Investment decisions: Practical aspects
The principles of portfolio management can be applied in practice. It is often considered to be a specialists job because it requires a data bank and professional advice. However, Indian capital market has developed in such a way that investors can get quick and up-to-date information for investment decisions. There are few firms who offer their expertise for individual portfolio management. There are no simple rules, tricks, charts or devices which will provide a return above the average. The market is quite rational, efficient and responsive mechanism that usually cannot be beaten by any single individual. Therefore the following aspects are discussed:
'Blue Chips' means the shares of particularly, well-known and established companies which have shown consistant growth over the years, which have bright future prospects, and which are expected to continue sustained growth in the future. In other words, strong, profitable, established and diviednd paying companies are known as 'Blue Chips'. They are safe investments and they yield regular dividends and appreciate value with satisfying regularity. The yield and appreciation in Blue chips is modest and less than riskier shares. Blue chip companies have a long history of dividend payments. For example, Coca-Cola, an American company has been paying dividends each year since 1893. TICO and ITC, are the Indian bluechip companies. These shares attract the attention of the investors due to their moderate yields and high capital gains. Blue chips do not always remain as blue chips. The stattus of a blue chip changes from time to time on the basis of their performance. 'Blue Chips' are well-established, financially strong and stable companies having a long and unbroken record of earnings and dividends. These companies are leaders and pace-setters in their respective industries. They are also actively traded and fairly priced. The shares of Tata Iron and Steel Co. Ltd., Hindustan Lever Ltd., and MafatlalIndustries Ltd. are some of the examples of Indian blue chips. These companies are managed by farsighted managements. Bluechips can be classified on the basis of the parentage and the years taken to achieve. The parentage blue chips are multinational corporations and large Indian groups. The other group consists of companies having completed 5, 10 and 15 years.
Anji Reddy in 1984 has shown tremendous record of Rs.
.4 lakh in 1985.s maturity phase. They go for latest technology and become more quality oriented and productive. Today. which was started by Dr. For example. It is good for long term investment.37. Dr. Growth stock is a stock that is expected to show above average capital appreciation in the future. They emerge as blue chips. The growth stocks are the shares of fast growing companies whixh show increasing and higher than average earnings per share than the industry. it is reckoned with an international drug market. They launch new projects. They should also take proper care for the timing of buying and selling of these stocks. Most of these companies enjoy a high profile and positive public image. They eventually transform into established growth stocks and become leaders in their product market segments. Emerging blue chips are normally atarted with technical and financial collaboration of multinational companies.99 crores of net profit in 1994-95 as against Rs. acquire new assets and raise more money from investors. The most distinguishing feature of emerging blue chips is rapid-fire growth accompained by high levels of profitability. although the current yield of such shares can be insignificant because of their high priceearning ratios. It is better to invest in emerging blue chips during the growth phase of the company and quit during it. Reddy's Laboratories Ltd. Investors should be careful in identifying an emerging blue chip. ICICI. Sese Goa are some of the emerging blue chips in India. Similarly.Emerging Blue Chip:
The new companies started by new promoters or existing business groups start experiencing growth in sales and profits. These companies achieve a high rate of growth in assets of ploughing back of profits. GTC.
Growth stock means a stock in a company that retains a good portion of it's earnings in anticipation of being able to reinvest them profitabily in the company. In case of emerging blue chip timing is far more crucial for success than in the case of established growth stocks. Apple Industries.
Bombay Dyeing Ltd. The institutional investors are the Mutual Funds.s early pjase the stock is unnoticed and low priced it gets it gets wide publicity during it's growth phase giving the investors excellent rewards. Income stocks pay out a relatively high percentage of their earnings as cividends but growth stocks do not. However. Investors should try tofind out growth stocks. the company reinvests it's earnings into profitable investment opportunities that are expected to increase the value of the company as well as it's stocks. They have both time and resources to dig deeper than the individual investors. it is a difficult task because going by just one or two characteristics. Voltas Ltd. GIC and Commercial Banks.. Bombat Dyeing was established in 1879. an investor has to sell his growth stock during the later stagnation phase or early decline phase. they cannot find out the growth stocks. The composition of a portfolio depends upon the need and objectives. Thus. They are volatile in the sense that price appreciation would be faster when positive signals are recieved but the price could tumble down fast once the signals of sales ar profits levelling acts are noticed though the situation may be only temporary. Many companies do not pay dividends and they publicly state that they have no plans to do so.. LIC. These companies enjoy healthy cash flows. These growth stock companies are usually well-established for a number of years. Financial Analysts and Investment Managers. When the growth potential of a stock becomes widely recognised. Escorts Ltd. Asian Paints Ltd. The second is the theorotical difficulties of reducing these forecasts to present values. documents of the relevant corporations or companies and read them with understanding. They can employ Skilled Economists. Growth stocks are also actively traded. Though in it. Bajaj Auto Ltd.. time of buying and selling of growth stock is also important for investment decisions. earnings and dividends. The first is. Investors should not consider these stocks as growth stocks because a stock that pays no dividends and doesnot increase in value would not be a very attractive investment. But other things rarely are equal particularly in a sophisticated market that is extremely sensitivite to growth. Again.. Normallly the investors should buy the growth stocks during their early phase or growth phase. During the maturity phase it's growth stagnates and price stagnates at a high level. They can have a continuous review and
. For example. They can purchase copies of registration. They plough back their profits. spent considerable amounts on research and development in orderto innovate new products.Growth stocks are in the eye of the beholder. Examples of established growth stocks are Reliance Industries Ltd. These stocks belong to the medium risk category.
Institutional portfolio management:
There is not much difference between the principles governing the management of a portfolio of an individual and an institutional portfolio. There are two problems encountered in appraising growth stocks. it's price is expected to react favourably and to advance ahead of stockd lacking growth appeal so that it's price-earnings ratio and dividend yield fall out of line according to conventional standards. A great deal of stock analysts time is spent trying to discover little known growth stocks. There is little doubt that when other things are equal the forward looking investor will prefer stocks with growth potential to those without. They offer medium returns. Instead. UTI. the practical difficulties of forecasting sales..
Information on councellors and councelling activities is limited because it is considered to be private. These benchmarks may be market indices or specialised benchmarks marks that reflect specific investment styles. They simply buy and hold these securities that contitute their assigned benchmarks. Their special nature is that unlike closed ended institutions. such as shares or fixed income securities. These managers are called passive managers. institutional investor has a great advantage over the average individual investor in managing the portfolio. The clients hire other managers to exceed the returns produced by the benchmarks. Their main objective is to sell shares to the public through public subscribtion. There are different institutional investors. It is listed in a stock exchange and it's shares are traded on the stock exchanges. the open ended institutional investors are often called mutual funds. Passive managers need to make no refeerence to the effiecient set or risk return preferences. There are closed ended and open ended institutional investors. The clients establish performance benchmarks for their managers. AMCs or managers are specialised in a particular asset class. d. They must create portfolios that produce returns exceeding the return on their assigned benchmarks in sufficient magnitude and consistency to satisfy their clients. quality of management and liquidity of funds. c. b. there is continuous purchase and sale of securities. Thus. It operates with the understanding that the quality of management is superior to the quality of investment in funds by an individual investor. Management Liquidity Diversification Analysis and selection of securities Specialised knowledge due to expertise and timing in evaluating investments
An investment advisor councels his clients for a fee. Active managers face a much more difficult task. In the case of active managers.scrutinity of their investment portfolio. UTI is an example of open ended institution. On the other hand. the portfolio selection is a problem. The closed ended institutions operate like a company. It has superior knowledge about the liquidity factors of the funds and it is able to draw upon the special dividend as well as capital appreciation factors of a particular security. The Institutional investors operate under the advantages of diversification. The clients hire some managers to simply match the performance of the benchmarks. Institutional investors such as UTI and other mutual funds typically hire Asset Management Companies(AMCs) to invest their funds. The specialised knowledge helps the institution to diversify in those stocks which will give the ideal combination of securities. These managers are called active managers. The instruments under
. Their portfolios are called index funds. The professional consultants have the following superiority over individual investorsin managing the portfolios: a. e.
However. If investor decides to use an investment councellor. Investing is an art which is required for becoming successful investor. He should also see that the follow up measures regarding reciept of shares. He has to stidy regularly for fimding out innovative ideas and research in order to assist his clients. However. finance. investment councelling plays an important role in the field of investment. capital market and security analysis. have been carried out by his clients from time to time. the councellor and the investor will evaluate the investor's needs and develop a portfolio objective. delivery. Rational investment decisions require skill and knowledge. The securities and other investments are not turned over the councellorbut the investor retains the possession and title. Thus. He should have deep knowledge in specific areas of the investment. the investor has the option of accepting or rejecting the councellor's recommendations. do not possess these skills and knowledge. Third. endorsement. taxation. Many investors need advice and guidance on the construction and revision of their investment portfolio. tranfer. which involves a transfer of title to the trustee. The councellor make specific recommendations about the purchase and sale of existing investments and the investment of any available cash. In India. etc.
. They require highly qualified and expert staff. The means of arriving at the objective will usually be fairly similar to that of the traditional approach. Individual investors in India. He has to match the needs of the investors and the type of investment medias. This is the main difference between councelling and the trust business. First.councellor's supervision may not be known exactly. Investment councellor requires a wide range to knowledge in the fields of economics. He has to keep good relationship with the investors. Therefore they have to depend upon these councellors. The councelling involves three stages. He should see that the investor maintains a systematic record of transactions in securities. He should have professional competence in order to maintain high degree of standards. Investment Agencies and Portfolio Managers render advisory services as well as manage portfolio for their investors. the account is subject to constant supervision and councellor will be in close contact with the client for updating portfolio performance and making recommendations for changes. Second. the large commercial banks with their extensive trust activities also are heavily involved in investment councelling services. The brokers and independent councellors also render investment advice. usually a one year contract will be drawn up between the two parties. the investor's present holding will be analysed with respect to this objective.