Portfolio Management And Investment Alternatives

Shruti Chavarkar

Evaluation of securities. considered as a unit. liquidity and profitability. Effective portfolio management balances between the objectives of safety. It refers to various assets of an investor.Portfolio : • It is a combination of various financial assets like shares. Objective: To minimize risk and maximize gains. • Portfolio Management : • • It means Selection. It is a carefully assets combination within a unified framework. bonds etc. debentures. Objectives of Portfolio Management : Stability of Income Capital Growth Objectives of Portfolio Management Safety Liquidity Tax Incentives . Portfolio Manager : • A professional who manages other people’s or institution’s investment portfolio with the object of profitability. Planning . growth and risk minimization is a portfolio manager.

For this he should have the knowledge of economic and industry needs. Whenever it is necessary he has to diversify his investment for safety. can be converted into cash by selling them. etc. Safety: It is nothing but protection against loss because fluctuations in the market. bonus. debentures etc. A portfolio manager has to take decisions about investments by considering tax implications.Objectives: • • Stability : An investor wants stability in his income and also stability in his own purchasing power of income. Investment should be liquid as well as marketable so that whenever he needs money can get it from his investment. Liquidity : Investments in shares. An investor wants that his basic amount should remain safe. Tax : There should be less tax liability from the investments. • • • . Capital Growth: Investors seek growth stocks which provides a very large capital appreciation by way of rights.

Marketable Financial Assets Money Market Instruments Bonds Equity Shares Mutual Fund Schemes Real Estates Life Insurance Policies Precious Objects Financial Derivatives .Investment Alternatives Non.

50 without any limit. It can be Pledged for raising loans. .1. Ceiling on the interest rate payable on deposits in the savings account. B. No withdrawal is allowed for 6 months.subject to a penalty. 1000 and no maximum limit. guarantee provided by Depositor Insurance Corporation. Interest is calculated half yearly and paid annually. Withdrawal facility after 2 and half years. From 6months to 1 years if any withdrawal made . No tax deduction at source. Non. Interest varies as per the term . . Interest rates are slightly higher than those on bank deposits.Not know personally who is the seller. Bank Deposits :      Very safe. but buying equity share.Marketable Assets • • A. Investment doubles in 8 years. C. It can be Pledged for raising loans. Post Office Time Deposits (POTD) :       Deposits can be made in multiples of Rs.following regulations of RBI . Loans can be raised against bank deposits. Can be encashed prematurely by incurring small penalty. Eg. but before the term of deposit . Can get deduction under section 80 C for tax purpose. These assets are represent personal transactions between the investor and the issuer. Opening a Saving bank account – dealing with the bank personally. interest is paid for the period the deposit held. Fixed deposits with Short term – less interest and long term – High interest It enjoys high liquidity. And on withdrawal after one year .      Kisan Vikas Patra (KVP) : Minimum amount Rs. no interest is payable on it.

1000.      National Savings Certificates Issued at post offices. Rs. Rs.       Company deposits Fixed deposits mobilised by manufacturing companies are regulated by Company Law Board and fixed deposits mobilised by finance companies are regulated by RBI.rated. 300. A manufacturing company can mobilise upto 25% of its net worth from the public and an additional amount equal to 10% of its net worth from its shareholders. ( compound rate of return is 8. Company deposits represent unsecured loans They have to be necessarily credit. Interest rate is 8% monthly and 10% is payable on maturity. No tax benefits on company deposits.banking Finance companies can mobilise a higher amount. . Anon.  E.1. 6. Monthly Income Scheme of the Post Office (MISPO) It is meant to provide regular monthly income to the depositors Minimum amount of investment is Rs.000 in single account and Rs. No TDS. 5000. The term is of 6 years.D. F. 100 becomes Rs. It comes in denominations of Rs 100. The interest rates on company deposits are higher than those on bank fixed deposits. 160. Rs. 5000 and Rs.000 in joint account. Premature withdrawal after one year with 5% deduction before 3 years.16%) Can be deducted from taxable income under 80C. Rs.. 1000 and maximum Rs.      It can be Pledged for raising loans. No TDS. 500. 10000.00. no TDS upto interest income of Rs.

       Public Provident Fund Individuals and HUFs can participate in this scheme. Each employee has a separate provident fund account in which both the employer and the employee are required to contribute a certain minimum amount on a monthly basis. Interest is accumulated in the account and not paid annually to the employee and totally exempted from taxes. The Subscriber can make one withdrawal every year from the sixth year to fifteenth year. 100 per year and maximum deposit per year is Rs. the employee is eligible to take a loan against the provident fund balance H. and contribution made by the employee can be deducted from taxable income under section 80 C.5 % and totally exempted from taxes. ) Minimum amount of Rs.G.%. It can be deducted from taxable income u/s 80 C. . Within a certain limit . The employee can choose to contribute additional amounts. Compound interest is 9. Interest is accumulated in the account and not paid annually to the employee. The number of contributions has to be 16. Compound interest is 8. Employee Provident Fund Scheme       A major vehicle of savings for salaried employees. 70000. subject to certain restrictions. (The period of PPF is of 15 years. Contribution made by the employer fully exempt. A PPF account may be opened at any branch of the State Bank of India or its subsidiaries or at specified branches of other nationalized banks.

Commercial papers and repos. They are sold at discount and redeemed at par. Maturity period of 3 months to 1 year. corporates and mutual funds. A.      Treasury Bills: They represent the obligations of the Government of India which have a primary tenor like 91 days and 364 days. financial institutions. Certificate of deposits.       Certificates of Deposits. CDs are risk free. Highly liquid and have negligible risk. . They are sold on an auction basis every week in certain minimum denominations by the RBI. B. (CD) They are short term deposits which are transferable from one party to another. Individual participants scarcely participate in the money market directly. CDs offer higher rate of interest than Treasury bills or term deposits. But still they have an appeal – They can be transacted readily and there is a very active secondary market for them They have nil credit risk and negligible price risk. Yield on TB is somewhat low.2. Bank and Financial Institutes are major issuers of CDs. Principal investors in CDs are banks. Money Market Instruments • • • • Debt instruments which have a maturity of less than one year at the time of issue are called as money market instruments. Treasury bills.

It carries name of the holder and is registered with the PDO ( Public Debt Office) .term debt instruments. Even though these securities carry some tax advantages.C.    Government Securities Debt securities issued by Central govt.   Repos ( Repurchase Agreement) It involves a simultaneous “ sale and purchase “ agreement. insurance companies and provident funds mainly because of some statutory compulsions. preference shares etc. D.investment.For transfer .and quazi. A promissory note. The difference between the sale price and repurchase price represents the interest cost to A ( doing Repo) and the interest income to B ( doing Reverse Repo) .. A sells securities to B at a certain price and simultaneously agrees to repurchase the same after a specified time at a slightly higher price. Example: A wants short term fund and B wants to make a short term. 3. It can be transferred to a buyer by an endorsement by the seller. The issuer of a bond promises to pay periodic interest over the life of the instruments and principal amount at the time of redemption.Government securities. • • • Commercial Paper Short term Unsecured promisory note issued by firms that are considered to be financial strong. A. The current holder has to present the note to the Government Treasury to receive interest and other payments. which contains a promise by the president of India ( Govt or State) to pay as per a given schedule. financial institutions.    . PSU bonds. debentures. The PDO pays interest to the holders registered with it on the specified date of payment. It is sold at a discount and redeemed at par . issued to the original holder. Bonds ( Fixed Income Securities) Bonds or debentures represents long. state govt. They are held by banks. A bearer security where the interest and other payments are made to the holder of the security.government agencies. it has to be lodged with the PDO along with a duly completed transfer deed. they have traditionally not appeared to individual investors because of low rate of interest and long maturities and somewhat illiquid retail markets.. Maturity period is 90 to 180 days.

   . a trustee is appointed through a deed. Payable half yearly. The trustee is usually a bank or a financial Institution. Entrusted with the role of protecting the interest of debenture holders. Saving bonds         Individuals. The company has the freedom to choose the redemption period. The bonds can be offered as security to banks for availing loans. C. and NRIs can invest in these bonds.5 years.B. Nomination facility is available. Interest rate. Maturity period. The bonds are exempt from Wealth tax ( No limit) .8% per annum . The bonds are transferable. the trustee is responsible for ensuring that the borrowing firm fulfills its contractual obligations. The interest is taxable. HUF.Rs. All debentures issued with a maturity period of more than 18 months must be necessarily creditrated. Minimum Amount. 1000 and no upper limit.  Private Sector Debentures : When a debenture issue is sold to the investing public. Debentures are convertible . They can covert into equity shares on certain terms and conditions that are pre.specified.

secured lenders. The amount of capital that a company can issue as per its memorandum represents the Authorized Capital. There is no TDS on interest. These shares are redeemable.  Shareholders elect the board of directors and have the right to vote on every resolution placed before the company. They bear the risk and enjoys the rewards of ownership. Dividend is exempted from tax. when there is inadequacy of profit. Hence . Dividend is payable only out of the distributable profit. The amount offered by the company to the investors is called the Issued Capital.Claims of all others ( debenture holders. Dividend is generally cumulative. E. They are transferable.      Preference Shares: They carry a fixed rate of dividend. unsecured lenders. Part of the Issued Capital that has been subscribed by the investors is called Paid – up Capital. Dividend skipped in one year has to be paid subsequently before equity dividend can be paid. No dividend is payable. Shareholders. There is no stamp duty applicable on transfer. This means that the profit after tax less preference dividend belongs to equity shareholders. .  The equity shareholders have a residual claim to the income of the firm. The period is usually 7 to 12 years. They are traded on the stock exchange. Shareholders collectively own the company.D. preferred shareholders and other creditors) are prior to the claim of the eq.       Public Sector Undertaking Bonds ( PSU bonds) : Two varieties: Taxable bonds and Tax free bonds A PSU can issue tax free bonds only with the prior approval of the Ministry of Finance. 4.  Equity Shareholders have a residual claim over the assets of the company in the event of liquidation. Equity Shares : Equity capital represents ownership capital.

1986 – UTI was the only Mutual fund in India. Mutual Fund shall be constituted in the form of trust executed by the sponsor in favour of the trustees. AMC( Asset Management Company) . Mutual Fund represents a vehicle for collective investment. The moneys collected under schemes shall be invested only in transferable securities. No schemes shall be launched by the AMC unless it is approved by the trustees and a copy of the offer document has been filed with SEBI. Mutual Fund     If you find difficulty in investing directly to shares or debentures . The sponsor or the trustees( if authorized by the trust deed ) shall appoint the AMC. MF schemes invest in 3 categories :    Stocks. The Mutual Fund can appoint the custodian . .debt instruments ( maturity period more than 1 year) Cash – bank deposits and debt instruments ( maturity period less than 1 year) Mutual funds in India are regulated by SEBI. you can invest in these financial assets indirectly through a Mutual Fund. registrars and transfer agents.5. Entities involved in Mutual Fund – Sponsor. trustees. The net Assets Value ( NAV) and sale and repurchase price of MF schemes must regularly published in daily newspapers.Equity and equity related instruments Bonds. Custodian.

but has no obligations to do something.6.  Futures:  Options :    It gives owner the right to buy or sell an underlying assets on or before a given date at a predetermined price. Now if the price of XYZ limied is Rs.to sell . whereas the party holding the short position loses if the price increases and vice versa.100 from B to be delivered 90 days hence. 95. if the price of the XYZ limited happens to be 105 Then A gains Rs. Special kind of financial contract in which the holder enjoys the right . It may be viewed as a side bet on the assets. .Call option – to purchase and Put Option. The party which agrees to purchase the assets is said to have a Long Position and The party which agrees to sell the assets is said to have a Short Position. The party holding the long position benefits if the price increases . 5000.Short Position On the 90th day . 5000 ( 1000( 95-100) But B gains Rs. Example :       A agrees to buy 1000 shares of XYZ limited at Rs. a fixed number of shares of a certain stock at a given price on or before the expiration date. It is an agreement between two parties to exchange an asset for cash at a predetermined future date for a price that is specified today. Two options. Financial Derivatives        It is an instruments whose value depends on the value of some underlying assets. 5000 ( 1000 no. Then A loses Rs. A – Long position and B. 5000. ( 105-100) But B losses Rs.

Tax saving investment. etc. It requires time and efforts for managing it. Legal formalities . It is a method of compulsory saving over a long period out of regular income. No liquidity. Real Estate: . and principal amount) Supply of land is limited and demand for it is high. ( interest on loan. Profitable investment and there is no risk in this investment. registration . Commercial property. It provides loan facility from banks. Huge investment is required. Life Insurance • • • • • • • • • • • • • • • • Basic need of customer-protection and savings. etc.7. In practice . Any sum received under a life Insurance policy. Premium payable can be deducted from taxable income under section 80 C of Income tax Act . are complicated and there is a chance of cheating at the time of buying and selling 8. including the sum allocated by way of bonus on such policy is exempt from under Section 10(10 D) of the Income Tax Act. Interest on loan taken for buying and constructing is tax deductible within certain limits. Protection from unwelcome events such as death or long term sickness/ disability. agricultural land. Residential house. Policies that are designed as savings contracts allow the policyholder to build up funds to meet specific investment objectives such as income in retirement or repayment of a loan. quick appreciation in the value of assets. many policies provide a mixture of savings and protection benefits.

9. Highly liquid with less trading commission. silver. Risky due to chances of theft. . therefore the return on investment is also increasing. No tax advantage associated with them. The market prices are continuously increasing . precious stones . Ex: gold. Precious objects: • • • • • • • • Small in size but highly valuable in monetary terms. They can not provide regular current income. There is a possibility of being cheated. etc.

In response to such changes. short term high priority objectives long term high priority objectives low priority objectives money backing objectives 2. real estate. Selection of securities: To maximize their expected return and at the same time to minimise the risk.Portfolio Management Process 1. 4. This is the proportion of ‘ Stocks’ and ‘bonds’ in the portfolio. 6. Be careful about the current market conditions and about financial situation while deciding the investment policy. Revision means changing the asset allocation of a portfolio in such a . and safety of principal. Portfolio Execution: Implementing portfolio plan by buying and or selling specified securities in given amounts. Portfolio Revision and Evaluation : The value of the portfolio as well as its composition may change a stocks and bonds fluctuate. an appropriate portfolio strategy has to be hammered out. 5. etc. 3. fixed income securities. Formulation of Portfolio Strategy/ policy: Once a certain assets mix is chosen. There are different classes of investments like money market instruments.Choice of Asset Mix: The most important decision in portfolio management is the assets mix decisions. periodic rebalancing of the portfolio is required. The relative importance of these objectives should be specified.This is an important practical step that has a bearing on investment results. equity share. Specification of investment objectives and constraints: The typical objectives sought by investors are current income. capital appreciation.

Portfolio Revision and Evaluation : The value of the portfolio as well as its composition may change a stocks and bonds fluctuate. In response to such changes. . The key dimensions of portfolio performance evaluation are risk and return.6. Review may provide useful feedback to improve the quality of the portfolio management process on a continuing basis. periodic rebalancing of the portfolio is required. Revision means changing the asset allocation of a portfolio in such a manner that it gives minimum risk and maximum return. The performance of a portfolio should be evaluated periodically.

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