etc.A portfolio manager is liable to penalties if he 1. Regulations guidelines. In such a case. • Shall provide necessary guidance to and ensure compliance internally by the portfolio manager of all Rules. government of India and other regulating authorities. its Rules and Regulations. • Shall ensure that observations made/ deficiencies pointed out by SEBI in the functioning of the portfolio manager do not recur. Fails to comply with any conditions subject to which certificate of registration has been granted. Contravenes any of the provisions of the SEBI act. issued by SEBI.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. Cancellation of registration.
that the objectives must be clearly defined before an investment decision is taken. it is a reward for waiting for money. The objectives of an investment portfolio are normally expressed in terms of risk and return. The ordinary units are meant to provide a steady return only. 30 . he can attempt the same by purchasing high risk shares. however. 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. As aggressive investment company may. risk and return have direct relationship. Savings of the people are invested in assets depending on their risk and return. There can be many objectives of making an investment. in which case there is high amount of risk that he may even lose his initial investment itself. It is obvious. It is on the basis of the objectives that a finance manager decides upon the type of investment to be purchased. Higher the return that one wishes to have from the investment portfolio. if one wishes to double his investment in one year.PORTFOLIO MANAGEMENT Introduction to Investment Meaning of Investment: The concept of investment has many meanings. will invest the moneys of the trust in different kinds of shares and securities. Investment is the employment of funds with the aim of getting return on it. It is the commitment of funds which have been saved from current consumption with the hope that some benefits will receive in future. As already mentioned. higher could be the risk that one has to take. The investment manager. 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. therefore. under both the schemes. be willing to take high risk in order to have high capital appreciation. Thus. 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.
units. 31 . the next decision is to decide upon the kind of investment which should be purchased. convertible bonds. i. debentures. For example there was a time when jute industry was in great favor with the investors because of its growth potential and high profitability.e. 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. However. Government securities and bonds. It is important to recognize that at a particular point of time. What should be the proportion of investment in fixed interest dividend securities and variable dividend bearing securities? Obviously. with the fall in profitability and the advent of substitute products. Once industries with high growth potential have been identified. preference shares. capital. equity shares. 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. 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. the next step is to select the particular industries. a particular industry may have a better growth potential than other industries. In case investments are to be made in shares and debentures of companies. at this point to time. considered as growth oriented industry and the likelihood of appreciation in the value of these shares is not considered to be high. the jute industry is no longer. units etc.PORTFOLIO MANAGEMENT • Selection of Investment: Having defined the objective of investment portfolio. in whose shares and securities investments are to be made.
the timing of investment decisions is crucial. • Investment Strategy: Portfolio management can be practiced by following either an active or passive strategy. Active strategy is carried out as follows: 1. The risk is high and the composition of portfolio is flexible. Aggressive security management: Aggressive purchasing and selling of securities to achieve high yields from dividend interest and capital gains. The objective is to include in the portfolio a large number of securities so as to reduce risks specific to individual securities. the prices are rising consistently and sometimes in a bear phase. On the other hand the stocks could be randomly selected on the assumption of a perfectly efficient market. Active strategy is based on the assumption that it is possible to beat the market. 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. Thus. there is no significant trend of rise of fall in prices. Speculation and short term trading: The objective is to gain capital profits. The passive strategy does not aim at outperforming the market. and at other times stagnant. Investments are to be purchased at a time when prices are low and sold at a time when prices are high. 32 . if an investment manager wishes to make the most profitable use of the investment opportunities.PORTFOLIO MANAGEMENT • Timing of Investment Decisions: As we have seen earlier.e.e. 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. i. weight age of various securities in the portfolio and individual share selection. This requires identification of bullish and bearish trends in the prices of stocks in the share market. Success of active strategy depends on correct decisions as regard the timing of movement in the market as a whole. 2. he will have to make sales and purchases of investments at proper times. Unlike the active strategy. i. i. the prices are falling consistently.e.
The strategy can be implemented by investing in securities so as to duplicate the portfolio of a market index which is called indexing. Risk has a definite financial meaning. An investment can be distinguished from speculation in three ways – Risk. It is a possibility of incurring a loss in a financial transaction. often without regard for the safety of his invested principal. They are based on tips. speculative investments are not carefully thought out decisions. Long Term Investment Horizon 2. Investment involves longer term allocation of funds whereas speculation involves holding a security for a short term and trading quickly for earning higher gain. and rumors. He indulges in a bit of speculation. Thus. Investment involves putting money into an asset which is not necessarily marketable in order to enjoy a series of returns. speculation involves buying a security at low price and selling at a high price to make a capital gain. in which a person assumes high risks. are carefully thought out decisions. “The time span in which the gain is sought to be made is usually very short. The investor sacrifices some money today in anticipation a financial return in future. However. • Investment & Speculation: “Speculation is an activity. 33 . Genuine investment. Capital gain and time period. it does not mean that all investments are speculative by nature. 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. There is an element of speculation involves in all investment decisions. Little Portfolio Revisions Thus it is basically a buy and hold strategy. On the other hand. Investment involves limited risk while speculation is considered as an investment of funds with high risk. to achieve large capital gain. quite contrary to its literal meaning.PORTFOLIO MANAGEMENT The characteristics of positive strategy are: 1.
characteristics of the industry within which the company falls and the national and international economic scene. 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 may be noted that an industry may not remain a growth industry foe all the time.PORTFOLIO MANAGEMENT Speculation involves a higher level of risk and a more uncertain expectation of returns. 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. • 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. 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. 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. In other words. 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. These factors generally relate to the strengths and weakness of the company under consideration. 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. • 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 would assess the various factors which influence the value of a particular share. Two approaches are suggested in this regard.
The following factors may particularly be kept in mind while assessing to factors relating to an industry. 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. • Profitability: The cost structure of an industry as related to its sale price is an important consideration. This approach is known as the intrinsic value approach. since profit is both a measure of performance as well as source of earning of him. • 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. This would reflect the future growth prospects of the industry. This would give him an idea about the profitability of the industry as a whole. maturity or saturation and decline. an appraisal of the particular industry’s prospects of the industry to which it belongs. If an industry has already reached the saturation or decline stage. These are introduction. In this. As we have discussed earlier. It is obvious that profitability in an industry is a vital consideration for the investor. Industry Analysis: First of all. may analyze. cost structure of the industry and other economic and Government constraints on the same. In order to know the future volume and the value of the output in the next ten years or so. 35 . the profitability ratios. In India there are many industries which have a growth potential on account of good demand position. Chambers of Commerce and institutions like NCAER. etc… Management experts identify five stages in the life of an industry. development. therefore. The investment manager. rapid growth. the investment manager will have to rely on the various demand forecasts made by various agencies like the planning commission. both qualitative and quantitative factors are to be considered. specially return on investment. its future demand potential is not likely to be high. an assessment will have to be made regarding all the conditions and factors relating to demand of the particular product. gross profit ratio and net profit ratio of existing companies in the industry.PORTFOLIO MANAGEMENT and weigh the various factors and judge the quality of the share or the security under consideration.
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 net profits. • Size and ranking: A rough idea regarding the size and ranking of the company within the economy. In this regard the net capital employed. would help the investment manager in assessing the risk associated with the company. Such cycles or fluctuations in earnings must be carefully studied. • 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. Once the industry’s characteristics have been analyzed and certain industries with growth potential identified. However. An illustrative list of factors which help the analyst in taking the investment decision is given below. the investment manager has to visualize the performance of the company in future by analyzing its past performance. the return 36 . For example. and the industry. see whether the industry under analysis has been maintaining a cordial relationship between labour and management. The investment manager should. therefore. Before purchasing the shares of the company. relevant information must be collected and properly analyzed. in general. certain industries have a fast changing technology. in particular. it must be emphasized that the past performance and information is relevant only to the extent it indicates the future trends. which must be studied in depth in order to understand their impact on the working of the industry. Hence. It is obvious that in such industries technological obsolescence will take place at a fast rate. Similarly many other industries are characterized by high rates of profits and losses in alternate years. Company Analysis: To select a company for investment purpose a number of qualitative factors have to be seen.PORTFOLIO MANAGEMENT • Particular characteristics of the industry: Each industry has its own characteristics.
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 plans of the company. net income. this is not so in practice due to many factors. This requires the analysis of the existing capacities and their utilization. Hence. However. The nature of technology of a company should be seen with reference to technological developments in the concerned fields. 37 . its shares cannot be rated high from the investment point of view.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. It may also be useful to assess the position of the company in terms of technical know how. • Growth record: The growth in sales. proposed expansion and diversification plans and the nature of the company’s technology. in terms of expansion or diversification. the possibility of its product being superseded of the possibility of emergence of more effective method of manufacturing. The existing capacity utilization levels can be known from the quantitative information given in the published profit and loss accounts of the company. An evaluation of future growth prospects of the company should be carefully made. and (c) percentage growth rate of net block. Growth is the single most important factor in company analysis foe the purpose of investment management. A company may have a good record of profits and performance in the past. Theoretically. net capital employed and earnings per share of the company in the past few years must be examined. The following three growth indicators may be particularly looked into (a) price earning ratio (b) percentage growth rate of earnings per annum. but if it does not have growth potential. this ratio should be same for two companies with similar features. research and development activity and price leadership. 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. 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.
For this purpose certain fundamental ratios have to be calculated. etc. These ratios will provide an overall view of the company to the investment analyst. 38 . 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. the operating efficiency and operating leverages of the company. its policy vis-à-vis its relationship with the investors.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 confidence that the investors have in a particular business house. The return on owner’s investment. 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. liquidity ratio. Yet it has a very important bearing on the value of the shares. price earnings ratios. operating efficiency and turnover efficiency of the company may also be calculated. the investment manager may work out current ratio. the efficiency with which the funds are used. book value and the intrinsic value of the share. Various other ratios to measure profitability. the profitability. the most important figures are earnings per share. This is because of the quality of management. From the investment point of view. To examine the financial solvency or liquidity of the company. debt equity ratio. 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. dividend and financial performance record of other companies in the same group. He can analyze its strengths and weakness and see whether it is worth the risk or not. etc. yield. • Quality of Management: This is an intangible factor. capital turnover ratio and the cost structure ratios may also be worked out. 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.
In the past few years. could receive certain amount as compensation in cash. skill and integrity of the persons at the helm of the affairs of the company. who wish to opt out. • Pattern of Existing Stock Holding: An analysis of the pattern of the existing stock holdings of the company would also be relevant. 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. Nearness to market is also a factor to be considered. This would show the stake of various parties in 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. When the bank was nationalized. who wished to out of the company.PORTFOLIO MANAGEMENT Quality of management has to be seen with reference to the experience. skilled labour and raw materials etc. • Marketability of the Shares: Another important consideration for an investment manager is the marketability of the shares of the company. 39 . of institutional investors that the compensation offered to the share holders. Mere listing of the share on the stock exchange does not automatically mean that the share can be sold or purchased at will. It was only at the instance and the bargaining strength. the residual company proposed a scheme whereby those shareholders. was raised considerably. • 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. 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.
In this regard.PORTFOLIO MANAGEMENT There are many shares which remain inactive for long periods with no transactions being affected. the investor is expected to decide whether he should buy or sell the securities. To purchase or sell such scrips is a difficult task. It included an analysis of the macro economic and political factors which will have an impact on the performance of the firm. The other relevant factors are the speculative interest in the particular scrip. the particular stock exchange where it is traded and the volume of trading. dispersal of share holding with special reference to the extent of public holding should be seen. 40 . After having analyzed all the relevant information about the company and its relative strength vis-à-vis other firm in the industry. 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.
These services are offered across our network of over 240 offices across the country. (ii) Investment Advisory. • Wealth Management: Portfolio Management Services. advisory. The business activities undertaken by HIDL through its subsidiaries include (i) Securities Broking. which include providing personalized investment management services including planning. (iv) Portfolio Management Services and (v) Securities related financing (NBFC). • Retail Broking: Equities & Derivatives.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. Broadly the retail services are divided into two broad categories. (iii) Distribution of financial products. Mutual Funds. IPOs. 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. 41 . Retail Business: Retail offerings of HSBC InvestDirect seek to cover all financial planning requirements of individuals. execution and monitoring of the full range of investment services.
financial About HSBC Group: Headquartered in London. the Americas. formerly known as IL&FS Investsmart Limited is one of India’s leading companies in the financial services industry. the Asia-Pacific region. Portfolio Management Services (PMS): Accelerating your investments When it comes to investing your hard earned money. HSBC's international network comprises around 8. The shares are traded on the New York Stock Exchange in the form of American Depositary Receipts. New York. shares in HSBC Holdings plc are held by around 220. HSBC provides a comprehensive range of financial services: personal financial services. In short. HSBC is one of the largest banking and financial services organizations in the world. one of the world’s largest banking and services organizations. The company is now held by the HSBC Group. commercial banking. Through an international network linked by advanced technology.PORTFOLIO MANAGEMENT Promoters: HSBC InvestDirect (India) Limited. With listings on the London. Hong Kong.000 shareholders in 119 countries and territories. corporate. the Middle East and Africa. and other activities. you need to partner with someone you trust.500 offices in 86 countries and territories in Europe. investment banking and markets. 42 . including a rapidly growing ecommerce capability. private banking. You need someone who can guide you through the complex maze of investment options with unbiased advice. one who will make your money work hard. Paris and Bermuda stock exchanges. experts who will understand your needs and help you reach your financial goals.
The primary objective of iPreserve is to manage investments in Mutual funds. Managing one’s investments has become nearly a full-time affair that requires considerable time and expertise. But managing your own investments can be an extremely challenging task. Balanced investment strategy aimed at both. a Discretionary Portfolio Management Service. assessing the impact of socio-economic changes on your investments. Risk Type High Risk Moderate Risk Low Risk Details Pure Growth oriented investment strategy aimed at wealth creation. Anticipating market trends. We offer a choice of two types of PMS schemes: iPreserve is a discretionary investment management scheme.PORTFOLIO MANAGEMENT Financial markets today offer enormous growth potential. 43 . capital appreciation and preservation. encompassing both debt as well as equity schemes. Conservative investment strategy aimed toward capital preservation plus some more. offering investment solutions in Mutual Funds that are aligned to suit your financial goals. Features: Investors have a choice of five schemes based on investor risk profile – High / Moderate / Low. About HISL-PMS Options: Every investor is unique and has unique investment preferences and risk appetites. 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. keeping abreast of latest corporate developments and financial analysis all adds up.
• Part Withdrawal is allowed only twice in a year. • Partial withdrawal * Load for withdrawal after first year (full/part Nil withdrawal) * For Partial Withdrawal. (first year) • Complete withdrawal 0.5% on the amount withdrawn. 1 lakh or more Rs. 44 . Convenience of investing in multiple funds through a single product. 5 lakhs Rs. Product Features: Details Minimum portfolio value Additional investments Account Maintenance fees Billing frequency Rs. Investment Strategy: • • • Adopt Model portfolios to guide investments across products. 1.PORTFOLIO MANAGEMENT Benefits: • • • No management fee charged for managing the funds Asset allocation as per the client risk profile. Adequate diversification with an aim to optimize risk-adjusted returns.000 p.a on monthly folio values.a At the end of the year or termination whichever is earlier iPreserve Exit Load for withdrawal before expiry of one year 1% p. following rules are applicable. Proactive management of funds.
• • PORTFOLIO MANAGEMENT Amount should be more than Rs. Features & Benefits: Investors have a choice of three schemes based on investor risk profile . iGrowth is a discretionary portfolio management scheme focusing on investments in equities and derivatives with an objective of growth.High / Moderate / Low. 1 lac. • Medium Risk: Combines growth/value styles of investing in long-term growth opportunities across sectors and market caps. Minimum account balance after such withdrawal should be more than the threshold limit of Rs. 45 . cyclical factors within sectors and technical factors. It aims at creating long-term wealth through judicious stock selection and asset allocation. • Low Risk: Endeavors to minimize risk and yet offer stable and modest returns. 10 lacs. relative under-valuations. through judicious mix of defensive stocks. Expect higher portfolio turnover. Emphasizes on quality of businesses and pricing. • High Risk: Dynamically managed product to capture medium term upsides from attractive business profiles.
Complete withdrawal . Minimum balance after such withdrawal should be more than the threshold limit of Rs.PORTFOLIO MANAGEMENT Investment Strategy: • Adopt Model Portfolios to guide investments across products.5% on amount withdrawn Nil 1. Portfolio composition of 20-30 stocks to provide sharper sector focus while providing adequate diversification.If fully withdrawn before 1 yea Billing frequency 2% p.5% on the portfolio value 1.a on monthly Plan B Rs. Amount should be more than Rs. 10 lakhs. • • Bottom-up approach to stock picking. 1 lakh or more Part A -1% p.a on monthly portfolio values (billed on quarterly basis) PLUS Part B . 1 lakh. • • • Part Withdrawal can be done only twice a year. 10 lakhs Rs.5% on amount withdrawn Nil * For Partial Withdrawal.Partial withdrawal* Load for withdrawal after first year (full/ part withdrawal) Monthly Portfolio Values 1. 1 lakh or more 2% p.yearly or date of termination whichever is earlier Geometric Mean Method .a on monthly At the end of each quarter Calculations based on Load for withdrawal before expiry of one year (first year) . 46 .15% annual performance linked fee to be charged over 8% returns same as above for Part A. following rules applicable.5% on the portfolio value 1. 10 lakhs Rs. • Product Features: Details Minimum portfolio values Additional investments PMS fees Normal Plan A Rs. Domestic market focus with a global perspective.Quarterly for Part B .
Debentures 5. It means how much to invest in stocks? How much to invest in bonds? And how much to keep in cash reserves? Thus. PSU bonds 47 . the asset allocation decision is the most important determinant of investment performance. While selecting the assets the portfolio manager has to make asset allocation. bonds and cash. individual investors should concentrate on the allocation of their money among stocks. (a) Security Selection: This means identifying groups of securities in each asset class and decides the optimal portfolio. Asset allocation means different things to different people. Once a portfolio is selected the next step is the selection of the specific assets to be included in the portfolio. Assets in this respect means group of security or type of investment. The portfolio manager has to complete the following stages before making asset allocation. Asset Allocation: In order to achieve long term success. Preference Shares 4. Equity shares-old issues 3. To achieve this objective. the investor should look where the best bargains lie. The following are the different asset classes: 1.PORTFOLIO MANAGEMENT Assets Allocation: Introduction: The portfolio manager has to invest in these securities that form the optimal portfolio. Equity shares-new issues 2. The basic long term objective of any investor should be to maximize his real overall return on initial investment after investment. It is the process of dividing the funds among different asset class portfolios.
One is technical analysis and the other is fundamental analysis. Charts are drawn to identify price movements of a given security over a period of time. This is a tricky job which needs efficiency of high caliber. It is essential that every security be viewed in a portfolio context. 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. Government Securities 7. These charts enable us to predict the future movement of the security. the amounts invested in each security should also be important.PORTFOLIO MANAGEMENT 6. Therefore. Moreover. There are two approaches to the selection of equity portfolio. It is logical that the expected return of a portfolio should depend on the expected return of each of the security contained in it. 48 . All financial and market information of given security is already reflected in the market price. the portfolio manager has to keep in mind the following factors while making asset allocation and design an efficient portfolio. Technical analysis assumes that the price of a stock depends on supply and demand in the capital market. 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.
Non-diversible risk arises from the influence of economy wide factors which affect returns of all companies. such risk can be diversified by including stocks of other companies in the portfolio. Diversification: Investing funds in a single security is advisable only if the security’s performance is rewarding. Portfolio risk can be divided into two groups.B High risk (Shares) `````````````````````````````````````` A Medium (Debent) Risk O Risk free (Bank Deposits) X 49 . Often investors tend to buy or sell securities on casual tips. Diversification means shifting form one security to another security. government policies etc… an efficient portfolio manager can obviously give more weight to fundamental analysis than technical analysis. Y C -------------------------------------. or to follow others.diversible risk and non-diversible risk. sudden impulse. 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. 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. past and present track record of the company.PORTFOLIO MANAGEMENT The fundamental analysis includes the study of ratio analysis. Hence. quality of management. prevailing mood in the market. The maximum benefits of risk reduction can be achieved by just having of 10 to 15 carefully selected securities. investors cannot avoid the risk arising from them. Diversible risk arises from company’s specific factors. To reduce risk of a portfolio investors resort to diversification.
whereas in debentures and insurance people interested in investing are 8% and 6% respectively 50 . 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. There may be a combination of A.PORTFOLIO MANAGEMENT We can observe from the above diagram that the strategy of an investor should be at A. Out of the total surveyed most of the people are interested in investing into banks (42%). In case of mutual funds people interested in investing are 12%. This diversification can help to minimize risk and maximum the returns. B or C respectively. depending upon his preferences and income requirements. The risk can be reduced by a proper diversification of scripts in the portfolio. On the other hand people interested in investing in shares are 32%. but the market risk is outside his control. If he takes some risk at B or C. the risk can be reduced if it is concerned with a specific company risk.
51 . b) People belonging to income class of 8000-12000 are also interested in Banks & Insurance but less in shares. banks & debentures. c) People belonging to income class of 12000-20000 are equally interested in shares and debentures but less interested in Mutual Funds. people belonging to income class of less than 8000 and those belonging to income class of 8000-12000 are very much interested in banking. d) People belonging to income class of more than 20000 are more interested in shares and less in insurance.PORTFOLIO MANAGEMENT a) Out of the 50 people surveyed.
More weight age is given to security aspect i. 42%.e.e. while second consideration is given to the return that one gets from the investment i. 13%. the third consideration is given to the tax saving i.e. 12% and the last consideration is the reputation of the concern i. 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.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. what factors do people consider while making the investment decision. 52 . 33%. But the portfolio manager takes the decision of investment only after studying the past performance and the future prospects of the company.e. 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.
UTI US 2002 (Balanced) 12. UTI Children’s Career Plan (Special Scheme for Children) 9. UTI Mahila Unit Scheme (Balanced) 7. UTI Liquid fund 5. UTI Monthly Income Scheme (Predominantly debt) 6. UTI G-Sec fund (Debt) 2. UTI bond fund (Debt) 3.PORTFOLIO MANAGEMENT The schemes offered by UTI mutual fund are namely: 1. UTI Money Market Fund (Liquid) 4. UTI CRTS-81 13. UTI Master Index Fund (Equity-Index) 14. UTI Retirement Benefit Plan (Balanced-with Income Tax Benefit) 10. UTI US 95 (Balanced) 11. UTI ULIP (Balanced with Income Tax) 8. UTI Index Select Fund (Equity Index Actively Managed) 53 . UTI Nifty Index Fund (Equity Index) 15.
UTI Equity Tax Saving Plan (Equity with Income Tax Benefit) 25. Auto Sector. Banking Sector. 54 . Petro. 24. Basic Industries. UTI MNC Fund 29. UTI Primary Equity fund (Equity) 23. UTI Master Value Fund (Equity-Value Stocks) 18. UTI Thematic Funds – Large Cap. UTI Master gain (Equity) 20.PORTFOLIO MANAGEMENT 16. UTI Variable Investment Schemes (Equity-Asset Allocation) 26. SUNDER 27. UTI Master Plus (Equity) 22. Pharma. UTI Unit Scheme 92 28. Brand (Equity Sector Fund) 30. UTI Master Equity Plan Unit Scheme. UTI Grandmaster (Equity) 19. Services. UTI Growth Sectors fund software. UTI Master growth (Equity) 21. PSU fund. Mid Cap. UTI Master share 86 17.
00% • Asset Allocation: G-S : 34% EC CAS & EQUIVAL H ENT : 1% COR DEB : 65% P.62% 14. T 55 . which invests in rates corporate debt papers and government securities with relatively low risk and easy liquidity.16% 5. Portfolio composition as on 31st March. 2009 Security GOI Securities Banks Housing and Finance companies NBFC’s Manufacturing and other companies Securitized Papers Total Percentage of Total 33.24% 13.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.23% 100.47% 5.73% 27.
Crores) 2. Portfolio composition as on 31st March.40% 100.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.5 56 . 2009 Security GOI Securities Corporate Debt Equity Net Current Assets Total Fund Size Percentage of NAV 24.81 2.48% 25. 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.00% Market Value (Rs.12 11.99 3.98% 31.58 2.14% 18.
2009 Percentage of NAV Equity 34.00% Security 57 . Investment by an individual in the scheme is eligible for exemption under section 88 of the IT Act 1961. In addition the scheme also offers life insurance and accident insurance cover.42% Bonds 35.92% Net Current Assets 16.09% Total 100. Portfolio composition as on 31st March.57% Central Government Securities 13.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.
a means to receive scholarship to meet the cost of higher education and or to help them in setting up a profession.24% 100.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. Portfolio composition as on 31st March.16 58 . after they attain the age of 18 years.00% Market Value (Rs.97% 43.95% 40.79% 4. Crores) 132.19 51.32 1210. Investment can be made in the name of the children up to the age of 15 years so as to provide them.79 531. 2009 Security GOI Securities Debt Equity Net Current Assets Total Fund Size Percentage of NAV 10.85 494. practice or business or enabling them to set up a home or finance the cost of other social obligation.
01 137.09 20. This ensures to provide pension to investors particularly self-employed persons after they attain the age of 58 years. Crores) 21.50 149. Portfolio composition as on 31st March. 2009 Security GOI Securities Corporate Debt Top Equity Holdings Net Current Assets Total Percentage of NAV 6.38 59 .55% 45.79 328.75% 6.00% Market Value (Rs.33% 100. in the form of periodical cash flow up to the extent of repurchase value of their holding through systematic withdrawal plan.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 .
52.21 167885.23 As on 31.49.61 4.12 216.07 185676.03.03.79.12.47.78 Investment outside India 1.PORTFOLIO MANAGEMENT Investments As on 31. Subsidiaries and /or joint 202. Subsidiaries and /or joint 15874.56 ventures 6.94. Others 1436.05 debentures) 3512.42 381.48 TOTAL 181684.03.32.26.26.29 4527.26.61 1189.94 172347.44 3864.38 1282.2008 (Previous Year) 143727. Shares 4194.60.12 2.93.38 TOTAL GRAND TOTAL 3992.36.2009 (Current Year) Investment in India 1.28 4462. Debentures and Bonds 901.48.38.59.72 Conclusion: 61 .188.8.131.52. Other investments (Shares and 276.17 992.90. Govt. Government Securities 157738.75 5.60 ventures abroad 3.85 16166. Other Approved Securities 3.29. Securities 2.94 1538.73.
Appendix Questionnaire 62 . 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. 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. Portfolio managers can provide the professional advice to the investors to make an intelligent and informed investment.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 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 .
P.Y.utiwms. Jain Investment Analysis and Portfolio Management by Prasanna Chandra http://www.sbimf.indiatimes. Khan .com/ http://www.com/Aboutus/financials/Schemes_annual_report_2008-2009.com/ http://www.PORTFOLIO MANAGEMENT Management Accounting and Financial Analysis by M.K.com/ 64 .pdf http://www.economictimes.