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CHAPTER I INTRODUCTION
The study of portfolio management : The objective of this thesis is to learn ways to manage one’s money so as to derive maximum benefit from what one earns. To accomplish one needs to know about the investment alternatives that are available today. And what is more important is to develop a way of analyzing and thinking about Investments that will remain with you in the years ahead when new and different investment opportunities become available. The anlysis involves the examination of past performance, present conditions and future prospectus. Many changes have occurred in the securities markets during the last few years in terms of theory, new financial instruments and trading practices. There have been a lot of developments in private sector mutual funds. As Investors today are more aware of the advantages of a good Investment Portfolio, they also find out more and more information on the Investment options. A lay Investor may not understand the techniques of the investment market, he may be aware of the potentialities of planning, of tax planning and right investment decisions to make money. The study of portfolio (investment) management is necessary for the financial manager as well as the investor.
Section I :
Includes Introduction to the concept of portfolio management, its
definition, objectives. Also on the construction of a portfolio and the risk and return associated with portfolio.
Section II : Includes the details on the current Investment options, its benefits and the risk involved with each option.
Section III : Includes the Investiments for NRI’s and FII’s. There are certain norms or guidelines by SEBI which have been covered in this section.
Section IV : This concluding section covers the evaluation of performance of a portfolio and certain Investment tips for good investment.
CHAPTER II OVERVIEW TO PORTFOLIO MANAGEMENT
For most of our life, you will be earning and spending money. Rarely though, will your current money income exactly balance with your consumption desires. These imbalances
will lead one to either to borrow or to save to maximize the benefits from one’s income. But one has to only save money under the mattress then after years the money got back is the same amount of money which is saved. But if one has to invest this savings in a proper form then in future larger sums of money would be available. The investor who gives up Rs 100 will expect atleast Rs 150 in return. 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 be received in the future. Investors include individuals with surplus funds, which they desire to invest for short or long term period with safety and fair returns. Various avenues of Investments are available. Every avenue has certain advantages and disadvantages. Some investment avenues provide maximum safety but low returns whereas some provide maximum returns but low safety. One of the major advances in the investment field over the past decade has been the recognition that the creation of an optimum investment portfolio is not simply a matter of combining a lot of unique individual securities that have desirable risk-return characteristics. But it has been seen that to build an optimum portfolio one has to keep in mind as to what is his portfolio objectives.
MEANING OF PORTFOLIO MANAGEMENT
Portfolio means combined holding of many kinds of financial securities i.e. shares, debentures, government bonds, units and other financial assets. The object of portfolio is to reduce risk by diversification and maximise gains. Portfolio management means selection of securities and constant shifting of the portfolio in the light of varying attractiveness of the constituents of the portfolio. The Modern Portfolio theory quantifies relationship between risk and return and assumes that an investor must be compensated for assuming risk. Basic portfolio theory was originated by Harry Markowitz (Nobel Prizewinner) in the early 1950’s. While investors before then knew intuitively that it was smart to diversify
(i.e. don’t "put all your eggs in one basket.") Markowitz was among the first to attempt to quantify risk and demonstrate quantitatively why and how portfolio diversification works to reduce risk for investors. He was also the first to establish the concept of an "efficient portfolio". An efficient portfolio is one which has the smallest attainable portfolio risk for a given level of expected return (or the largest expected return for a given level of risk). The process for establishing an optimal (or efficient) portfolio generally uses historical measures. Historical measures are used as a proxy for expected future returns which may or may not be true, particularly over the short term.
MODERN PORTFOLIO THEORY
The 4 basic steps in Modern Portfolio Management are :
Security Valuation : That is identifying assets in terms of their expected risk and expected returns. Asset Allocation Decision : It means deciding how assets are to be allocated to various classes on investments. Portfolio Optimization : It is achieving the best returns for a particular level of risk by choosing selected investments avenues. Performance Measurements : It is analysing each assets performance into marketrelated and industry or individual share related risk.
OBJECTIVES OF PORTFOLIO MANAGEMENT:
The basic objective of portfolio management is to maximise yield and minimise risk. The objective of holding any financial asset is to earn ensured return. But any investment has its associated risk/probability of yielding return. The other objectives are as follows: 1) STABILITY OF INCOME
In order to provide safety a careful review of economic and industry trends is necessary. which provides a very large capital appreciation by way of rights. it is most commonly applied to asset classes. Even investor wants that his basic amount of investment should remain safe. yield and other returns. He also considers the stability of purchasing power of income. The portfolio should contain a planned proportion of high grade and readily saleable investment. 2) CAPITAL GROWTH Capital appreciation has become an important investment principle. In other words errors in portfolio are unavoidable and it requires extensive diversification. 3) LIQUIDITY An investment is a liquid asst. An investment programme without considering tax implications may be costly to the investor. 4) SAFETY Safety means protection for investment against loss under reasonably variations. EFFICIENT PORFOLIO ALSO NEEDS : Asset Allocation While this process can be performed on any portfolio with two or more assets. It can be converted into cash with the help of a stock exchange. tax implications. The portfolio manager has to keep a list of such investment avenues along with the return risk. 5) TAX INCENTIVES: Investors try to minimize their tax liabilities from the investments. 5 . profile. Each asset class will generally have different levels of return and risk. Asset allocation is the process of allocating funds to each asset class. bonus and appreciation in the market price of a share. Investment should be liquid as well as marketable.An investor considers stability of income from his investment. Investors seek growth stocks.
Assets. risk (standard deviation of returns) and correlation coefficients data. will act rationally in making decisions and make decisions based on maximising their return for the level of risk that is acceptable 6 . Optimal Portfolios By computer processing the returns. which have a correlation coefficient of -1. It assumes they dislike risk and like returns. The higher the standard deviation. Risk (Standard Deviation or Returns) The Standard Deviation of (historical) returns is probably the most common measure of the risk of listed securities and portfolios. For a value of +1 they are perfectly positively correlated. Assumptions Modern portfolio theory makes some assumptions about investors.Correlation Coefficient Correlation coefficient is a measure of the degree to which two assets (or investments) move together. the more uncertain the outcome over any period. it is possible to establish a number of portfolios for varying levels of return. The value of the correlation coefficient ranges from -1 to +1. It is a statistical measure which measures the variability of returns (about the mean or average). Returns Total return is a measure of the combined income and capital gain (or loss) from an investment. their values move simultaneously in opposite directions and magnitude. each having the least amount of risk achievable from the asset classes included.
INTERIOR DECORATING APPROACH 7 .CHAPTER II PORTFOLIO CONSTRUCTION Portfolio construction means determining the actual composition of portfolio. The different approaches to portfolio construction are : 1. Portfolio construction requires the knowledge of the different aspects of securities.
An individual investor ahs to carefully develop his portfolio over a period of years to suit his needs and match his investment objectives. The investor will have to consider the following important categories of investment opportunities : • • • • • Protective investment Tax oriented investments Fixed income investments Speculative investments Growth investments Emotional investments With the help of these varieties of investment we can develop a matrix for matching the individual characteristics of specific investment so that a suitable portfolio can be developed for each investor. It is the process of combining assets that are less than perfectly positively correlated in order to reduce portfolio risk without sacrificing portfolio returns. 8 . The main purpose is to locate a minimum variance portfolio. The portfolio will consist of the securities which will suit the investment objectives. MARKOWITZ APPROACH This approach provides a systematic search for optimal portfolio. It enables the investors to locate minimum variance portfolio that is portfolios with the least amount of risk for different levels of expected returns.2. MARKOWITZ APPROACH INTERIOR DECORATING APPROACH : Is tailor made to the investment objectives and constraints of each investor.
Portfolio analysis considers the determination of future risks and return in holding various blends of individual securities. Portfolio expected return is a weighted average of the expected return of individual securities but portfolio variance in sharp contrast can be something less that a weighted average of security variance. As a result an investor can sometimes reduce portfolio risk by adding another security with greater individual risk than any other security in a portfolio.CHAPTER III RISK AND RETURN Portfolio analysis begins where security analysis ends and this fact has been very important for investors. 9 .
Instead of measuring the probability of a number of different possible outcomes the measure of risk should somehow estimate the extent to which the actual outcome is likely to diverge from the expected. The dispersion of possible returns represents risk. Low dividend i. The greater the dispersion on an investment the greater is the risk. Very few investors do this instead investors should diversify that is include more than one security in their portfolio. It simply follows that investor who wants the greatest possible expected return should hold one security the one which is considered to have the greatest expected return. Since portfolio is expected return is a weighted average of the expected returns of its securities the contribution of each securities to the portfolio expected returns depends on its expected return and its proportionate share of the initial portfolio market value. dividend lower than banks fixed deposits rates Stagnation in the price of shares Insolvency of the company. In order to estimate the total risk of a portfolio of assets several estimates are needed the variance of each individual asset under consideration for inclusion in the portfolio and the covariance or correlation coefficient of each asset with each of the other assets. That is a loss. 10 . The risk that equity shares can carry are : • • • • Loss of dividend when no dividend is declared. Under conditions of risk investors realise that there is a range of possible returns and can associate some probability to each possible return. It is logical then that the amounts invested in each security should be important.e.A portfolio is a selection of securities since it is rarely desirable to invest the entire fund of an individual in a single security it is essential that every security be viewed in a portfolio context. Between the two extremes of investment certainty and investment uncertainty lies the area of investment risk. Risk Of all possible questions which the investor may ask the most important one is concerned with the probability of actual yield being less than zero.
As price rise the purchasing power of a rupee falls and the real return on an investment may fall even though the normal return in current rupee rises. If interest rates rises bond values will fall 11 .TYPES OF RISK DEFAULT RISK It is the risk of issuer of investment going bankrupt. Internal business risk is associated with the efficiency with which a firm conducts its operations. The principal determinants of a firm’s business risk are the variability of sales and it’s operating leverage. An investor who purchases shares or debentures will have to place the possibility of default and bankruptcy of the company. The company may fall on financial grounds if its capital structure tends to make earnings unstable. The likelihood of a company defaulting on its debt servicing obligations is known as financial risk. which is beyond its control. PURCHASING POWER RISK It is the variation of real returns on the security caused by inflation. Business risk can be divided into two categories External and Internal External business risk is the result of operating conditions imposed upon the firm. RATE RISK The earnings of companies and their performance of the shares are sensitive to interest rate changes. Inflation reduces the purchasing power of money. The return on an investment after adjusting for inflation is known as real rate of return. The prices of debt securities and all other securities with fixed payout are dependent on the level of market interest rate. FINANCIAL RISK It is a function of the company’s capital structure of financial leverage. Financial leverage is the percentage change in net earnings for a given result from the use of debt financing in the capital structure. When the operating profits fall the company will have to pay large interest payments and the net profit will fall even more. BUSINESS RISK Is the risk of a particular business failing and thereby the investment is lost.
Investor invests their funds to make a profit. can be defined in the following manner: r = Where r p0 = p1 = ( p1 .p0 + d1 ) / p0 x 100 = Expected rate of return from the investment Market price at time 0 Market price at time 1 12 . Return therefore. bonus. Again such returns can be realised and not realised (notional) at the time of gain analysis. MARKET RISKS The market risk means the variability in the rates of return caused by the markets upswings or downswings. This is generally indicated as a percentage return on the initial amount invested. When an investor wants to sell a stock he is concerned with his liquidity whereas when an investor wants to buy a stock he is interested in its availability. In a security market liquidity risk is a function of the marketability of the security. etc. which is more or less equal to previous price. which is known as a return. Some securities are quite sensitive to changes in the market and has a high degree of market risk while others fluctuate very little while the market changes. capital appreciation. But when market interest rates rises the bond rate rises and vice versa. It is caused by investor reaction to tangible as well as intangible events in market. LIQUIDITY RISK It arises from the inability to convert an investment quickly into cash. A stock may be regarded as not easily available and the purchaser has to wait for quite some time to buy it at a price.the return on other types of securities also depends upon interest rates. From an investor’s point of view expected return includes gains in terms of dividend / interest. RETURN The return means the profit earned on the capital invested in the business. and such returns are always measured for a given period of time.
which may be realised or notional. RISK . Some quantity of risk is always associated with it. Flow of return and capital appreciation from an investment can not be forecasted with cent percent certainty. PORTFOLIO RISK 13 . Risk and return are an important concept in investment. It takes into account risk aversion. To measure the rate of return an investor wants to know 3 items • • • The period of time that the measurement covers The net profit of the investment over the time period The amount needed to establish and maintain the investment The final component of return is usually the purchase price if the security. MEASURES OF RETURN Return can be measured as a rate of return on capital invested.RETURN RELATIONSHIP Risk and return are probably the two main concerns of investors. Debentures and fixed deposits with companies are not risk free although their returns are higher. Government bonds are free from insolvency risk and their returns are also lowest. Thus investment with higher risk level should have higher risk level.d1 = Cash Dividend for period 1 Thus return to an investor during a given period is the sum total of cashflows by way of dividend/interest. and change in the value of investment. The relationship between the two for and investment is that the investors will want some more return from investments that have greater risk. The actual flow of return may vary both in positive and negative ways from what is the expectation. Equity shares carry the highest risk \their returns can also be high from dividend as well as bonus.
Modern portfolio theory believes in the maximization of return through a combination of securities. 14 . The key to the amount of risk reduction that diversification can achieve is he degree of correlation of returns on the security and the returns on the existing portfolio. Modern Portfolio theory states that by combining a security of low risk with another security of high-risk success can be achieved by an investor. It determines the relationship between different securities and then draw interrelationship of risk between them. Although the expected return for a portfolio is an average of the individual securities return a portfolio risk can be less than the average of it’s the risk of its component securities.
SECTION II INVESTMENT AVENUES CHAPTER I 15 .
Balanced schemes also have a decent track record.75-9. property. However.25 (%) Tax aspect Taxable Taxable Taxable Tax free Taxable Tax free Funds Medium (Debt) * Returns are based on past data Mutual Funds still hold a promise. However. lack of awareness. randomly. Property prices have crashed and hence investment into the same is no longer a very rewarding proposition.INVESTMENT AVENUES IN CURRENT ECONOMY The current economic scene has brought investors to a great deal of confusion. life insurance have been traditionally the investment avenues in India. However this is not entirely true. The conventional instruments like Gold have waned as their importance have come down and returns have been negligible. but more due to a wrong approach. Gold. This has been on account of the risk being associated with equity investing. Also.50 12-15 8. the investment avenues suddenly seem to have dried down. India has a skewed pattern of investment with only 4% of the savings being diverted towards the equity market. Income funds have generated excellent returns over the past one year of around 1618%. equity and private insurance. In the past year. Mutual Funds have become the favorite whipping boys of investors. with the fall in stock markets. you get lower returns and vice versa. Though the equity funds have 16 . The various investment avenues and their returns are given in the table below – Instrument Gold Property Bank Deposit Insurance Corporate Deposits Mutual Safety High High High High Low Liquidity High Low Medium Low Medium High Returns 5-20 Variable 9-11 9. Investors must focus into finding out Solutions for carrying out their investment rather than making investment into any product. As you go to find greater safety. bank deposits. this may not be true. lack of professional counseling. mutual funds. Investment opportunities are also available in the form of corporate deposits.
which has been largely ignored by Indians. whereas the Indian Investors have not looked at it that way. Given the current scenario equity offers the most exciting investment opportunity over the long term. Some reasons for the same are explained here. Nasdaq. Equities offer big scope.lost quite a bit over the past one year in line with the stock market trend. India’s market cap to GDP ratio is towards the lower end when compared with the other equity markets in the world. Innovative products. it may not be entirely correct. Onset of Private Insurance. Dow Jones and the Sensex are at their trough with the sensex touching its 8 year lows recently. Firstly. Country USA Japan Germany France China India South Korea (fig of April 2001) Market cap in US $ GDP $ billion billion 16635 4546 1432 1475 330 184 308 8351 4078 2079 1427 980 442 397 Market Cap to GDP ratio (%) 200 111 70 103 33 42 77 The market cap to GDP ratio of current times for India would be below 30% as the rates have plummeted further thereafter. offer superior returns over the long term. Another good avenue of investment. An interesting thing to observe is the average of sensex over the 17 . a few of the diversified funds have still managed a positive return since inception. There is a sense of disillusionment for making equity investment. which have been launched by the private insurance companies. It can be very easily ascertained from this that other countries in the world have looked at Capital Market very positively for doing growth. The common investor has been disenchanted with equity investments over the past one year given the persistent losses. is insurance Currently only 10% of the total disposable income among Indians goes towards insurance when the ideal allocation should be close to 30%. Secondly. However.
For eg. Reddy’s. equities are also capable of delivering returns over the medium to short term.64% 1.last eleven years. Gujarat Gas. Sun Pharma. Company Brittania Cipla Dr. Risk goes down if you have a long-term investment ability.79% of Mkt 18 .98% 1.64% 3. It has also been seen that in equities risk diminishes as the holding period increases. Select Companies have outperformed in worst times. strong companies. The myth that equity investment means losses can be proved wrong by investing in good. and 1 to 3 years also.73% 9. as per an Economist Survey of Equity returns worldwide.00% 5. currently the sensex is 24% lower than in 1991.31% 1. Going by such an average of the high/low movements. Some bluechips have provided returns despite all odds over the last six-seven years. Blue Dart have appreciated in medium to short term time span of 6 months.52% 5. Reddy’s Infosys Wipro Reliance Zee HLL HDFC Returns per year Holding period 1 5 10 15 20 Minimum -59 8 12 13 12 Maximum 159 36 25 22 18 Current Market Cap Rs crs 1350 7200 7200 15500 22000 24240 3198 43910 7854 Returns % CAGR Share 1995-2000 22 22 41 31 49 11 35 25 32 Cap 0. If investments are made carefully. Companies like Cipla. Historically it has been seen that if one invests in fundamentally good companies. 30% lower than in 1995 and 33% lower than in 1998. one gets good returns over the long term. HDFC. Dr.51% 0.
The fixed-income markets are generally less risky (smaller price fluctuations) than the stock markets – but reduced risk historically has meant you will give up something in longterm returns. for example. can give an investor access to a diversified portfolio of securities that would be difficult for most individuals to attain through direct investment. Let us look at the basic aspects of this debt instrument. which could result in additional capital gains for many bond and bond fund investors.CHAPTER II INVESTMENT AVENUES COMPANY BONDS A bond is an investment option that pays its holder. quarterly or even monthly. There is no guarantee. The period can be short term or long term and interest inflow to you can be annual. BOND FUNDS A bond fund. interest rates would probably fall further. but should the economy and job market slow. interest for a pre-determined period of time at a rate and frequency fixed at the time of its issue. like a stock fund. Like stocks. Past performance is no guarantee of future results. Through a bond fund. individual investors typically gain access to bonds of denominations that may otherwise be out of their price range as well as 'institutional vehicles' – investments often unavailable to the general public – at reasonable prices. Individual bonds are designed to repay principal at maturity while bond funds maintain 19 . total returns in bonds comprise regular income and capital gains. Bonds usually stress interest income. while stocks rely more heavily on capital gains. half-yearly.
and short-term funds. at periodic intervals of time. Basics of bonds Bond is a negotiable IOU or a loan. Ideally. The reverse is true of low-risk shortmaturity funds. long-maturity funds get good grades in bull markets and bad grades in bear markets. a government or another financial institution. mortgages. pay attention to the discount. interest to the investors. The issuer typically promises to pay. The issuer borrows the money for a specific time period. And when buying a closed-end bond fund.an average maturity and thus have no fixed maturity. after all. corporate bonds. you want a taxable closed-end bond fund to have a discount at least 12 times its expense ratio—only ten qualify. The rate at which the interest is paid is known as the coupon of the bond. can goose up its yield by taking big risks with your money. The Bond Fund invests in a diversified portfolio consisting of government securities. you should pay more attention to the expense ratio than the yield. The grades tell you something about how risky a portfolio is. Issuer can be a corporation. Bond coupons can be fixed or floating. When buying a bond fund. High-risk. Investors who buy bonds are lending a specific sum of money (principal amount) to the issuer of the bond. A fund. 20 . This fund's return is largely affected by changes in interest rates. also known as the tenor of the bond.
Settlement date Maturity date 21 . The day on which the bond will mature.Frequently used terms . to The return which accrues to the holder of the bond.Bond investing Face value Coupon Tenor Frequency Yield maturity The principal amount for which the bond is issued. The interest rate which the bond is going to pay the investor. including any capital appreciation or loss and regular coupon payments. The time period for which the bond/debt will remain outstanding The periodicity with which the coupon payments will be made to the holder of the bond. The date by which the seller expects the payment for the bond. if the bond is held to maturity.
of a Bond is the price at which a bond is originally issued. specifying a fixed period. The amount is also referred to as par value or maturity value. Bonds issued by financial institutions and blueshall look at liquidity of bonds in more detail later.e. This is the lue of a bond is the amount that the issuer agrees to repay you. on recognized stock exchanges. usually redeemed at face value. An exception is the money multiplier bond where the issue price is at o (i. lesser than) the face value. An interest rate of 15% on a face value of ies that an annual return of Rs. the rate of interest and a greater liquidity when accompanied by the facilities of premature redemption cy of its payment.15 will be paid to you on every bond you hold. Between a Bond and a fixed deposit d. there are regular income bonds and so on. ate have reasonable liquidity on the exchanges and offer you entry and exit 22 . Thus. unlike bonds. the bondholder. returned to the issuer. a Fixed Deposit ssued to you by the institution. A distinct advantage of bonds is the wide spectrum of need-based choices they offer. It is on this date that you can expect to get your aid on bonds until they are redeemed i. at which interest on the bond is linked. If you are looking for regular income. Original Investment known as the maturity date. However.of a Bond date. for a fixed deposit in a company. bank or financial institution. the issue price is the face value. fixed deposits are always unsecured. though a premium may be payable in certain d is redeemed. The redemption estment back. accumulated interest will be paid separately at the time of redemption. Normally. you will receive a payment that will comprise the face value and d interest as applicable.e.
23 . mat) • Treasury notes (upto yr. * These bonds compensate the holder through a yield to maturity.A different animal * These bonds DO NOT PAY ANY interest to the bondholder. which is higher than that of bonds with similar maturities. * The bonds are quoted at a price which is HEAVILY discounted to face value. This ensures that the holder is compensated through capital appreciation in the value of the bond. mat) Corporate Bonds * Bonds which are issued by various companies with varying quality and in various maturities * Maturities range from 1 year to more than 10 years * Most corporate bonds are assigned a letter coded rating issued by agencies like Moody’s Investor Service and S and P * Corporate bonds with low rating or no rating are called high yield bonds since these bonds compensate investors for the higher risk with higher returns • Zero Coupon Bonds . Mat) 10 Treasury bonds (greater than 10 yr. TYPES OF BONDS • US treasuries * Treasury securities are issued by the US treasury and are fully backed by the full faith of the US government * Market prices of these securities are NOT guaranteed and fluctuate daily * Interest paid on these securities is usually exempt from state and local income taxes * US treasury securities come in three forms namely : Treasury bills (upto 1 yr.In the next article we shall examine what are the factors you should look at before Investing in a bond.
* The credit quality reflects the ability of the issuer to pay periodic interest as well as repay principal amount borrowed upon maturity. there is a yield to call calculation which calculates the yield replacing maturity date with the call date. * To compensate investors for the risk that bonds may be called back. a low credit rating demands a higher yield and a high credit rating demands a lower yield. it is clearly mentioned in the bond’s prospectus. in addition to the yield to maturity. Why bonds ? Principal protection if invested in high quality paper if held to maturity Periodic interest/coupon payments to manage short term cash flows Reduces risk across a diversified portfolio Attractive yields which compensate for lower fixed deposit rates Potential for capital appreciation through fluctuation in price of bond Rating of Bonds * Ratings are assigned by independent bond rating agencies like Moody’s Investors Service or Standard and Poor’s Corporation. The two techniques are as follows namely : 24 . * Emerging market debt is considered speculative and commands a higher yield. * Ratings reflect the credit quality of the bond. * Callable bonds are redeemed when interest rates fall to a level which enables the issuer to money by issuing new bonds at lower interest rates. save * If there is a call option on a bond. * Usually.• Callable Bonds * Certain bonds have provisions which allow the issuer of the bond to call or redeem the bond prior to its maturity date. callable bonds tend to pay higher coupons as compared with other bonds with similar maturities and credit ratings. Computation of return on Bonds There are two popular techniques used to compute returns on bonds. for callable bonds.
a rise in interest rates leads to a fall in bond prices. we have a bond which pays 6% versus a bond which pays 7% both valued at Rs1000. For example. 1998. the bond pays the holder Rs 3 every six months. bonds with longer maturities are more likely to express volatility than their short term counterparts keeping other factors constant.How to compute and why ? On bonds which pay periodic coupons. you will find that bonds which are issued for longer tenors are likely to carry a HIGHER yield than bonds with short tenors. Maturity The maturity of the bond also impacts the price of the bond. there is an element of accrued interest which must be accounted for accrued interest represents the interest due to the seller of the bond for the time the bond was held between the last coupon date and the settlement date for the sale.This method should be used to compare bonds with similar maturities. This is because bonds with long term maturities are more prone to interest rate change risks which in turn leads to price volatility. hence. However. Factors which affect bond prices/YTM Interest Rates : It is imperative to understand the relationship between interest rate movement and bond prices. If interest rates rise to 7%. a fall in interest rates leads to a rise in bond prices.Current yield . Consider a bond with face value of Rs1000 paying a coupon of 6% annually. To compensate for the lower yield. Suppose that the coupon dates are Jan 01. Accrued interest . 25 . the bond at 6% will become attractive if the price drops below current price !!. if a bond pays 6% semi annually on a face value of Rs100.. The relationship is inverse. The YTM reflects the interest received as well as any capital appreciation or loss which the holder incurs by holding the bond. 1998 and July 1. In general. the weakness in this technique is that it does not include the possibility of any capital appreciation or loss and does not include reinvestment of dividend earned through periodic coupon payments Yield to maturity .This is nothing but the annual coupon interest divided by the market price of the bond.The reverse happens when interest rates fall.
banks pay between 6. the interest on FDs is calculated every quarter. 1998.5 % 4. Duration helps to measure the interest rate sensitivity of a bond. with different tenures carrying different rates. if Sameer Kaul buys the bond with settlement date as March 15. can be determined with the help of the duration of the bond.0 % Interest Rates Decrease 0. A tenure that gives you a 10% interest with one bank might only fetch 9% in another. The change in the price of a bond. 1998.0 X 0. Interest Rates Increase 0.0 X 0. 1998 till March 15. Sameer Kaul will get the entire interest from Jan 01 1998 to July 01 1998.25% and 10% as interest on FDs. there are three factors you should consider regarding interest rate on fixed deposits. Secondly. Currently.5 + 0. So in the first place. DURATION OF THE BOND The duration of a bond helps to answer the question “ When will I effectively receive my initial investment in the bond “. he has to pay the seller interest on the bond from Jan 01. given the change in interest rates. You have a choice of asking the bank to credit it to your savings or current account every quarter or add it to 26 . There are a few factors that one must check thoroughly to get the maximum benefits out of a bank FD. Accrued interest is not taken into account when we compute yield to maturities. remember.Now. This is because on July 01. Interest Rate: Basically. you have to choose a bank that pays high interest for a term of your choice.2. 1998.5 % 4.5 .2 % 4 year Duration Change in rate Percentage change in bond price --------------------------------------------------------------------------------------------------------------------------------- FIXED DEPOSITS A fixed deposit (FD) with a bank is a relatively safe investment.
if a bank offers 8% for 1 year but 9% for a term between 1 and 2 years. by keeping a deposit for one more day.000-9. At the same time. you might get a higher return. the mandatory TDS limit of Rs. then your total taxable income becomes (1. 1. Then the bank will not cut any TDS from the deposit. If the deposit is in a corporate name.000. For example. you can open a fixed deposit for any length of time above 15 days even for one year and one day to take advantage of the interest rate structure Tax Deduction At Source : Interest income from bank deposits is exempt from tax up to Rs. if your interest income will exceed Rs. For example.4% (including surcharge).50. if your total taxable income is Rs. So.000) or Rs. 9.2% (including surcharge). 5.000 a year applies not to a bank but to a bank's branch. if one informs the bank that they do not have tax liability at all then one needs to furnish to the bank a form called `15H' . banks are obliged to deduct tax at source on deposits that fetch more than Rs. 5. the tax deduction at source (TDS) is calculated at 20. you will get the benefit of compounding. try and distribute the cluster of deposits among a few branches of the same bank.the sum you have deposited. if the interest income from a bank deposit is above Rs.000 a year but below Rs. If you prefer accumulation rather than periodical withdrawal. 5. 9.000. if you can help it. All this effectively means that generally.41. However. If an individual holding a deposit.000 per year under Section 80 L of Income Tax Act. Remember.000 from a branch. 27 .000 out of which the interest income from bank deposits is Rs. Technically. 1.000 per year. the bank has to deduct tax at source (TDS) at the rate of 10. go for a 13 months' deposit that will fetch you 9% (unless you need the money exactly after 12 months). 5. then one can claim the refund for the TDS deducted when filing returns. Thirdly. This will save you the hassle of having to collect refunds from the IT department. 20. more specifically to all the deposits held in a particular branch.50.000 (the tax exemption limit).
Premature Withdrawal Facility
Till about three years ago, banks levied a uniform 2% penalty on premature withdrawal of deposits. It worked like this. If one has to break a two-year deposit that fetched you a 10% return in say, seven months, one would get the rate applicable for seven months (say, 7%) less 2% (that makes it 5%). The Reserve Bank of India (RBI) has now left it to the bank's discretion to levy a penalty. Most banks levy a 1% premature withdrawal penalty on the applicable rate. The other option is to take a loan on the deposit (you can take up to 75% of your deposit as a loan) than by withdrawing before maturity. On the loan too, which will be for the remaining tenure of the deposit, you will pay interest that is 2% above the rate you are getting.
SENIOR CITIZENS DEPOSITS SCHEMES
Most banks today, are offering senior citizens interest rates of 0.5-1 percent higher on fixed deposit schemes than they offer to the others. Some banks like Global Trust, Karnataka and Saraswat bank have launched special schemes where apart from high rates on fixed deposits, they also offer some add-ons like, free demand drafts and loans at concessional rates against fixed deposits. The recent scam in the US - 64 scheme of UTI has added to the woes of the ordinary citizen. In addition, there has been an all round slashing in the PPF and NSC rates by 11.5 percent. The special schemes and higher rates on fixed deposits come handy at a time when the avenues of where to invest money have become very few for the risk wary investor. Most banks ask for some proof of age for senior citizens and this could range from a passport copy, a pension payment order, school leaving certificate, voter identity card, driving license, LIC policy, ration card or age certificate issued by the chief medical officer of the district. SOME OF THE SCHEMES OFFERED ARE:
Monthly interest facility on deposits provided the amount of deposit is Rs 10,000 and above with a minimum period of one year. Two remittance/drafts per calendar month up to an aggregate amount of Rs 10,000 are permitted free of bank charges to any centre where the bank has a branch to the senior citizens who maintains an aggregate deposit of Rs 25,000 and above in the same branch.
It also offers immediate credit of local/outstation cheques up to Rs 7,500 to those senior citizens whose accounts are satisfactorily operated. Interest rates up to 0.75 percent per annum extra on senior citizens' deposits. This higher rate of interest is applicable to term deposit, reinvestment deposit, flexi unit deposit and recurring deposit products of the bank.
• • • • • • • • •
One can choose an investment from a period ranging from 15 days to 10 years. It also offers the facility of opening a savings account without the minimum balance stipulation. So you can transfer your interest earnings into this account. A structured monthly income plan can also be designed to meet your needs. Door step service for account opening Free MyTime Card and 2424 phone banking 3 free personal demand drafts per month (only for SB account) Free collection of outstation cheques drawn on branch locations Concessional interest rates for demand loans/overdraft against own deposit In case the senior citizen wishes to avail a loan the bank is offering a 100 percent loan against your fixed deposit, at an interest rate of one percent over your fixed deposit rate.
Changes In Rates Over the past few months some banks have slashed interest rates on fixed deposits while others have kept them constant. For example, State Bank of India, has cut the rates it is offering on fixed deposits of 1-2 years maturity by 0.5 percent to 9 percent from 9.5 percent and for 2-3 years deposits to
9.5 percent from 10 percent. However, some banks like Centurion Bank continues to offer a high rate of 11.25 percent on there deposit schemes for over one year deposits. Some of the other private banks offering good rates to senior citizens are Global Trust bank and IndusInd bank, both offering 10.75 percent on fixed deposits over one year. Karnataka Bank is also offering a good rate of 10.5 percent for deposits between 1-3 years and 11 percent for deposits over three years. The latest rates for senior citizens in the table given below. FIXED DEPOSIT INTEREST RATES FOR SENIOR CITIZENS
Bank's Name State Bank of India Centurion Bank Canara Bank Global Trust Bank Punjab National Bank IndusInd Bank Bank of Baroda Allahabad Bank Karnataka Bank ICICI Bank Saraswat bank Min Amt(Rs) 10,000 1,000 1,000 5,000 1,000 10,000 NA Any Amt NA NA 10,000 6m-1 yr NA 10.5 8% 10.25% 7.50% 9.25-9.75% 7.50% 8.50% 9.50% 8% NA 1-2 yrs 9% 11.25% 9% 10.5-10.75% 9% 10.75% 9.25% 9% 10.50% 8.50% 11% 2-3 yrs 9.50% 11.25% 9.50% 10.75% 9.50% 10.75% 9.75% 9.50% 10.50% 8.50% 10% Over 3 yrs 9.75% 11.25% 10% 10.75% 9.75% 10.75% 9.25% 10.00% 11% 9% 10%
The TDS Rules According to the changes in tax liabilities brought about by the 2001-2002 Union Budget, TDS will apply to all interest earnings above Rs 5,000 on fixed deposits from June 1, 2001, compared with the earlier R s 10,000 limit. This limit of Rs 5,000 is applicable for every branch of a bank. What this means, is that if your interest earnings on fixed deposits exceeds Rs 5,000 in any branch of any bank, a TDS at the rate of 10 percent will be deducted from the excess amount. If you take an average interest rate of nine percent per annum on one year fixed deposits, it is advised not to keep a sum of over Rs 50,000 as fixed deposit in any branch of a bank. This TDS obligation is applicable to senior citizens as well, until and unless they can supply the bank with the Form 15 H, which states that their income is below the taxable income slab of Rs 50,000.
PUBLIC PROVIDENT FUND (PPF)
Provident funds are the third largest investors in this market. They have to invest 25% of their incremental deposits in Govt. dated securities, 15% in State Govt. . securities, 40% in PSU bonds and they can invest a maximum of 10% of their incremental deposits in rated private sector debt instruments. Apart from these statutory instruments, these instruments provide these institutions with fairly good assured returns coupled with negligible risk. PPF is one of the attractive tax sheltered investment schemes for middle class and salaried persons. This scheme was introduced in 1969 and has been improved from time to time. A PPF account can be opened at any SBI or any nationalized banks. It can be opened by an individual or HUF. The PPF account is for a period of 15 years and it can be extended for 5 more years. The depositor is expected to make a minimum deposit of RS 100 every year. In addition money can be deposited once every month. The maximum permissible deposit per year is RS 60,000. The investment in PPF account must be made out of taxable income and not out of borrowed funds. The PPF account is not transferable, but nomination facility is allowed. The deposit in the PPF account are qualified for tax rebate under the income-tax act i.e. 20% of investments made. The balance in a PPF account is fully exempted from the wealth tax. A compound interest of 11% p.a. is paid in the case of PPF account. This interest is accumulated in the PPF account and this income is also exempted from tax payment. The depositor to a PPF account is eligible for one withdrawal per financial year after five years from the end of the year in which the subscription is made. It is limited to 50% of the balance at the end of the fourth year.
It is an example of mutual fund wherein savings of individuals are pooled together for safe and profitable investment with the help of professional experts. Income tax exemption is available to the income from UTI 6. Reasonably high rate of dividend 5. Its activities are fast expanding during this period. It plays an important role in bringing industrial development and also in raising the rate of capital formation in the country. Wide choice is given to the investor while investing his savings 32 .000 crores through various open ended and close ended investment schemes. The basic objective of UTI is to encourage savings habit in the society and to pool the savings of the people for secured and profitable investments. Benefit of profitable and diversified investment. withdrawal facility an exemption from income tax. 2.On maturity the credit balance in the PPF account can be withdrawn by the depositor. 3. Limited risk in the investment as UTI operates in the public sector. Advantages Of UTI Scheme 1. UTI as an investment intermediary was established on February 1st 1964 and has completed more than 36 years of its operations. Due to these special advantages such as attractive interest rates. --------------------------------------------------------------------------------------------------------------------------------- UTI SCHEME The Unit Trust of India is the first investment institution started in the public sector in India. It has mobilised more than Rs 15. Benefits of professional management as regards investments. 4. UTI is the single largest investor in the Indian stock market and it provides financial support to Indian industry. The number of unit holding accounts now exceed 2 crores. At present the PPF scheme is the most attractive avenue for investment t in the case of tax payers. UTI also aims at providing the benefit of diversified investment and expert management to investors.
Investment in UTI is possible at nay time by purchasing different types of units. Thus after. The benefit of capital appreciation is available to investors. The UTI occupies a unique position among the mutual funds as it commands ¾ of the mutual fund industry in India. tax saving schemes and so on. --------------------------------------------------------------------------------------------------------------------------------- PUBLIC DEPOSITS / COMPANY DEPOSITS In order to meet temporary financial needs companies accept short term deposits from the investors such deposits are called public deposits / company deposits and are very 33 . Prompt and satisfactory service to investors who are quite large (more than two crores) 8. It also gives the investor instant liquidity of funds. 9.7. The scheme introduced by UTI includes open ended scheme which gives the investor complete flexibility with regard to its investment as he can invest or de-invest any amount at any time. Small investors are interested in securing the benefits of diversified investment by purchasing shares and other corporate securities. The other scheme is close ended scheme which ahs a fixed corpus and operates for a fixed duration at the end of which the entire corpus is dis-invested and proceeds distributed to unit holders in proportion to their holdings. Close-ended schemes include pure growth schemes. They however avoid making direct investment in such securities due to lack of knowledge skills and experience. Therefore they to enter stock exchange through UTI. There is no upper limit of investment in UTI. Units of UTI are easily acceptable by banks for granting loans. 10. The popularity of UTI is a clear indication of the changing prospective of Indian investors who wish to enter the stock market but feel safer using mutual funds as a vehicle for such entry. the scheme ceases to exist. UTI provides reinvestment facilities of dividend income earned by the investors.
Many companies are now supplementing their fixed deposit scheme by cumulative time deposit scheme. The purpose 34 . Companies offer attractive interest rates on such deposits ranging from 10% to 12%. 4. 3. Such restrictions are as per the companies amendment rules 1978. On maturity the depositor has to return the deposit receipt to the company and the company pays back the amount deposited. These interests are payable on monthly. the interest is paid regularly to depositors. Companies appoint share brokers to help them collect such deposits and look after the administrative work in connection with such deposits.popular among the middle class investors. six monthly yearly or on cumulative basis. Shareholders of the company are paid half more interest when they offer such deposits. Under which the deposited amount along with interest is paid back in lumpsum on maturity. Public deposits / company deposits enable the companies to trade on equity and pay higher dividends on equity shares. Advantages Of Public Deposits / Company Deposits 1. in such case he has to submit a fresh application to the company. 2. The depositor can renew his deposit for a period of 1 – 3 years. This method of financing is simple and cheaper than obtaining loans from banks. The depositors receive an attractive interest on their deposits. 5. The formalities to be completed for depositing money are easy and simple there is no deduction of tax at source where interest does not exceed a particular limit. 3 years. At present along with private sector companies public sector companies and public utilities are accepting such deposits in order to meet their working capital needs. quarterly. Public deposits / company deposits are available easily and quickly it involves limited formalities for the company and the interest investor. Public deposits / company deposits refer to the deposits accepted from the investing class for a certain period minimum 1 year and max. In India various restriction are now imposed on the public deposits / company deposits by the RBI. Some incentives are offered on accepting money. investors are also interested as they get interest at a higher rate in comparison to rates offered by banks.
commercial premises. Marketability 3. Liquidity 5.behind imposing restrictions is to see that bank deposits are not adversely affected. A residential home or building represents the most attractive real estate property for large majority of investors. farmhouses. Exemption from tax ----------------------------------------------------------------------------------------------------------- INVESTMENT IN REAL ESTATE / PROPERTIES Investment in real estate / properties include buildings. agricultural land near cities and so on. Interest rates 4. Restrictions are also necessary for the protection and safety of investors. Such properties attract the attention of affluent investors. Sometimes the property is not sold for 20 – 30 years but the resale price is normally attractive and the owner can recover 4 times or more of the price paid. Such restrictions are also necessary in order to support public borrowing programs of the Government and for the healthy growth of the Indian capital market. There is a capital appreciation of residential building particularly in the urban areas. It is attractive for the following reason: • • Ownership – of a residential house provides owned accommodation and a useful family asset with saleable value. industrial land. plantations. They purchase such properties at low prices and do not sell the same unless there is a substantial increase in the market price. Security 2. Also documentation formalities are lengthy and costly. 35 . It may be noted that liquidity in the case of such properties is limited as quick sale is neither possible nor profitable. While selecting a company special attention should be given to the following 5 factors: 1.
cash dividend is declared after few months of the closing of accounts. at the same time if there is a reduction in the declared dividend it will be taken as a sign of expected trouble in the future. When a firm declares a regular dividend investors accept the declaration as a sign of continued normal operations. The stock dividend allows the firm to declare a dividend without using up cash that 36 . The dividend paid to each cash shareholder depends on the number of shares held by him and the amount of dividend declared by the company. Interest from such loans is tax deductible within certain limits. Cash dividend A large majority of dividend is payable by cash normally cash dividend is paid out of the current years net profit. This has effect of increasing the number of shares of the firm. construction or renovation of a owned residential building. Large majority of middle and low class people prefer to have own residential accommodation as it gives convenience and also acts as a profitable investment in the case of need. The equity shares holders generally prefer to receive steady dividend that is a certain amount of fixed cash each year as they make advance commitments of investments.• • • Loans are available from different agencies like banks. for buying. DIVIDEND INCOME Dividend is that portion of earnings that is paid to equity shareholders. Dividend stability that is whether dividend remains fixed or fluctuates from period to period is a sign whether the company is doing well or not. Wealth tax benefit is available in the case of residential building as the value is reckoned at its historical cost and not at its present market price. HDFC. Stock dividend (Bonus shares) A stock dividend occurs when the board of directors authorise a distribution of bonus shares to existing stockholders.
As the returns to the holders are discretionary the corporation is under much less compulsion to pay preference dividends than to pay bond interest because Preference shares is merely given the right to receive its specific dividend before any dividends are paid on the equity. It’s also an indication of higher future profits. It is hybrid because it combines some of the characteristics of debt and some of equity. i. In the investment practice. however Preference share is basically a weak corporate security as it has the limitation of bonds with few of the advantages. the margin of safety 37 . In fact some of the disadvantages of the Preference shares can be offset if following qualifications of a well performed Preference shares are taken care of : • • It must meet all the minimum requirements of a safe bond It must exceed these minimum requirements by a certain added margin to offset the discretionary feature in the payment of dividends. Preference shares do have however certain preferences which makes it similar to bonds since both bonds and Preference shares usually have 1) a limited return and 2) a prior claim on assets and income of the corporation. Legally a Preference share represents a position of the ownership of the company and thus is shown in the balance sheet with the equity shares as making up the capital stock or equity interest. It does not enjoy strong legal position of a bond when the corporation is required to pay return to the investor and refund the principal amount at maturity.e.may be needed for operations or expansions. ----------------------------------------------------------------------------------------------------------- PREFERENCE SHARE VALUATION AND ANALYSIS : Preference shares are a hybrid security that is not heavily utilised by corporations as a means of raising capital. If the regular cash dividend is continued after an extra stock dividend is declared the shareholders will receive an increase in cash dividend in the future.
Convertible Convertible Preference share means that the owner has the right to exchange a Preference share for a share of equity share of the same company. There are times when conversion is determined on the basis of par value. which means that any dividend not paid by the company accumulates. Participating Preference Shares Most Preference shares are non participating meaning that the preference shareholder receives only his stated dividend and no more.must be so large that the directors may always be expected to declare the dividend as a matter of course. As in the case of bonds sometimes the number of shares of equity are given. Dividends Preference shares have dividend provision which are either cumulative or non cumulative. FEATURES OF PERFERENCE SHARES The features of Preference shares like those of bonds cover a wide range. Corporation financial managers usually emphasize one or the other set of features while issuing them. These unpaid dividends are know as dividends in arrears or arrearages. Most shares have the cumulative provisions. They merely divide the annual dividend payment by the current market price to calculate this yield as follows CURRENT YIELD = ANNUAL DIVIDEND 38 . Normally the firm must pay these unpaid dividends prior to the payment of dividends on the common stock. Each individual Preference share will vary as to the features it includes. Preference Share Yield :When Preference shares do not have a maturity date the investors use the current yield to measure the return available from dividends.
The total yield or yields to maturity may be substantial over a period of time. Limited Liability In corporate form of organisation. Main Advantages Of Equity Shares Are Listed Below: Potential For Profit The potential for profit is greater in equity shares than in any other investment security. In bankruptcy equity holders are in principle entitled only to assets remaining after al prior claimants have been satisfied. 39 . They are not further liable for any failure on the part of the corporation to meet its obligation. Shareholders may lose their investment but no more. Equity share is usually fully paid. It is a residual claim in the sense that creditors and Preference shareholders must be paid as scheduled before equity shareholders can receive any payment. they receive certificates of ownership as proof of their being part owners of the company. shares tend to be less attractive and prices tend to be depressed. Current dividend yield may be low but potential of capital gain is great. Hedge Against Inflation The equity shares is a good hedge against inflation though it does not fully compensate for the declining purchasing power as it is subject to the money rate risk. But. Thus. when interest rates are high. risk is highest with equity shares and so must be its expected return. When investors buy equity shares.MARKET PRICE ----------------------------------------------------------------------------------------------------------- EQUITY SHARE VALUATION AND ANALYSIS : Equity represents an ownership position in a corporation. its owners have generally limited liability. The certificate states the number of shares purchased and their par value.
2. The buyer should ensure that the issuing corporation transfers the owner on its books so that dividends voting rights and other privileges will accrue to the new owner Shares In The Growth The major advantage of investment in equity shares is its ability to increase in value by sharing in the growth of company profits over the long run.SOME COMMON QUESTIONS ANSWERED 1. INVESTMENT IN SHARES . What type of instruments are traded in stock exchanges? The following type of instruments are traded in stock exchanges (a) Equity Shares (b) Preference shares (c) Debentures (d) Bonds and (e) Units of Mutual funds. Buy and Sell orders from the brokers reach the central computer located at NSE and are matched by the computer. 3. What is Stock Market Index? How does one read of the index? 40 .Free Transferability The owner of shares has the right to transfer his interest to someone else.based trading the brokers can trade from their offices wherever they are located. When stock exchanges go in for screen. They are connected from their work stations To the central computer located at the Exchange via. Tax Advantages Equity shares also offer tax advantages to the investor. thereby eliminating the need for physical trading floors. The larger yield on equity shares results from an increase in principal or capital gains which are taxed at lower rate than other incomes in most of the countries. What is electronic trading ? NSE was the first introduce in India fully automated screen based trading. Satellite using VSATs (Very Small Aperture Terminals).
Each stock will given a weight in the index equivalent to its market capitalization. Many of these registered brokers have authorised and registered sub-brokers. 7. If your problem does not get resolved satisfactorily by the sub-broker you should approach the main broker and he would be legally bound to redress your problem.The index is market capitalization weighted index comprising scientifically selected stocks having the highest liquidity and largest market capitalization. 4. What is contract note? Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client. How do I deal with a registered sub-broker? You should send your request for purchase or sale of securities. the main broker has to take complete responsibility for your transaction. The index value compares the day's market capitalization vis a vis base capitalization and indicates how prices in general have moved over a period of time. Will a small investor who deals through a sub-broker get bounced back and forth between the broker and the registered sub-broker in case of a problem ? Several measures have been put in the place to tightly couple the broker/sub-broker relationship. The purchase/sale note would help in resolving any disputes with the sub-brokers. You should execute your deal through a SEBI registered sub-broker. 5. 6. A contract note is issued in the prescribed format and manner and it establishes a 41 . This purchase/sale note originates from the contract note which is issued by the main broker to the sub-broker. The sub-broker on executing your order provides you with a purchase/sale note. Though your order is placed through the sub-brokers. How many brokers operate on the Stock Exchange? The brokers of the stock exchanges are SEBI registered trading members. The capitalization of such selected stocks as on a specified date is taken as the "Base capitalization" Daily price change in index securities is captured in the market capitalization figure and reflected in terms of index of movement.
their SEBI registration number. Secondly.legally enforceable relationship between the member and client in respect of the trades stated in that contract note. details of other levies. The list of members on the company register as on these cut off dates would be the people entitled to the corporate benefits. shares cannot be sold on an exchange bearing a date on the transfer deed earlier than the book..closure. What is a Book Closure / Record date ? The ownership of shares of companies traded on the stock exchanges is freely transferable by registration. This does not hold good for the record date... details of trade such as order no. 10. brokerage. 8 What are the points to be checked by an investor to check the validity of a contract note ? Name and address of trading member. The company announces cut-off dates from time to time. settlement no. shares are many times held by buyers without sending them for registration to the company. security name. Record date is a cut-off date (in the above example 3rd Jan'96) for determining the number of registered members who are eligible for the corporate benefits (Interim dividend (30%). a buyer would need to send it for registration. bonus. In order to be sending it for registration to the company and in order to be entitled to the benefits such as dividend.. signature of authorised signatory and the arbitration clause stating that the trade is subject to the jurisdiction of Mumbai must be present on the face of the contract note. ----------------------------------------------------------------------------------------------------------- 42 . the company does not close its register of security holders. Contract notes are made in duplicate. and the member and client both should keep one copy each. 9. However. What is the difference between book-closure and record-date ? The same logic holds good for record date but the two main differences are in case of a record date. trade no. announced by the company. in case of book-closure. rights etc. trade time. quantity. rate.
Even with a small amount of investment.000 to invest. you 43 . These were mainly public sector banks and financial institutions.10. With this amount. The concept of a mutual fund originated in 1870s with Robert Fleming establishing the first investment trust in Scotland in 1890. SBI Mutual Fund. Why investing through a Mutual Funds There are a number of good reasons for an investor to invest through the Mutual Fund vehicle. which established their own Mutual Funds. the more the contribution the higher the ownership and vice versa. You want to invest in software stocks.MUTUAL FUND : A Mutual Fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The year 1987 saw the entry of public sector mutual funds into the market. These are enumerated below: • Lower Risk Each investor in the Mutual Fund owns a proportionate part of all the Mutual Fund's assets. The mutual fund industry in India was started by the Unit Trust of India (UTI) in 1963 with the introduction of the Unit Scheme' 64 (US'64). he becomes a part owner of a large asset value spread over a number of investments.e. Canbank Mutual Fund. You have Rs. This is explained below with a specific situation. The fund belongs to all investors with each investor's ownership depending on the proportion of his contribution to the fund. i. LIC Mutual Fund and Indian Bank Mutual Fund were among the first to be launched. This scheme is the largest in the country.
1. A fall in one or both these shares can wipe you out! However.00.000 15.000 will go into the pool of money collected from other investors like you and the Mutual Fund will buy IT shares of a larger number of companies.000 10.000 7.will be able to purchase in only one or at the most two IT shares.10.000 9.000 1. But that is a sacrifice worth making for the sake of safety! • Asset Allocation Mutual Funds offer the investors a valuable tool . The downside is that if the shares were to go up. Debt: Government Securities Company Debentures Institution Bonds Money market TOTAL 57% 15% 12% 10% 9% 7% 4% 43% 20% 10% 9% 4% 100% Mutual Scheme crores) 57 15 12 10 9 7 4 43 20 10 9 4 100 (Rs.000 12. This is explained by an example.000 43. the profits to you would be higher if you directly invest in them than if you invest through a Mutual Fund.00.) Types of Mutual Funds Nature of investment 44 .Asset Allocation.000 20. will have his Rs.10. An investor investing Rs.00.000 10.1. Kodak Ltd. Nestle Ltd.000 4. if you deposit your money with a Mutual Fund specialising in investing in IT shares.000 will now be spread over more than 2 companies reducing the chances of you losing your money.000 4.000 9. Your Rs. which has collected Rs. your Rs.100 crores and invested the money in various investment options.000 in a Mutual Fund scheme.000 spread over a number of investment options as demonstrated below: Investment Type Percentage of Total Portfolio of Investor's Allocation (% of total the portfolio) Equity Hindustan Lever Ltd Indian Shaving Procter & Gamble Cadbury Ltd.000 portfolio Fund allocation (Rs.in 57.
corporates. c. Certificates of Deposits issued by banks and Commercial Paper issued by companies. convertible securities. e. preference shares and equities.a. Debt/Income schemes These schemes invest most of their corpuses in debt instruments issued by the Government. fluctuations in interest rates bring about changes in market prices of these securities resulting in gain or loss to the investor. Since there is no investment focus on a particular type of business or sector. Equity schemes These schemes invest most of their corpuses in equities of companies in various industries/sectors/businesses. These securities are mainly Treasury Bills issued by the Government. Although these securities have 'zero' risk (Sovereign rating). These schemes also invest in the inter-bank call money market.e. these are called diversified equity schemes. Gilt schemes These schemes invest in Government securities with medium to long-term maturities i. A very small portion of the corpus is invested in debt securities in order enable the scheme to repay money to outgoing investors. Money Market schemes These schemes invest in securities with maturities of less than one year. 45 . b. These schemes' objective is to earn income with moderate capital appreciation. The investment in equity and debt is more or less in equal proportion. they are also called income schemes. financial institutions and entities engaged in infrastructure/utilities. more than one year. Since these schemes don't focus on capital appreciation but on earning higher incomes. Balanced schemes Portfolios of these schemes consist of debt instruments. d. banks.
if the index tracked constitutes shares of Hindustan Lever Ltd. This section stipulates that an investor gets a tax rebate of 20% on a maximum investment amount of Rs. Tax saving schemes These schemes are essentially diversified equity schemes with an additional benefit of offering a tax rebate under section 88 to the investor. i. the investor has to remain invested for a minimum period of three years in order to not have the tax rebate cancelled. the scheme will also invest 25% of its corpus in HLL shares. Sector Specific schemes These schemes invest in only one industry or sector of the market such as Information Technology. Being a very focused investment option. However. h. For instance. g.f. Pharmaceuticals or Fast Moving Consumer Goods. Open-ended schemes 46 . these schemes carry a high level of sector and company specific risk.10.000 per Financial Year in a tax saving scheme. Index schemes These schemes track the performance of a specific stock market index. Bond Schemes These are focused debt schemes investing primarily in corporate debentures and bonds or in infrastructure or municipal bonds. The objective is to match the performance of the index by investing in shares that constitute the index. they invest in these shares in the same proportion as the weightage they are given in the index. Tenure a. (HLL) wherein HLL's shares make up 25% of the index. Not only do these schemes invest in the same shares that make up the index.
b. An investor can buy units from or redeem units to the Mutual Fund itself. This method of reinvestment is a tax saving tool (dividend income attracts no tax). not reinvesting their dividends back into the scheme. at a price based on the scheme's Net Asset Value (NAV). Interval schemes Some close-ended schemes offer repurchase facility for short periods of time where the investor can directly sell his units back to the Mutual Fund. c. Growth option : Investors can opt for not having dividends declared at all with the appreciation in value of the portfolio being constantly added on to the NAV. This is another method of income reinvestment offered by the Mutual Fund. An investor in this scheme has to either hold on to his units till the scheme matures for redemption or can sell his units in the mutual funds segment of the stock market. Mutual funds intimate their investors when they plan to open repurchase facility for a specific period of time. Dividends a. investors can obtain this information from popular financial publications. Close-ended schemes These schemes offer units for sale and repurchase at their initial public offering after which they are not available for either sale or repurchase.These schemes are available for sale and repurchase at all times. Also. These are called 'Interval Schemes'. Reinvestment option : Investors have the option of having their dividends declared and then having it reinvested back into the scheme.e. which announce dates during which interval schemes are open for repurchase. Payout option : Investors have the option of collecting their dividends in cash i. 47 . b. c.
15.15. Rs. Here.e.000). While purchasing units during the IPO. Open-ended schemes Units of open-ended Mutual Fund schemes are first available during the scheme's IPO at face value (i. the investor has to pay his broker a brokerage fee for purchase of his units. Similarly. can sell his units on the stock exchange to a person wanting of buy units of that scheme. Brokerage at 1% works out to Rs. However.15. Stamp duty rates in the state of Maharashtra are 0. Units of closeended Mutual Fund schemes can be purchased either when the scheme is first offered to the public during its Initial Public Offering (IPO) at the face value (i. while selling units on the stock exchange.75 (0. stamp duty payable by the purchaser will be Rs. Mutual Funds schemes should be segregated into close-ended and open-ended schemes. However.000 units at a price of Rs. while purchasing units from the stock exchange. is from the stock exchange. Brokerage rates range between 1%-2% of the transaction value. While investing during the scheme's IPO. the investor has to also incur costs of stamp duty to transfer the units in his name. the investor does not incur any cost for investment. the total value of the transaction is Rs. if the investor purchases units in the dematerialized form. the only way a person can buy units of a close-ended Mutual Fund scheme whose IPO is closed. Taking the above example.Transacting Mutual Funds Close-ended schemes While talking about the methodology of purchasing Mutual Fund units.000).10 per unit) and then the Mutual Fund offers sale and repurchases facilities thereafter (at the current NAV).5% of the transaction value.000. The only exit for the investor is the stock market. However. the investor doesn't have to incur any costs for purchase. Close-ended Mutual Fund schemes don't offer sale and repurchase facilities to its investors once the IPO is closed.15 per unit.5% of Rs. if an investor purchases 1. Similarly.10 per unit) or after it is listed on the stock exchange (at the market price). While purchasing units. an existing close-ended scheme investor who has purchased his units during the scheme's IPO and does not want to stay invested till maturity of the scheme. no stamp duty is payable.e. while purchasing units from 48 . For instance.150 (1% of Rs. the investor has to pay his broker a brokerage fee for sale of his units. Rs.
For instance. if an investor decides to buy 1. Unfortunately.000 units of an open-ended scheme whose NAV is Rs. Tracking Performance On making investments in Mutual Fund schemes. including those minted by Canada.the Mutual Fund after the IPO. it is very important to track the investment performance.5% and 1.5%. inflation and troubled times. some unscrupulous dealers in precious metals prey on this fascination. Futures contracts Certificates Warehouse receipts 49 .15. which is a percentage of the NAV at the time he buys the units. he is charged Rs. South Africa. beautiful metals with intrinsic value that will remain stable investments through wars. They include: • • • • • Ingot or bullion Coins.15 per unit. FORMS OF GOLD AND SILVER INVESTMENT Gold and silver investments take many forms. ----------------------------------------------------------------------------------------------------------- GOLD & SILVER INVESTMENT : Historically gold and silver have been investments with a mystique. Tracking the performance of the investment helps an investor decide whether to hold on to his investment or switch to another Mutual Fund scheme. Entry loads normally range between 0. which can be confusing to the investor. The advantage of having the sale and repurchase facility from the Mutual Fund is that there is no stamp duty payable on purchase of the units.15 and the entry load is 1%. and the United States. Mexico. the investor may be charged an entry load.
investors heed the following warnings: • Don't buy precious metals advertised at "below spot prices. however. check into their reputation and integrity. This is an indication of a possible fraud. • Make sure the dealer segregates funds. broker of financial institution. This is a danger sign. Since the gold or silver bears no interest sitting in a vault (unless the dealer is in another income producing venture) the only way the dealer can pay a percentage or interest for holding onto your gold or silver is from the investments of other customers. Experience has shown that these dealers often do not buy the ordered metals hoping that the market will go down. If the salesperson won't confirm that funds are segregated or you can't find out some other way. the only way dealers selling below spot can make money is if the price drops so that they can later buy the ordered metal at a price lower than they sold it top the public. A real red flag is the refusal of a dealer to timely deliver your gold after your request. STEPS INVESTORS CAN TAKE TO PROTECT THEMSELVES To minimize the risks involved with investing in precious metals. Dealers selling gold or silver below spot are selling below market.• • • Options on coins Options on gold futures Options on gold bullion If you do decide to invest in precious metals. it is always a good idea to consult with a reputable financial adviser and deal through a recognized merchant. Find out if investment funds are kept separate from operating funds of the company in some sort of trust agreement. Although they tell customers that gold is going up. steer clear of the dealer. • If someone has to hold the gold for the Investor. If investment funds are not segregated and the 50 . • Be cautious of buying precious metals where the dealer pays a percentage of your investment as some sort of "rebate" for the right to hold your purchase." Spot prices mean today's prices fixed on major exchanges.
A safe method of payment. silver or other metals be cautious. your chances of getting any money back are greatly diminished. • Small investors should be careful when presented with offers to invest in "strategic" metals such as cobalt and titanium.company goes out of business. used by many legitimate dealers. remember. the receipts are only as good as the name of the seller. is delivery of the bullion or coins to your bank against your bank draft. CHAPTER III 51 . • Money should not be send in the mail to a dealer by certified check. Similarly in buying gold or silver certificates always should deal through reputable brokerage firms or banks. The bank will not release the money until the gold or silver is in its hands or in your safe deposit box. • When buying warehouse receipts for gold. Recently some unscrupulous dealers have been misrepresenting the potential risks and earnings connected with dealing in these metals. It is the best to buy from a major bank or bullion dealer that is government regulated. state or provincial governments and that many coin and bullion dealers similarly are not subject to regulatory oversight. • Deferred delivery contracts for gold and silver are not regulated by federal.
blue chip value portfolios are relatively compact. A large body of academic research strongly suggests that diversified stock portfolios containing issues selling at low price-earnings multiples tend to outperform similar risk portfolios with higher valuation multiples. These are firms with above-average historical returns on equity. Investment Process : When selecting blue chip stocks. Generally. Investor Profile : This portfolio is suitable for both conservative and moderately aggressive growth-oriented investors. Investment Philosophy : History indicates that average annual common stock returns far outstrip the rate of increase in consumer prices. portfolio turnover tends to be relatively low. In addition. portfolios that are heavily invested in common stocks best serve the goals of long-term oriented investors. This portfolio seeks to capture the returns available from investments in large capitalization companies while tempering investment risk through both diversification and the purchase of stocks that possess reasonable valuations. Thus. Emphasis is placed on longterm total returns. for this portfolio seek to capitalize on recent stock price weakness due to which there are temporary glitches in company performance. Investment selection begins with a search for good companies. The portfolio is ideally suited for investors with long term investment horizons.ALTENATIVE INVESTMENT OPTIONS Blue Chip Portfolio Investment Objective : This portfolio seeks a combination of capital appreciation and dividend income though investments in the common stocks of some of the largest companies. Because a majority of the companies whose stocks have been selected for this portfolio pay a portion of their earnings in cash dividends. total investment return consists of both current income and capital appreciation. a value discipline 52 . Companies with low valuation multiples tend to be those that are currently out of favor with investors. consisting of between 20 and 30 stocks drawn from diverse industries. and those that are leaders in their respective industries. These "unpopular" companies are generally those that have reported disappointing financial results during the recent past and their stock prices have suffered as a consequence. Thus. companies that have demonstrated that they are capable of sustaining above-average long-term growth rates.
the blue chip value portfolio is subject to short-run swings in stock market prices. Also. sector and international equity funds. Portfolio return consists of both capital appreciation and dividend income. Thus. In addition. the portfolio may contain index funds that seek to replicate the return of a particular category of assets and funds whose shares are sold to institutional investors only. Investment Process : The Global Growth Portfolio is created using a top-down approach 53 . Furthermore. Risk and Return : Although portfolio assets are concentrated in blue chip stocks that tend to be far less volatile than the stocks of smaller. As with all aggressively managed portfolios. the portfolio is sensitive to changes in the overall stock market. like common stock portfolios in general. it is not suitable for investors who seek a high level of dividend or interest income. Stocks are usually sold when they return to favor with investors and valuation multiples have expanded dramatically. The portfolio tends to be dominated by aggressive growth. unseasoned companies. Investment Philosophy : In selecting mutual funds for this portfolio. both index and "institution only" funds possess expense ratios that are well below those of retail funds. the portfolio's risk is mitigated by diversification across several investment categories. a premium is placed on those funds that are sold without sales charges (no-load funds) and those that possess low annual expense ratios.requires that shares be purchased during periods when stock prices in general are declining. Since the portfolio stresses capital gains over current income. Generally. Global Growth Portfolio Investment Objective : Its primary investment objective by investing in a wide variety of mutual funds. preference is given to those funds that remain fully invested in their respective investment category at all times. portfolio turnover tends to be relatively low. At times the portfolio may contain a large allocation to money market funds for defensive purposes. Investor Profile : The Global Growth Portfolio is suitable for aggressive investors who are willing to assume above average risks and those that possess a long-term investment horizon. Though aggressive in nature. the pursuit of a greater-thanaverage annual return is accompanied by greater-than-average portfolio volatility.
create target investment category percentage allocations using financial forecasts as inputs. This is especially true of funds that concentrate their investments in a single industry. the value of the dollar relative to foreign currencies. In addition to viewing the fund's financial characteristics and historical returns. The portfolio’s return potential tends to reflect its allocation to growth and aggressive growth mutual funds. However. Thus. may be concentrated in a small number of mutual funds drawn from a narrow range of asset categories. Risk and Return : Over a normal financial market cycle. the portfolio contains political and foreign exchange risks in addition to the normal risks of equity fund investing. the volatility of this portfolio will vary from a low level to an exceptionally high level of volatility.to mutual fund selection. one should not hesitate to increase allocation to relatively safe money market funds. That is the nature of aggressive investing. analysts assess conditions in the global economic and financial markets. Finally. portfolio turnover tends to be relatively high. averaging between 50 percent and 100 percent annually. at times. Next. the goal of this portfolio is to produce long-run returns in excess of those historically provided by large capitalization stocks. purchasing funds that invest in asset categories that have recently experienced significant declines and those that are out of favor with individual investors. However. Since the portfolio usually contains a relatively large allocation to international equity funds. seek the benefits of portfolio diversification and will not abandon investments in specific investment categories because of disappointing shortterm returns. 54 . Once these allocations have been determined. Variables considered include regional business cycles. it is best to follow a contraire investment strategy. interest rate trends. Because portfolio volatility tends to be above average. First. These inputs are used to establish the investment categories to be included in the portfolio. In addition. and global financial market trends. closely monitor each allocation and maybe terminate any investment in particular funds if financial market conditions change. it is for investors who possess a long-term investment horizon. Portfolio Strategy : Portfolio assets. then begins the search for mutual funds in each investment category. expected rates of inflation. Although this portfolio may exhibit a higher frequency of trading than some of the other portfolios. when valuations appear to be excessive in a number of investment categories.
and those that have relatively low expense ratios. The goal is to produce a portfolio with limited volatility. because the returns across investment classes are less than perfectly correlated with one another. The portfolio may be more appropriate for the conservative portion of an investor's portfolio because of its emphasis on a high degree of diversification and the inclusion of equity.All Weather Portfolio Investment Objective : All Weather Portfolio seeks a combination of long-term growth of capital and current income. large capitalization stocks. small capitalization stocks. investment capital spread across a wide spectrum of asset categories allows investors to escape the down drafts in investment wealth that can occur when one category of assets suffers a severe setback. bond and money market funds in its portfolio. etc. domestic bonds. the portfolio may contain funds whose shares are sold to institutional investors only. gold stocks. losses in one investment category may be offset by gains in other categories.). Investor Profile : The All Weather Portfolio is designed for investors seeking a low risk approach to growth and income investing. and money market instruments. Second. The portfolio’s primary investment objective is preservation of capital and growth of capital as a secondary objective. while providing meaningful return potential. each of which invests in securities drawn from one of seven investment classes including: large capitalization stocks. First. foreign bonds..e. In addition. At times the portfolio may contain index funds that seek to replicate the performance of a specific investment category (i. The All Weather Portfolio maintains a commitment to mutual funds representing each of the above. The portfolio seeks to reduce risk by investing in several mutual funds. foreign stocks. Investors with relatively short time horizons will find the All Weather Portfolio to be ideal Investment Philosophy : The All Weather Portfolio is created on the assumption that diversification reduces risk and that prudent investors should balance the rewards of investing with the risks they assume.mentioned investment 55 . small capitalization stocks. Investment Process : When selecting mutual funds for this portfolio a premium is placed on those funds that have no front-end or back-end sales loads.
Such periodic rebalancing tends to result in the sale of fund shares in those categories that have appreciated significantly and the purchase of fund shares in those categories that have suffered price declines. small stocks. gold. Given its allocation constraints. ongoing financial market trends. the portfolio will contain between seven and 11 different no-load mutual funds. current income is not a consideration in asset selection. Risk and Return : During the course of a normal market cycle. However.classes at all times. international stocks. 56 . and internal and external economic and financial market forecasts. domestic bonds. while assuming less risk. The goal of the portfolio is to provide annual returns near market returns. Although some small growth companies pay cash dividends. the percentage of portfolio assets allocated to each investment class can vary from a target that ranges from five to twenty percent of portfolio assets depending on the investment climate in each respective category. Therefore. the portfolio generally contains no more than neither 80 percent of assets allocated to equity funds nor less than 40 percent with the balance allocated to a combination of bond and money market funds. the portfolio will have a volatility level approximately half that of the stock market. The primary objective is to provide a high level of long-term capital growth." This "effect" is the tendency of the common stocks of small companies to outperform the common stocks of large companies at equivalent levels of investment risk. The returns of individual portfolios can differ due to such factors as portfolio composition. Small Cap Value Portfolio Investment Objective : This portfolio seeks to provide a vehicle that gives investors the opportunity to capture the "small firm effect. The All Weather Portfolio is periodically rebalance when changing prices in the financial markets cause the portfolio's allocations to specific asset categories to stray from their intended targets. international bonds. Portfolio Strategy : The portfolio’s main strategy will be to maintain investments in all asset classes (large stocks. The return potential of the portfolio tends to reflect its allocation to equity. bond and money market funds. although there is no assurance that these returns can be achieved. the timing of client cash flows in and out of the portfolio and the date on which the portfolio was initially constructed. and cash equivalents).
Once selected. and start-up companies. discussions with large shareholders. Portfolio Strategy : that one of the keys to investment success is proper portfolio management. a portfolio turnover ratio of about 30 percent). No matter how attractive a company's growth prospects. we resist the urge to trade frequently. and by paying below-average multiples of sales. Best results are obtained when investing for longer-term capital appreciation. earnings and book values. Risk is reduced by maintaining a portfolio diversified across the stocks of 40 to 50 small companies (equity market values between $30 million and $300 million). active trading can erode investment returns by a significant amount. Investment Philosophy : Our goal is to provide high capital appreciation potential while maintaining a portfolio with moderate risk characteristics. The resulting list of stocks is then subjected to rigorous analysis. The portfolio provides diversification benefits when combined with growth portfolios that stress large-cap stocks and international equities. earnings and book values when selecting small company growth stocks. small company stocks are held an average of about three years (i. A good investment is the stock of a "good" company that has been acquired at a reasonable price.. eliminate companies that are selling at excessive multiples of revenues.Investor Profile : The portfolio is suitable for both aggressive and moderately aggressive growth-oriented investors. Eventual stock selections are those that have above-average growth potential and reasonable valuations. eliminate companies with excessive levels of long-term debt. those that have not been profitable for several years. A small-cap portfolio must be more widely diversified than a blue chip portfolio to reduce company specific or non-specific risk. Because transaction costs can erode portfolio returns. we will not make an investment in that company if we are required to pay a multiple of projected earnings that is greater than our estimate of a company's annualized growth rate.e. which may include company visits. Diversification among non-correlated industry groups and the inclusion of 50 to 60 individual issues 57 . there is a big difference between a "good" company and a "good" investment. examine the historical growth of revenues and earnings and retain those companies that have demonstrated an ability to grow at a double-digit annual rate. Because small company stocks are relatively illiquid. Diversification is another key to successful small-cap investing. Finally. and discussions with operating management.
The goal of the portfolio is to provide an average annual return in excess of the yield on long-term government bonds plus the annual rate of increase in the consumer price index. In short. 3) a Company’s financial condition deteriorates to the point at which its growth potential becomes impaired. Furthermore. the objectives of the fund are to produce both current income and to preserve the purchasing power of portfolio assets. small company stocks have returned more than those of large companies. small firm stock portfolios can outperform large company stock portfolios in streaks that can last for several years. Small companies may not possess adequate access to sources of capital needed to support above average growth rates. Finally. In addition.reduces volatility while maintaining above-average growth potential. allocation of assets across equity funds. Income Plus Portfolio Investment Objective : The Income Plus Portfolio seeks a combination of current income and capital appreciation by investing in bond. small companies possess limited product lines. which may cause their quarterly revenues and earnings to fluctuate more than those of highly diversified companies. 4) Finally. Although the equity fund portion of the portfolio seeks to provide capital appreciation. seek growth stocks with low price-earnings ratios relative to their growth potential. Small company growth stock investing can provide for more volatility than other investment strategies. 2) appreciation in share price causes a stock’s sales. and companies with strong balance sheets and exceptional track records. a sale is "forced" when a company is acquired by another firm. Investor Profile : This very conservative portfolio is suitable for highly risk averse investors who require current investment income to meet their living requirements. our small company portfolios are diversified across numerous companies drawn from unrelated industries. Small firm stocks are thinly traded and are thus less liquid than the stocks of large companies. and money market funds provides a 58 . stocks with reasonable multiples of sales and book values. bond funds. Risk and Return : On average. which reduces return volatility. Stocks are sold for the following reasons: 1) growth boosts a small stock to the point that it joins the ranks of mid-caps. earnings and book value multiples to become expensive. money market and equity mutual funds.
when experienced over several years. Their goal is to meet the twin objectives of current income and low risk. short-term bond yields are similar to those of long-term bonds) the allocation to money market funds would be increased while the percentage of assets invested in longterm maturity bond funds would be decreased. Investment Process : Portfolio assets are allocated among money market funds. a larger portion of assets would be allocated to conservatively managed equity funds. during periods marked by expanding consumer prices. and those with relatively low annual operating expenses. Individual fund 59 . During periods marked by a declining value of the dollar relative to major foreign currencies. international bond funds may find their way into this portfolio. the purchasing power of portfolio assets can be maintained and even increased. this strategy may possess more risk than meets the eye. However. And during periods marked by rapid expansion of consumer prices. frequently invest the bulk of their assets in low risk bonds or bond mutual funds. On the other hand. investors could preserve the purchasing power of their assets by investing in a portfolio that increases in value by at least two percent annually. Even a modest increase in consumer prices. during a financial environment marked by a flat yield curve (i. or sector funds (such as utility funds) that invest in high yielding equities. especially those that are retired and are not adding additional assets to their investment portfolios. The equity fund portion of the portfolio may contain balanced funds. we seek those that invest in high quality corporate bonds and government bonds. By allocating a modest portion of portfolio assets to conservatively managed growth and income mutual funds that are capable of producing double digit average returns over the long run. When selecting bond funds. convertible bond funds. Investment Philosophy : Highly risk-averse investors. During periods of low inflation and robust economic expansion.much lower average return than that required by more aggressive investors who seek primarily capital appreciation. can exert a significant impact on the purchasing power of a so-called fixed income portfolio.e. For example.. a small allocation to a well-managed gold fund might be used as an inflation hedge. equity-income funds. That's because rising consumer prices erodes the purchasing power of both future interest income and the capital invested in bonds or bond funds. bond funds. The specific allocations are determined by market conditions. and growth and income funds.
portfolio turnover is kept relatively low. can result in the premature payment of capital gains taxes. the goal would be to produce an average annual return in excess of eight percent. rich or otherwise.selections are based on unfolding trends in the economy and the responsiveness of fund share prices to those trends. the prices of bond fund shares can decline in an inflationary environment marked by rising interest rates. However. which can negatively impact the shares of equity funds. Risk and Return : Although the Income Plus Portfolio is conservatively managed. Many experts have been stating that in the era of falling interest regime. In addition. will be reinvested in additional fund shares. For taxable accounts. an economic recession causes corporate earnings to decline. Mutual fund income and capital gains distributions. very safe. However. Portfolio Strategy : Although the portfolio is kept in tune with unfolding events in the economy and financial markets. the portfolio is ideally suited for highly risk averse investors. if 30-year treasury bonds yield six percent while the annual rate of inflation is two percent. taxpayers or otherwise. the returns from this avenue would also fall. the capital is safe. The returns therefrom are also safe. The goal is to offset realized capital gains with realized capital losses to minimize taxes. portfolio volatility is significantly lower than that experienced by the stock market. Thus. unless otherwise specified by the client. Rapid turnover of fund shares. funds that have declined in price during the calendar year will be sold and the proceeds reinvested in funds with similar objectives and management style. Rising interest rates cause bond prices to fall. this is 60 . investors face the usual risks of bond and equity investing. Pure-growth Open-ended Debt-based schemes (PODs) Of MFs have evolved as the best parking place for all investible funds of all the investors. The goal of this portfolio is to produce an average annual rate of return equal to the sum of the yield on 30-year government bonds and the annual rate of change in the Consumer Price Index. For example. bond and money market funds. Since the fund is required to invest only in government securities or investible-grade rated securities. Theoretically. especially those of equity funds. because portfolio assets are allocated across equity. there is no guarantee that this portfolio will meet its stated investment objective. Thus.
10 is revalued at the new rate of interest of 9 percent . The market rate is determined by the health of the economy. 1 lakh in the scheme. though the fund will be forced to invest your Rs.11. If the fund sells the units to you at it’s current NAV of Rs. You will be a partner in sharing the benefit of the higher returns of 10 percent.000 units @9 percent. In other words. SEBI has laid down some strict guidelines for computation of NAVs by factoring in the market rate of interest. Realise that the entire corpus of the fund stands invested at an average return of 10 percent. We shall examine the reason giving rise to this phenomenon. which works out to Rs.11. they will receive Rs. Actually every investment @ 10 percent of face-value Rs. It is therefore very clear that the investor in debtbased schemes of mutual funds is protected even against the falling rate of interest. The fund raises its NAV to Rs. 61 . government policies and many other factors which are strictly beyond the control of the fund manager. This means that if the fund sells all the assets of the scheme and distributes the money on equitable basis to all the unit holders. the interest rate falls from 10 percent to 9 percent. This is injustice to the existing investors.000 units. 1000 crores.11. 10. the returns rise when the interest falls. 10 and its corpus is Rs.000 units and not 10. The fund manager does not have to take any buy-sell action to hike up the NAV. 1 lakh at the lower rate of 9 percent. The performance is overshadowed by the mark-to-market. The playing field is almost identical for all the fund managers.000 units @10 percent would be identical with the returns on 10. the NAV rises when the interest falls. 10 per unit. the performance of a fund manager is gauged by the rate of returns achieved by him. 11. though he can have an educated guess at its rise or fall across the time dimension. you will be allotted 10. The proof of the pudding is in eating it. This is treated as the value of the asset and the NAV of the fund rises. Immediately thereafter you wish to invest Rs. Now suppose. Normally. This is an automatic process. Here comes the ‘mark to market’ concept.a universal truth but in practice. To illustrate. The debt-based scheme is a different animal. The returns on 9. This will benefit you immensely. Very strange but true. we assume that the current NAV of the mutual fund is Rs.000. You will be allotted only 9.
49 16. in the case of debt-based schemes.41 16.93 INCOME 23/10/1995 21. is less than one-tenth of this amount. Earlier the better. the mark-to-market does not provide a protection for ever. Therefore.V. 11.03 4. NAME OF THE ALLOTMENTDATE N. the various instruments held in the current corpus will continue to give the high contracted rate until their respective maturities. 10.41 13. I simply fail to understand why any investor goes to any bank for any investment.24.A.19 62 .Though the past performance is no guarantee for future achievements.73 Average Maturity in Years(as on Aug 31 2001) ALLIANCE INCOME BIRLA +B 03/03/1997 17. Have a look at the last column of the Table. Whatever scale you chooses to measure these with. Or look at the queues for monthly income schemes of Post Offices.66 3. debt-based or otherwise. Understandably. 10. the average period to maturity of the corpus becomes a more important selection-oriented criterion.99 CHOLA TRIPLE A 31/03/1997 17. 10 only and the asset value reduces by Rs.24 17. When the investment of face value Rs.57 19. revalued @11. PODs have emerged as torchbearer amongst all the investible avenues.51 19. whatever standard you select to compare these by. Higher the rate greater is the attraction.61 13.828 crores? The entire corpus of all the mutual funds taken together. the bank deposits have risen by 20 percent to Rs. an investor enters into a scheme on the basis of the current performance of the fund. the investor should wake up from his complacency and embrace PODs passionately.63 18. How short is this short? Well. Well. SCHEME EQUIVALENTRATE OFRETURN percent 90 DAYSRATE 180 360 OFRETURN DAYSRATE DAYSRATE OFRETURN % OFRETURN % 20. However. How can one explain the fact that on a year-to-year basis. After some short time.88 16.11 and NAV of the fund falls. normally. the returns from the scheme will eventually come down to meet the market rate.09 13. a little caution is required to be exercised while choosing the exact parking place.58 4.02 16.11 matures the fund receives Rs.
88 3.00 16.01 13.INDIA BOND 26/11/1997 JM.80 17.19 15.84 18.97 4.68 16.11 13.72 5.000.56 4.36 18. Section 88 of the Income Tax Act.45 18.000 is exclusively ear-marked for securities notified as infrastructure bonds.80 AS Equity Linked Saving Schemes (ELSS) are Section 88-eligible tax saving mutual fund schemes.83 19.33 18.88 4.11 17.2001 18/12/1997 14.05 13.50 4.92 17. 1961.80 13. Among the various other avenues which qualify for the balance Rs 60.08 13.27 0.10 2.58 16.19 12.11 17.63 21.41 16.57 3.15 4.41 16.27 27/03/1997 02/03/1997 17. Of the various Section 88 63 .71 09/07/1998 14.66 17.41 16.46 14.80 15.05 15.19 21.62 12. are investments of up to Rs 10.24 15.88 16.99 JF.72 12.49 4.21 17.44 17.46 19.15 DSP ML LYNCH 29/04/1997 BOND HDFC INCOME IL&FS BOND 11/09/2000 12/07/1999 11.46 18.96 10. specifies investment avenues which lead to a 20 per cent tax rebate on the amount invested.22 13.09.16 17.75 17.30 13.58 17.43 14.58 18/07/1998 HIGH 11/04/1997 14.12 15.000 in ELSS.35 13.19 16.88 17.000.77 12.63 18.14 SBI MAGNUM 01/12/1998 LIQUIBOND SUNDARAM BOND SAVER TATA INCOME TEMPLETON INDIA INCOME UTI BOND ZURICH INTEREST NAVS AROUND 10.87 12.92 13.60 19.88 16.24 4.80 4.24 14.05 15.26 19.80 15.92 31/12/1997 15.19 21.10 21.97 13. The total limit of investment specified for financial year 2000-01 is Rs 80.98 3.07 16.60 5.DHAN BOND 26/05/1999 13.66 4.33 18.INCOME KOTAK DEPOSIT PIONEER INCOME BUILDER PRUDENTIAL ICICI INCOME RELIANCE INCOME 01/02/1995 BOND 05/11/1999 ITI 24/06/1997 17.82 17.63 19.98 15.11 16. of which Rs 20.28 17.65 4.26 15.70 12.87 19.63 16.
Considering. ELSS is the only truly aggressive wealth-builder. • Twenty per cent tax benefit on investment No such tax benefits are available on other equity funds. and also more risky as their NAVs are likely to fluctuate more wildly than those of the mainstream equity funds. In effect. maintain an allocation of at least 80 per cent of their corpus in equities.000 annually into ELSS makes sense even if you are a conservative investor. Key features An equity-linked saving scheme is a variant of equity mutual funds. thus. and is capable of handsome appreciation over a period of time. • Three-year lock-in period. first-day 20 per cent return on your investment in an ELSS. at all times.000 in an ELSS. All others. this translates into an instant. in effect the IT Department gives you an instant 20 per cent return. In contrast. lower-risk investment avenues. Of course. How? When you invest Rs 10. the four ongoing open-end tax saving funds beat the Sensex by huge margins. your tax is lowered by Rs 2. like LIC premia. PF contributions and PPF are wealth-protecting. however. it will help push up the overall returns from your total Section 88 investments. Conversely. • Higher allocation to equity SEBI stipulates that ELSS must.000 out of the eligible Rs 80. putting Rs 10.investment options.000. vis-a-vis investment in another equity fund scheme. This high level of exposure to the stock market makes ELSS an aggressive equity fund with the potential of higher returns compared with other equity funds. The essential differences from mainstream diversified equity funds are essentially three. under adverse conditions during the calendar year 2000. they lost far more ground than did the Sensex. they are prone to higher volatility and thus higher risk. that Rs 70. For the financial year 99-00.000 under Section 88 is geared towards lower-return. the money you put into ELSS is invested in equity shares. income-generating investments which don't offer much scope for capital growth. 64 .
the lock-in also permits the fund managers to play for the long-haul gains. This is where the low minimum investment of only Rs 500 comes in handy.000 each rather than in one lump-sum to catch the 31 March deadline. say. 10 months at Rs 1. ELSS investments come with a 3-year lock-in period. it doesn't stop you from holding on for longer than that and waiting for a later market rise to redeem. It would make greater sense to spread the Rs 10. many funds also offer built-in systematic investment options.Eligibility for a 20 per cent income tax rebate is conditional upon staying invested for a minimum of three years. A staggered investment will ensure that you don't end up buying into an ELSS at an unusually high NAV level. guessing the extent of redemption’s they need to cater to by keeping cash or near-cash holdings. but since the lock-in specifies only a minimum holding period. particularly in the panicredemption downturns. the lock-in serves as a risk-management tool for the otherwise more aggressive equity fund that an ELSS is.000 you invest in an ELSS over. During market downturns. but rather at an 65 . True. The 3-year lock-in clause prevents such precipitate sales. you must invest before 31 March 2001. This is a boon both for the investor and the fund managers. Similarly. It also prevents cashing in on quick gains if markets soar within the 3-year period. the NAVs of ELSS are likely to fall more steeply than those of most other equity funds. So it's time to pick up your ELSS. They don't have to be looking over their shoulders all the time. Action alert To make use of the Section 88 tax rebate for financial year 00-01. In a way. For this reason. Falling stock market indices and NAVs are almost sure-fire triggers that send individual investors into redemption mode often with high but avoidable losses since holding on for the longer term typically leads to a reversal of fortunes.
By diversifying your investments. This is a great advantage now available ever since tax-saving ELSSs went open-ended a few years ago. However. If you add nine other unrelated securities to that single security portfolio. the single security is highly risky. 66 . Clearly. your return will depend solely on that security. the possible outcome changes—if that security flops. held by itself. CHAPTER PORTFOLIO DIVERSIFICATION If you invest in a single security.average NAV spread over several months. you have substantially reduced the risk of the single security. your entire return will be severely affected. your entire return won't be as badly hurt. that security's return will be the same whether held in isolation or in a portfolio. if that security flops.
TIME DIVERSIFICATION Time diversification. to reduce risk. TIMING THE MARKET 67 .Diversification substantially reduces your risk with little impact on potential returns. remaining invested over different market cycles. Time diversification helps reduce the risk that you may enter or leave a particular investment or category at a bad time in the economic cycle. Diversification among the major asset categories—stocks. It has much more of an impact on investments that have a high degree of volatility. Longer time periods smooth those fluctuations. Time diversification is less important for relatively stable investments. it is better to do so gradually over time. such as certificates of deposit. since these categories are affected by different market and economic factors. fixed-income and money market investments—can help reduce market risk. Diversification should occur at all levels of investing. those investments should be avoided. if you cannot remain invested in a volatile investment over relatively long time periods. In general. is extremely important yet often overlooked. inflation risk and liquidity risk. where prices can fluctuate over the short term. Conversely. Diversification within the major asset categories—for instance. for instance) or fixed-income products—can help further reduce market and inflation risk. among the various kinds of stocks (international or domestic. such as stocks. money market funds and short-term bonds. rather than all at once. Time diversification also comes into play when investing or withdrawing large sums of money. The key involves investing in categories or securities that are dissimilar: Their returns are affected by different factors and they face different kinds of risks.
contain excessive and unnecessary levels of risk. and exit when it is falling. you should at least limit the portion of your total portfolio that is subject to the risks of market timing. Timing strategies that call for either an all stock or an all debt portfolio. And market timing strategies sometimes miss the boat. and allow little time for even the most prescient market timer to act. investors should refrain from full-bore timing strategies that require the portfolio to be either 100% in stocks or 100% in short-term debt. and jumping in after it has started to rise. One recent study examined the distributions of monthly stock returns for the S&P 500 and small stocks from 1926 through 1987. In recognition of this all too familiar trait. the stock market movements are jerky. Thus. Market timers therefore tend to follow the trends. it is difficult to execute.The goal of a market timer is to enter the market when it is rising. Diversifying a portfolio across asset types provides protection that is too certain to be discarded for the uncertain promises of market timing. Small stock returns were shown to have been even more concentrated than the S&P returns. Probably the biggest risk of a market timing strategy is that a few missed bull markets can negate the long-term return advantage stocks have historically provided. not smooth. 68 . one of the major risks of this kind of strategy is that it may have an investor out of the market when the bulls stampede. since no one has been able to devise a system that can tell in advance if the market will rise or fall. However. or almost all stock or almost all debt. bailing out after the market has started to fall. If you are interested in market timing strategies. The researchers discovered that the best returns on the S&P 500 were concentrated in only a few months. While the strategy sounds appealing.
Government may even like to add further categories of securities later from time to time. To operationalise this policy. Nominee companies affiliates and subsidiary companies of a FII will be treated as separate FIIs for registration. 69 . such as Pension Funds etc. warrants. before any investment is made by them in the Securities of companies listed on the Stock Exchanges in India. the nodal regulatory agency for securities markets. FIIs would be welcome to invest in all the securities traded on the Primary and Secondary markets. and may seek separate registration with SEBI. The following guidelines have been formulated in this regard Foreign Institutional Investors (FIIs) including institutions such as Pension Funds. the Government has evolved guidelines for such investments by Foreign Institutional Investors (FIIs). debentures. Mutual Funds. FIIs would be required to obtain an initial registration with Securities and Exchange Board of India (SEBI). and the schemes floated by domestic Mutual Funds. including the equity and other securities/instruments of companies which are listed/to be listed on the Stock Exchanges in India including the OTC Exchange of India. These would include shares.SECTION III CHAPTER I GUIDELINES FOR PORTFOLIO INVESTMENT BY FIIS Government of India in its latest liberalisation move has allowed reputed investors. in accordance with these guidelines. to invest foreign in Indian capital market. Investment Trust. Asset Management Companies. Nominee Companies and Incorporated/Institutional Portfolio Manager or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) would be welcome to make investments under these guidelines.
SEBI's initial registration would be valid for five years. dividends and is so required by FII for its operational 70 . sale proceeds all of shares. (These can even be more than one account in the same bank branch each designated in different foreign currencies. in a format that would be specified by RBI's FERA permission together by SEBI. and to appoint a domestic Custodian for custody of investments held. For granting registration to the FII. FIIs seeking initial registration with SEBI shall be required to hold a registration from the Securities Commission. RBI's general permission under FERA to the FII will also hold good for five years. interests. This General Permission from RBI shall also enable the FII to: • Open foreign currency denominated account(s) in a designated bank. interests. SEBI shall take into account the track record of the FII.Since there are foreign exchange controls also in force. if it purposes). • Open a special non-resident rupee account to which could be credited receipts from the capital inflow. Both will be renewable for similar five year periods later on. invest on all recognized stock exchanges through a designated bank branch. or the regulatory organisation for the stock in the country of domicile/incorporation of the FII. for various permissions under exchange control. FIIs shall also file with SEBI another application addressed to RBI for seeking various permissions under FERA. sell and realize capital gains on investments made through initial corpus remitted to India.experience and such other criteria that may be considered by SEBI to be relevant. its professional competence. Besides. RBI's general permission under FERA would enable the registered FII to buy. financial soundness. dividends and sale proceeds all of shares. subscribe/renounce rights offerings of shares. under a single window approach. • Open a special non-resident rupee account to which could be credited receipts from the capital inflow. along with their application for initial registration. • Transfer sums in the securities in India out of the balances in the rupee account.
for the purpose of entry of FIIs.etc. The maximum holding of 24% for all non-resident portfolio investments. dividends. Also. a) • Investments by FIIs through the following alternative routes: Offshore single/regional Funds. The holding of a single FII in any company would also be subject to a ceiling of 5% of total issued capital. Repatriate the capital. Transfer repatriable (after tax) proceeds from the rupee account to the foreign currency account(s). which are permitted upto 51% in all priority areas. It is expected that the differential in the rates of taxation of the long term capital gains and short term capital gains would automatically induce the FIIs to retain their investments as long term investments. The ceiling would apply to all holdings taking into account the conversions out of the fully and partly convertible debenture issued by the company. 71 .minimum or maximum .will also include NRI corporate and non-corporate investments. For this purpose. the holdings of an FII group will be counted as holdings of a single FII. Portfolio investments in primary or secondary markets will be subject to a ceiling of 24% of issued share capital for the total holdings of all registered FIIs. in the primary/secondary market. but will not include the following : Foreign investments under financial collaborations(direct foreign investments). capital gains. including those of the registered FIIs. there would be no lock-in period prescribed for the purposes of such investments made by FIIs. any compensation received towards sale/ renouncement of rights offerings of shares subject to the designated branch of a bank/the custodian being authorized to deduct withholding tax on capital gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange. in any one company.incomes received by way of interest.• • • Make investments in the securities in India out of the balances in the rupee account. • Register FII's holdings without any further clearance under FERA. There would be no restriction on the volume of investment .
72 . The RBI shall make available to the designated bank branches a list of companies where no investment will be allowed on the basis of the upper prescribed ceiling of 24% having been reached under the portfolio investment scheme. FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more) capital gains.Such custodian shall establish separate accounts for detailing on a daily basis the investment capital utilization and securities held by each FII for which it is acting as custodian. Disinvestment will be allowed only through stock exchanges in India. and for information reporting. SEBI may permit sales other than through stock exchanges. RBI and/or SEBI may also at any time conduct a direct inspection of the records and accounting books of registered FII. Euroconvertibles. settlement of purchase and sale. All secondary market operations would be only through the recognized intermediaries on the Indian Stock Exchange. A registered FII can appoint as Custodian an agency approved by SEBI to act as a custodian of Securities and for confirmation of transactions in Securities. A registered FII would be expected not to engage in any short selling in securities and to take delivery of purchased and give delivery of sold securities. including the OTC Exchange. RBI may at any time request by an order a registered FII to submit information regarding the records of utilization of the inward remittances of investment capital and the statement of securities transactions. In exceptional cases. provided the sale price is not significantly different from the stock market quotations. including OTC Exchange of India.• • Global Depository Receipts. The custodian will report to the RBI and SEBI semiannually as part of its disclosure and reporting guidelines. where available.
Collecting dividend and interest. to carry out the formalities in respect of: Applying to the RBI for necessary approval. ADs are allowed to deal in shares on behalf of their portfolio clients with respect to the general permission. Subscribing to a new issue of shares and debentures. on the condition that the company obtains the approval of its shareholders in a general body meeting. 73 . or even a stock broker to act as his agent in India to deal in shares. The transactions may be either on a repatriation or a nonrepatriation basis. There is one more restriction that is an NRI should authorise only one branch of only one bank in India for the portfolio management. This bypassed the botheration of the NRI of approaching the RBI every time he desired to purchase shares of a company for which he had not obtained permission. Where special permission is required.CHAPTER II PORTFOLIO INVESTMENT SCHEME FOR NRI’S To attract foreign investments in the market. ADs can renew the permission without referring to the RBI after every 5 years instead of 3 years. Buying and selling shares and debentures. securities (other than bearer securities) of the central and state government and treasury bills through stock exchanges. Then the RBI began granting general permission to those companies which approached it for NRI investments. a relative or close friend. debentures. Specific PA may be granted in favour of the bank. Long ago. each and every NRI required the RBI’s special permissions for each and every company in which he desired to invest! Moreover. Renunciation of right entitlement and Arrange for repatriation if the investment is on repatriation basis. At present the situation has been further simplified. the government has drafted a 'Portfolio Investment Scheme' with alluring features. An NRI can authorise an Indian resident. Holding shares/debentures in safe custody. This was ridiculous. units of UTI/MFs. the permission was required to be renewed every 3 years.
speculation in terms of margin trading or short selling is not allowed.1. in spite of the government. the NRI happens to cross the limits. • Purchase of shares and debentures under the scheme is required to be made at the ruling market price. prior to the commencement of FERA [Sec. or 5% of the total paid-up value of each series of convertible debentures issued by it. Sinha appears to have focused his attention for extracting his pound of flesh from all who have prospered. technology and skills. Mr. This is the one and only concession given by FA00 to NRIs. 29(4a)]. thanks to their own knowledge. 74 . The restrictions are: • Investment made by any single investor in equity. he is allowed to continue to hold on to his investments. firms. RBI permission. RBI monitors this on an on-line basis. The special resolution has to be forwarded to the RBI. companies. This is the best that could have happened. • If on conversion of CDs into shares. FA00 has further raised this limit to 40%.. In other words. information.74 by NRI individuals. The second or the third holders can invest up to 5% individually in their own right as the first holder. with or without repatriation rights. It is necessary to take delivery of the securities purchased and give delivery of those sold under the scheme. is required even in respect of shares held before 1. There is a status quo on all the other provisions. To prevent a raid by a consortium of NRIs. certain ceilings are imposed on the percentage of holding of equities and convertible debentures.To protect domestic companies from a corporate raid by the acquisition of a major share holding. etc. the company concerned can pass a special resolution in its general body meeting to enhance the Aforesaid 10% limit to 30%. • The individual ceiling of 5% is only applicable to the first holder of the securities. the prescribed overall ceiling for all NRIs put together is 10% of the share capital. preference shares and convertible debentures of any listed Indian company should not exceed 5% of its total paid-up equity and preference capital. However.
provided the client agrees to it up-front.CHAPTER III SEBI . 75 . In addition the regulations also allow for temporary parking of surpluses in the automated lending and borrowing scheme and borrowing and lending of securities scheme (BLESS) operated by the NSE and the BSE.PORTFOLIO MANAGEMENT NORMS The Securities and Exchange Board of India's working group formed to review the regulations for portfolio management schemes has finalised a set of revised regulations for portfolio managers. which were finalised in a meeting of the working group. The new norms for PMS. A minimum set of risk factors and disclosure requirements in a client contract like a mutual funds offer document and removal on restrictions on investments by PMS managers in corporate debt instruments too have been laid down. SEBI has also permitted more than one company in the same group to obtain registration as a portfolio manager subject to fulfilling all the conditions laid down under the regulations. Regulations for portfolio managers were first promulgated in 1993. Thus a PMS entity can charge a variable performance linked or a fixed fee and even a combination of a fixed cum variable fee. respectively. The new norms also allow for a mutually agreed variable fee structure for PMS clients as opposed to the current fixed fee structure prevalent. In order to ensure that retail investors are not solicited for investments by portfolio managers SEBI has decided to specify a minimum investment amount of Rs 5 lakh per client. will liberalise investment by portfolio managers into areas like derivatives and bill discounting.
Currently. A performance-based fee structure allows portfolio managers to link their profits with the maximization of the client's income and is seen as a transparent fee mechanism. SECTION IV CONCLUSION 76 .This was one of the major demands of portfolio managers who felt that like hedge funds they should be allowed to charge a performance linked fee. PMS investors can withdraw the funds entrusted to PMS managers before a one year period only at the fund manager’s discretion which SEBI feels is not in the investor interest. MFs too are not allowed to charge any performance linked fee and have a fee cap specified by SEBI based on type of the scheme whether equity or debt and assets under management under the scheme. SEBI has also decided to remove the restrictions which prevent PMS investors from withdrawing their investments within the span of a one year period.
The second goal is to attain complete diversification. Certain application of evaluation techniques Degree of risk assumed That is the portfolio properly diversified. And if it is done to infrequently then the benefit of timing maybe foregone. The Sharpe measure indicates the excess returns per unit of total risk. The first major board of portfolio is to derive rates of returns that equal or exceed the returns on a selected portfolio with equal risk. if so is it too much. 77 . Friends and Blume contended that there was an inverse relationship between the risk of the portfolio and its composite performance. If it occurs too often the analysis cost will be high. Ideally investors should buy when prices are low and sell when prices rise higher than their normal fluctuations. does the investor use margins. Several techniques have been derived to evaluate equity portfolio in terms of both risk and return.CHAPTER I EVALUATION OF PORTFOLIO PERFORMANCE Investors must decide how often the portfolio must be revised. Additional work in equity portfolio evaluation has been concerned with models that indicate what components of the management process contributed to the results. The Treynor measure considers the excess returns earned per unit of systematic risk.
Cyclical and market timing Does the investor try to adjust the portfolio and to aggressive neutral or defensive position. On what basis does he formulate his anticipation of market swings.Selection of individual securities Does the investor have ability to select undervalued issues. CHAPTER II INVESTMENT PLANNERS / TIPS TEN COMMANDMENTS 78 . In conclusion investors need to evaluate their own performance and the performance of hired managers. What improvements can be made Risk adjusted returns The investor must compute annual rates of return on the portfolio the level of risk assumed in terms of the portfolio. The investor should compare the risk adjusted returns with those experienced by the market index. Though their various techniques and alternative measures all the measures should be used because they provide different insights regarding the performance of managers.
2. you shall invest in stocks where exit is easy i. Sector allocation: You shall allocate sector weightages that are different from sensex lest you should not achieve the objective of beating the sensex. Leaders only: You shall only buy companies that are leading in their respective industries i. An exception can be made only if there is a big turnaround or restructuring story. As all Homo sapiens can err. You should not forget that they can fall even faster.e. 4.e. Management quality: You shall not buy companies run by managements that have a track record of incessant equity dilution. You shall not fall in the trap of getting excited by every tip even if it looks sexy by its performance in the last few days. None of your investment decisions should violate any of the 10 commandments. Avoid tips: You shall not envy your friends getting rich if his/ her stocks appear to be rising faster than yours. 3. stocks with a minimum market capitalization (we set the limit at Rs100mn) and have good liquidity (average BSE turnover should exceed Rs10mn per day in the last 3 months).A MUST BEFORE YOU INVEST IN ANY STOCK Ten commandments 1. they should be in top 5 in the respective Indian industry. 5. 79 . Also the objective of limiting risk requires you not to go gung-ho on some sectors as their fortunes change without taking your permission. The only exception you can make if you have a reliable report that the management is changing. Liquid and focussed portfolio: You shall limit your portfolio to 10 and only 10 stocks. taking up unrelated projects. All successful investors agree that an unwieldy portfolio is a sure recipe for below average returns. misleading investors by miscommunications or no proven track record.
Such companies include the ones that hive off profitable division for a poor consideration or divert funds to other unknown group companies etc. competition and changes in industry structure. threat of substitution.6. That does not mean you shall ignore P/Es but requires you to evaluate future P/Es keeping in mind P/Es of the peer companies and relative growth prospects. Other things 80 . Industry position: You shall evaluate companies as which considers regards to their competitive position on the Porter Model parameters like bargaining power of buyers and suppliers. 7. Shareholder friendly: You shall not invest in companies that have track record of treating minority or non promoter shareholders like step children. Global competitiveness: You shall not invest in companies that are susceptible to unviablility with competition from imports and global competition. the companies that will have operating cash flows higher than their requirement of cash for capital expenditure and investments only merit investments. You shall find most companies with regulated earnings as out of your investment arena. 10. Valuation: You shall not be carried away by P/E multiples. In other words. You shall presume that import duty structure will be aligned to global norms in making this evaluation. A corollary is that you shall prefer companies with cost advantage. Also the investment candidates should expected to have a favorable change in their EVAs (economic value added). Positive cash flow: You shall invest only in companies that are expected to have a positive cash flow in the next 3 to 5 years. high operating efficiency and superior quality products. That is EVA in the next 2-3 years is expected to be substantially better than the same in the recent past. 8. 9.
Conclusion : In this thesis I have tried to touch apon all the current Investment options which are most sought after today. It is very important for a person to find and balanced investment avenues 81 . disclosures in annual reports etc. transparency.being equal. bonus. Finally the decision as to which is the best option lies with the Investor. prefer companies that are shareholder friendly in terms of dividend.
which would provide you with some opportunity. structure your needs and take a call. Equity could be the one to suit you. BIBILOGRAPHY: 1. If you look at doubling money in less than five years. you need to invest in instrument that possibly can offer 14-15 per cent return. how soon you wish to double your money. Reilly – Keith C Brown 2. Modern Investment Theory -. If you can resist with doubling money in more than five years. Hence before investing it is necessary that one must look at his own risk – return criteria and contingencies and structure the investments to suit these needs.Robert A Haugen 82 . then 24 to 25 per cent and so on. The real risk lies in not thinking about what you want to do with your money. Investment Analysis And Portfolio Management Frank K. yet there are many fixed income instruments. rather than taking random chances. So. If the answer is 5 years then. It would be very clear to you if you ask yourself a question. If it is 3 years.depending on the returns desired and the risks associated with them.
Introduction To Investment – Haim Levy 6. Portfolio Management Handbook – Robert A Strong 7.3. Investors Guide To Indian 5. Investment Management – Frank J Fabozzi 4. Internet Sites : Indiatimes Indiainfoline Hometrade The Economic Times 83 .
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