invst mgt risk and return of portfolio mgt

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INDEX

SRNO. TOPICS PAGE NO

1.PORTFOLIO MANAGEMENT -

INTRODUCTION5-14

2. TYPES OF PORTFOLIO MANAGEMENT 15-17

3. PORTFOLIO MANAGEMENT PROCESS 18-29

4. RISK RETURN ANALYSIS 3-33

5. PORTFOLIO T!EORIES 34-41

". PERSONS IN#OL#ED IN PORTFOLIO

MANAGEMENT

42-45

CONCLUSION 4"-47

$I$LOGRAP!Y 48

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C!APTER% 1

PORTFOLIO MANAGEMENT

INTRODUCTION

Stock exchangeoperations are peculiar in nature and most of the Investors feel

insecure in managing their investmenton the stock market because it is difficult for

an individual to identify companies which have growth prospects for investment.

Further due to volatile nature of the markets, it requires constant reshuffling of

portfolios to capitalize on the growth opportunities. ven after identifying thegrowth oriented companies and their securities, the trading practices are also

complicated, making it a difficult task for investors to trade in all the exchange and

follow up on post trading formalities.

Investors choose to hold groups of securities rather than single security that

offer the greater expected returns. !hey believe that a combination of securities

held together will give a beneficial result if they are grouped in a manner to securehigher return after taking into consideration the risk element. !hat is why

professional investment advice through portfolio management service can help the

investors to make an intelligent and informed choice between alternative

investments opportunities without the worry of post trading hassles.

MEANING OF PORTFOLIO MANAGEMENT

"ortfolio management in common parlance refers to the selection of securities

and their continuous shifting in the portfolio to optimize returns to suit the

ob#ectives of an investor. !his however requires financial expertise in selecting the

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right mix of securities in changing market conditions to get the best out of the

stock market. In India, as well as in a number of western countries, portfolio

management service has assumed the role of a specialized service now a days and

a number of professional merchant bankers compete aggressively to provide the

best to high net worth clients, who have little time to manage their investments.

!he idea is catching on with the boom in the capital market and an increasing

number of people are inclined to make profits out of their hard$earned savings.

"ortfolio management service is one of the merchant banking activities

recognized by Securities and xchange %oard of India &S%I'. !he service can be

rendered either by merchant bankers or portfolio managers or discretionary

portfolio manager as define in clause &e' and &f' of (ule ) of Securities and

xchange %oard of India&"ortfolio *anagers'(ules, +- and their functioning are

guided by the S%I.

ccording to the definitions as contained in the above clauses, a portfolio

manager means any person who is pursuant to contract or arrangement with a

client, advises or directs or undertakes on behalf of the client &whether as a

discretionary portfolio manager or otherwise' the management or administration of

a portfolio of securities or the funds of the client, as the case may be. merchant

banker acting as a "ortfolio *anager shall also be bound by the rules and

regulations as applicable to the portfolio manager.

(ealizing the importance of portfolio management services, the S%I has laid

down certain guidelines for the proper and professional conduct of portfolio

management services. s per guidelines only recognized merchant bankers

registered with S%I are authorized to offer these services.

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"ortfolio management or investment helps investors in effective and efficient

management of their investment to achieve this goal. !he rapid growth of capital

markets in India has opened up new investment avenues for investors.

!he stock markets have become attractive investment options for the common

man. %ut the need is to be able to effectively and efficiently manage investments in

order to keep maximum returns with minimum risk.

/ence this is the study on 0PORTFOLIO MANAGEMENT 1 IN#ESTMENT

DECISION2 so as to examine the role, process and merits of effective investment

management and decision.

DEFINITIONS OF PORTFOLIO

1& I'()*+,*/,0*.,

,)+,' of '()*+)'+* &all' owned by the same '0(06 or

,6'6+,'. !hese investments often include *+,*, which are investments in

individual :*')**)*3 :,'0*, which are investments in 0):+that are designed

to )6''+))*+3 and +6 ;'0*, which are essentially


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a' ll the securities held for investment as by an individual, bank,

investment company, etc.

b' list of such securities.

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DEFINITIONS OF PORTFOLIO MANAGEMENT

1& I'()*+,*>,0*.,

!heprocessof managing the assetsof a mutual fund, including choosingand monitoringappropriate investmentsand allocating fundsaccordingly.

2& I'()*+, G,**6=

5etermining the mix of assets to hold in a portfolio is referred to as portfolio

management. fundamental aspect of portfolio management is choosing assets

which are consistent with the portfolio holder4s investment ob#ectives and risk

tolerance. !he ultimate goal of portfolio management is to achieve the optimum

return for a given level of risk. Investors must balance risk and performance in

making portfolio management decisions. "ortfolio management strategies may

be either active or passive. n investor who prefers passive portfolio

management will likely choose to invest in low cost index funds with the goal

of mirroring the market4s performance. n investor who prefers active portfolio

management will choose managed funds which have the potential to outperform

the market. Investors are generally charged higher initial fees and annual

management fees for active portfolio management.

3& F'6'6 D+,'6=

*anaging a large single portfolio or being employed by its owner to do so.

"ortfolio managers have the knowledge and skill which encourage people to put

their investment decisions in the hands of a professional &for a fee'.

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DEFINITION OF DISCRETIONARY PORTFOLIO

MANAGEMENT

$*')**D+,'6=.,

Investment account arrangement in which an '()*+)'+ 6'6) makes

the buy$sell decisions without referring to the account owner &client' for every

transaction. !he manager, however, must operate within the agreed upon limits

to achieve the client4s stated investment ob#ectives.

DEFINITIONS OF PRO?ECT PORTFOLIO MANAGEMENT

1& I'+)')+., /):,


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MEANING OF PORTFOLIO MANAGERS

"ortfolio manager means any person who enters into a contract or arrangement

with a client. "ursuant to such arrangement he advises the client or undertakes on

behalf of such client management or administration of portfolio of securities or

invests or manages the client6s funds.

discretionary portfolio manager means a portfolio manager who exercises or

may under a contract relating to portfolio management, exercise any degree of

discretion in respect of the investment or management of portfolio of the portfolio

securities or the funds of the client, as the case may be. /e shall independently or

individually manage the funds of each client in accordance with the needs of the

client in a manner which does not resemble the mutual fund.

non discretionary portfolio manager shall manage the funds in accordance

with the directions of the client.

portfolio manager by virtue of his knowledge, background and experience is

expected to study the various avenues available for profitable investment and advise

his client to enable the latter to maximize the return on his investment and at the

same time safeguard the funds invested.

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SCOPE OF PORTFOLIO MANAGEMENT%

"ortfolio management is an art of putting money in fairly safe, quite profitable

and reasonably in liquid form. n investor6s attempt to find the best combination of

risk and return is the first and usually the foremost goal. In choosing among

different investment opportunities the following aspects risk management should be

considered7

6& !he selection of a level or risk and return that reflects the investor6s tolerance

for risk and desire for return, i.e. personal preferences.

:& !he management of investment alternatives to expand the set of opportunitiesavailable at the investors acceptable risk level.

!he very risk$averse investor might choose to invest in mutual funds. !he more

risk$tolerant investor might choose shares, if they offer higher returns. "ortfolio

management in India is still in its infancy. n investor has to choose a portfolio

according to his preferences. !he first preference normally goes to the necessities

and comforts like purchasing a house or domestic appliances. /is second preference

goes to some contractual obligations such as life insurance or provident funds. !he

third preference goes to make a provision for savings required for making day to

day payments. !he next preference goes to short term investments such as 8!I

units and post office deposits which provide easy liquidity. !he last choice goes to

investment in company shares and debentures. !here are number of choices and

decisions to be taken on the basis of the attributes of risk, return and tax benefits

from these shares and debentures. !he final decision is taken on the basis of

alternatives, attributes and investor preferences.

For most investors it is not possible to choose between managing one6s own

portfolio. !hey can hire a professional manager to do it. !he professional managers

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provide a variety of services including diversification, active portfolio management,

liquid securities and performance of duties associated with keeping track of

investor6s money.

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NEED FOR PORTFOLIO MANAGEMENT%

"ortfolio management is a process encompassing many activities of investment

in assets and securities. It is a dynamic and flexible concept and involves regular

and systematic analysis, #udgment and action. !he ob#ective of this service is to

help the unknown and investors with the expertise of professionals in investment

portfolio management. It involves construction of a portfolio based upon the

investor6s ob#ectives, constraints, preferences for risk and returns and tax liability.

!he portfolio is reviewed and ad#usted from time to time in tune with the market

conditions. !he evaluation of portfolio is to be done in terms of targets set for risk

and returns. !he changes in the portfolio are to be effected to meet the changing

condition.

"ortfolio construction refers to the allocation of surplus funds in hand among a

variety of financial assets open for investment. "ortfolio theory concerns itself with

the principles governing such allocation. !he modern view of investment is oriented

more go towards the assembly of proper combination of individual securities to

form investment portfolio.

combination of securities held together will give a beneficial result if they

grouped in a manner to secure higher returns after taking into consideration the risk

elements.

!he modern theory is the view that by diversification risk can be reduced.

5iversification can be made by the investor either by having a large number of

shares of companies in different regions, in different industries or those producing

different types of product lines. *odern theory believes in the perspective of

combination of securities under constraints of risk and returns.

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O$?ECTI#ES OF PORTFOLIO MANAGEMENT%

T) 6@, ,:@)+()* ,; %-

1& S)+=BS6;)+= ,; P'


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7& F6(,6:) T6 S+6+*% !he effective yield an investor gets form his

investment depends on tax to which it is sub#ect. %y minimizing the tax

burden, yield can be effectively improved.

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$ASIC PRINCIPLES OF PORTFOLIO MANAGEMENT%

!here are two basic principles for effective portfolio management which are given

below7$

I. E;;)+() '()*+)'+ ' ;6+,*-

a) Fiscal, financial and monetary policies of the :ovt. of India and the

(eserve %ank of India.

b) Industrial and economic environment and its impact on industry.

"rospect in terms of prospective technological changes, competition in the

market, capacity utilization with industry and demand prospects etc.

II. C,'*+6'+ R)()> ,; I'()*+)'+% It requires to review the investment in

securities and to continue the selling and purchasing of investment in more

profitable manner. For this purpose they have to carry the following analysis7

a) !o assess the quality of the management of the companies in which

investment has been made or proposed to be made.

b) !o assess the financial and trend analysis of companies %alance Sheet and

"rofit and ;oss ccounts to identify the optimum capital structure and better

performance for the purpose of withholding the investment from poor

companies.

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& !o analyze the security market and its trend in continuous basis to arrive at a

conclusion as to whether the securities already in possession should be

disinvested and new securities be purchased. If so the timing for investment

or dis$investment is also revealed.

CHAPTER 2

TYPES OF PORTFOLIO MANAGEMENT

T)) 6) (6,* +=


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pension funds, corporations etc.' or private investors &both directly via investment

contracts and more commonly via collective investment schemes e.g. mutual funds

or xchange !raded Funds'.

!he term 6**)+ 6'6))'+ is often used to refer to the investment

management of collective investments,&not necessarily' whilst the more generic

;'0 6'6))'+may refer to all forms of institutional investment as well as

investment management for private investors. Investment managers who specialize

in advisoryor discretionarymanagement on behalf of &normally wealthy' private

investors may often refer to their services as >)6+ 6'6))'+ or


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2. IT PORTFOLIO MANAGEMENT%

IT


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& P,@)+ P,+;,, -!his type of portfolio management specially address the

issues with spending on the development of innovative capabilities in terms of

potential (=I and reducing investment overlaps in situations where

reorganization or acquisition occurs. !he management issues with the second

type of portfolio management can be #udged in terms of data cleanliness,

maintenance savings, suitability of resulting solution and the relative value of

new investments to replace these pro#ects.

3. PRO?ECT PORTFOLIO MANAGEMENT%

"ro#ect portfolio management organizes a series of pro#ects into a single

portfolio consisting of reports that capture pro#ect ob#ectives, costs, timelines,

accomplishments, resources, risks and other critical factors. xecutives can then

regularly review entire portfolios, spread resources appropriately and ad#ust

pro#ects to produce the highest departmental returns.

"ro#ect management is the discipline of planning, organizing and managing

resources to bring about the successful completion of specific pro#ect goals and

ob#ectives.

pro#ect is a finite endeavor &having specific start and completion dates'

undertaken to create a unique product or service which brings about beneficial

change or added value. !his finite characteristic of pro#ects stands in contrast to

processes, or operations, which are permanent or semi$permanent functional work

to repetitively produce the same product or service. In practice, the management of

these two systems is often found to be quite different, and as such requires the

development of distinct technical skills and the adoption of separate management.

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CHAPTER: 3

PORTFOLIO MANAGEMENT PROCESS%

(A) T!ERE ARE T!REE MA?OR ACTI#ITIES IN#OL#ED IN AN

EFFICIENT PORTFOLIO MANAGEMENT /!IC! ARE AS

FOLLO/S%-

a) Identification of assets or securities, allocation of investment and also

identifying the classes of assets for the purpose of investment.

b) !hey have to decide the ma#or weights, proportion of different assets in the

portfolio by taking in to consideration the related risk factors.

c) Finally they select the security within the asset classes as identify.

!he above activities are directed to achieve the sole purpose of maximizing

return and minimizing risk on investment.

It is well known fact that portfolio manager balances the risk and return in a

portfolio investment. >ith higher risk higher return may be expected and vice

versa.

$& IN#ESTMENT DECISION%

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:iven a certain sum of funds, the investment decisions basically depend upon

the following factors7$

I. O:@)+()* ,; I'()*+)'+ P,+;,,% !his is a crucial point which a Finance

*anager must

consider. !here can be many ob#ectives of making an investment. !he

manager of a provident fund portfolio has to look for security and may be

satisfied with none too high a return, where as an aggressive investment

company be willing to take high risk in order to have high capital

appreciation.

/ow the ob#ectives can affect in investment decision can be seen from the

fact that the 8nit !rust of India has two ma#or schemes 7 Its 0capital units2 are

meant for those who wish to have a good capital appreciation and a moderate

return, where as the ordinary unit are meant to provide a steady return only.

!he investment manager under both the scheme will invest the money of the

!rust in different kinds of shares and securities. So it is obvious that the

ob#ectives must be clearly defined before an investment decision is taken.

II. S))+,' ,; I'()*+)'+% /aving defined the ob#ectives of the investment, the

next decision is to decide the kind of investment to be selected. !he decision

what to buy has to be seen in the context of the following7$

a) !here is a wide variety of investments available in market i.e. quity shares,

preference share, debentures, convertible bond, :ovt. securities and bond,

capital units etc. =ut of these what types of securities to be purchased.

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b) >hat should be the proportion of investment in fixed interest dividend

securities and variable dividend bearing securities? !he fixed one ensures a

definite return and thus a lower risk but the return is usually not as higher as

that from the variable dividend bearing shares.

c) If the investment is decided in shares or debentures, then the industries

showing a potential in growth should be taken in first line. Industry$wise$

analysis is important since various industries are not at the same level from

the investment point of view. It is important to recognize that at a particular

point of time, a particular industry may have a better growth potential than

other industries. For example, there was a time when #ute industry was in

great favour because of its growth potential and high profitability, the

industry is no longer at this point of time as a growth oriented industry.

d) =nce industries with high growth potential have been identified, the next

step is to select the particular companies, in whose shares or securities

investments are to be made.

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FUNDAMENTAL ANALYSIS%

A&FUNDAMENTAL ANALYSIS OF GRO/T! ORIENTED COMPANIES%

=ne of the first decisions that an investment manager faces is to identify the

industries which have a high growth potential. !wo approaches are suggested in

this regard. !hey are7

a) S+6+*+6 A'6=** ,; P6*+ P);,6')%

statistical analysis of the immediate past performance of the share price indices

of various industries and changes there in related to the general price index of

shares of all industries should be made. !he (eserve %ank of India index numbers

of security prices published every month in its bulletin may be taken to represent

the behaviour of share prices of various industries in the last few years. !he related

changes in the price index of each industry as compared with the changes in the

average price index of the shares of all industries would show those industries

which are having a higher growth potential in the past few years. It may be notedthat an Industry may not be remaining a growth Industry for all the time. So he

shall now have to make an assessment of the various Industries keeping in view the

present potentiality also to finalize the list of Industries in which he will try to

spread his investment.

b) A**)**' +) I'+'* #6) ,; 6' I'0*+=BC,


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the industry within which the company fails and the national and international

economic scene. It is the #ob of the investment manager to examine and weigh the

various factors and #udge the quality of the share or the security under

consideration. !his approach is known as the intrinsic value approach.

!he ma#or ob#ective of the analysis is to determine the relative quality and the

quantity of the security and to decide whether or not is security is good at current

markets prices. In this, both qualitative and quantitative factors are to be

considered.

$& INDUSTRY ANALYSIS

First of all, an assessment will have to be made regarding all the conditions and

factors relating to demand of the particular product, cost structure of the industry

and other economic and :overnment constraints on the same. s we have

discussed earlier, an appraisal of the particular industry6s prospect is essential and

the basic profitability of any company is dependent upon the economic prospect of

the industry to which it belongs. !he following factors may particularly be kept in

mind while assessing to factors relating to an industry.

D)6'0 6'0 S


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agencies like the planning commission, @hambers of @ommerce and

institutions like A@(, etc.

!he management expert identifies fives stages in the life of an industry. !hese

are 0Introduction, development, rapid growth, maturity and decline2. If an

industry has already reached the maturity or decline stage, its future demand

potential is not likely to be high.

(i) P,;+6:+=% It is a vital consideration for the investors as profit is the

measure of performance and a source of earning for him. So the cost structure

of the industry as related to its sale price is an important consideration. In

India there are many industries which have a growth potential on account of

good demand position. !he other point to be considered is the ratio analysis,

especially return on investment, gross profit and net profit ratio of the existing

companies in the industry. !his would give him an idea about the profitability

of the industry as a whole.

(ii) P6+6 C66+)*+* ,; +) I'0*+=% ach industry has its own

characteristics, which must be studied in depth in order to understand their

impact on the working of the industry. %ecause the industry having a fast

changing technology become obsolete at a faster rate. Similarly, many

industries are characterized by high rate of profits and losses in alternate

years. Such fluctuations in earnings must be carefully examined.

(iii) L6:, M6'6))'+ R)6+,'* ' +) I'0*+=% !he state of labour$

management relationship in the particular industry also has a great deal of

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influence on the future profitability of the industry. !he investment manager

should, therefore, see whether the industry under analysis has been

maintaining a cordial relationship between labour and management.

=nce the industry6s characteristics have been analyzed and certain industries with

growth potential identified, the next stage would be to undertake and analyze all

the factors which show the desirability of various companies within an industry

group from investment point of view.

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C& COMPANY ANALYSIS%

!o select a company for investment purpose a number of qualitative factors have to

be seen. %efore purchasing the shares of the company, relevant information must

be collected and properly analyzed. A' *+6+() *+ ,; ;6+,* > )< +)

6'6=*+ ' +6' +) '()*+)'+ 0)*,' * ()' :),>. /owever, it must be

emphasized that the past performance and information is relevant only to the extent

it indicates the future trends. /ence, the investment manager has to visualize the

performance of the company in future by analyzing its past performance.

1) S) 6'0 R6''% rough idea regarding the size and ranking of the

company within the economy, in general, and the industry, in particular,

would help the investment manager in assessing the risk associated with the

company. In this regard the net capital employed, the net profits, the return

on investment and the sales volume of the company under consideration

may be compared with similar data of other company in the same industry

group. It may also be useful to assess the position of the company in terms

of technical knowhow, research and development activity and price

leadership.

2) G,>+ R),0% !he growth in sales, net income, net capital employed and

earnings per share of the company in the past few years must be examined.

!he following three growth indicators may be particularly looked in to &a'

"rice earnings ratio, &b' "ercentage growth rate of earnings per annum and

&c' "ercentage growth rate of net block of the company. !he price earnings

ratio is an important indicator for the investment manager since it shows the

number the times the earnings per share are covered by the market price of a

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share. !heoretically, this ratio should be same for two companies with

similar features. /owever, this is not so in practice due to many factors.

/ence, by a comparison of this ratio pertaining to different companies the

investment manager can have an idea about the image of the company and

can determine whether the share is under$priced or over$priced. n

evaluation of future growth prospects of the company should be carefully

made. !his requires the analysis of the existing capacities and their

utilization, proposed expansion and diversification plans and the nature of

the company6s technology.

!he existing capacity utilization levels can be known from the quantitative

information given in the published profit and loss accounts of the company.

!he plans of the company, in terms of expansion or diversification, can be

known from the directors reports the chairman6s statements and from the

future capital commitments as shown by way of notes in the balance sheets.

!he nature of technology of a company should be seen with reference to

technological developments in the concerned fields, the possibility of its

product being superseded of the possibility of emergence of more effective

method of manufacturing.

:rowth is the single most important factor in company analysis for the

purpose of investment management. company may have a good record of

profits and performance in the past3 but if it does not have growth potential,

its shares cannot be rated high from the investment point of view.

D& FINANCIAL ANALYSIS%

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n analysis of financial for the past few years would help the investment manager

in understanding the financial solvency and liquidity, the efficiency with which the

funds are used, the profitability, the operating efficiency and operating leverages of

the company. For this purpose certain fundamental ratios have to be calculated.

From the investment point of view, the most important figures are earnings per

share, price earnings ratios, yield, book value and the intrinsic value of the share.

!he five elements may be calculated for the past ten years or so and compared with

similar ratios computed from the financial accounts of other companies in the

industry and with the average ratios of the industry as a whole. !he yield and the

asset backing of a share are important considerations in a decision regarding

whether the particular market price of the share is proper or not.

Barious other ratios to measure profitability, operating efficiency and turnover

efficiency of the company may also be calculated. !he return on owner6s

investment, capital turnover ratio and the cost structure ratios may also be worked

out. !o examine the financial solvency or liquidity of the company, the investment

manager may work out current ratio, liquidity ratio, debt equity ratio, etc. !hese

ratios will provide an overall view of the company to the investment analyst. /e

can analyze its strengths and weakness and see whether it is worth the risk or not.

& 6+= ,; M6'6))'+% !his is an intangible factor. Cet it has a very

important bearing on the value of the shares. very investment manager

knows that the shares of certain business houses command a higher premium

than those of similar companies managed by other business houses. !his is

because of the quality of management, the confidence that the investors have

in a particular business house, its policy vis$D$vis its relationship with the

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investors, dividend and financial performance record of other companies in

the same group, etc.

!his is perhaps the reason that an investment manager always gives a close

look to the management of the company whose shares he is to invest. Euality

of management has to be seen with reference to the experience, skill and

integrity of the persons at the helm of the affairs of the company. !he policy

of the management regarding relationship with the share holders is an

important factor since certain business houses believe in generous dividend

and bonus distributions while others are rather conservative.

& L,6+,' 6'0 6:, 6'6))'+ )6+,'*% !he locations of the

company6s manufacturing facilities determine its economic viability which

depends on the availability of crucial inputs like power, skilled labour and raw

materials etc. Aearness to market is also a factor to be considered.

In the past few years, the investment manager has begun looking into the stateof labour management relations in the company under consideration and the

area where it is located.

(iii) P6++)' ,; E*+' S+, !,0'% n analysis of the pattern of the existing

stock holdings of the company would also be relevant. !his would show the

stake of various parties associated with the company. n interesting case in

this regard is that of the "un#ab Aational %ank in which the ;.I.@. and other

financial institutions had substantial holdings. >hen the bank was

nationalized, the residual company proposed a scheme whereby those

shareholders, who wish to opt out, could receive a certain amount as

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compensation in cash. It was only at the instant and bargaining strength of

institutional investors that the compensation offered to the shareholders, who

wish to opt out of the company, was raised considerably.

(iv) M6)+6:+= ,; +) S6)*% nother important consideration for an

investment manager is the marketability of the shares of the company. *ere

listing of the share on the stock exchange does not automatically mean that the

share can be sold or purchased at will. !here are many shares which remain

inactive for long periods with no transactions being affected.

!o purchase or sell such scripts is a difficult task. In this regard, dispersal of

share holding with special reference to the extent of public holding should be

seen. !he other relevant factors are the speculative interest in the particular

scrip, the particular stock exchange where it is traded and the volume of

trading.

Fundamental analysis thus is basically an examination of the economics and

financial aspects of a company with the aim of estimating future earnings and

dividend prospect. It included an analysis of the macro economic and political

factors which will have an impact on the performance of the firm. fter having

analyzed all the relevant information about the company and its relative strength

vis$D$vis other firm in the industry, the investor is expected to decide whether he

should buy or sell the securities.

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C& TIMING OF PURC!ASES%-

!he timing of dealings in the securities, specially shares is of crucial

importance, because after correctly identifying the companies one may lose money

if the timing is bad due to wide fluctuation in the price of shares of that companies.

!he decision regarding timing of purchases is particularly difficult because of

certain psychological factors. It is obvious that if a person wishes to make any

gains, he should buy cheap and sell dear, i.e. buy when the share are selling at a

low price and sell when they are at a higher price. %ut in practical it is a difficult

task.

>hen the prices are rising in the market i.e. there is bull phase, everybody #oins

in buying without any delay because every day the prices touch a new high. ;ater

when the bear face starts, prices tumble down every day and everybody starts

counting the losses. !he ordinary investor regretted such situation by thinking why

he did not sell his shares in previous day and ultimately sell at a lower price. !his

kind of investment decision is entirely devoid of any sense of timing.

I' *,+ >) 6' ,'0) := *6=' +6+ I'()*+)'+ 6'6))'+ * 6 , 6= :) :,)' 0,>' '+, +) ;,,>' *+)


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!he most important decision in portfolio management is the asset mix

decision very broadly3 this is concerned with the proportions of stocks6 &equity

shares and units9shares of equity$oriented mutual funds' and bonds6 in the

portfolio.

!he appropriate stock$bond6 mix depends mainly on the risk tolerance and

investment horizon of the investor.

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ELEMENTS OF PORTFOLIO MANAGEMENT%

P,+;,, 6'6))'+ * ,'-,' ' :6* +6**7

Identification of the investor6s ob#ectives, constraints and preferences.

Strategies are to be developed and implemented in tune with investmentpolicy formulated.

(eview and monitoring of the performance of the portfolio.

Finally the evaluation of the portfolio

T)')* O; P,+;,, M6'6))'+%

s of now the under noted technique of portfolio management7 are in vogue in

our country.

1& E+= P,+;,,% It is influenced by internal and external factors the internal

factors affect the inner working of the company6s growth plans are analyzed

with referenced to %alance sheet, profit 1 loss a9c &account' of the company.

mong the external factor are changes in the government policies, !rade

cycle6s, "olitical stability etc.

2& E+= S+, A'6=**7 8nder this method the probable future value of a

share of a company is determined it can be done by ratio6s of earning per

share of the company and price earnings ratio

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EARNING PER S!ARE H PROFIT AFTER TAXHH

NO. OF EUITY S!ARES

PRICE EARNING RATIO HMARKET PRICE PER S!ARE&H

EARNING PER S!ARE

=ne can estimate trend of earning by "S, which reflects trends of earning

quality of company, dividend policy, and quality of management.

"rice arnings ratio indicate a confidence of market about the company future, ahigh rating is preferable.

T) ;,,>'


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!he wise principle of portfolio management suggests that J$= >)' +)

6)+ * ,> , $EARIS! 6'0 *) >)' +) 6)+ * *' , $ULLIS!.

Stock market operation can be analyzed by7

a' F'06)'+6 6


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of the portfolio. !hese are two measures of risk in this context one is the absolute

deviation and other standard deviation.

*ost investors invest in a portfolio of assets, because as to spread risk by not

putting all eggs in one basket. /ence, what really matters to them is not the risk and

return of stocks in isolation, but the risk and return of the portfolio as a whole. (isk

is mainly reduced by 5iversification.

F,,>' 6) +) *,) ,; +) +=) R*% It is also known as inflation risk also emanates

from the very fact that inflation affects the purchasing power adversely.

Aominal return contains both the real return component and an inflation

premium in a transaction involving risk of the above type to compensate for

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inflation over an investment holding period. Inflation rates vary over time

and investors are caught unaware when rate of inflation changes

unexpectedly causing erosion in the value of realized rate of return and

expected return.

"urchasing power risk is more in inflationary conditions especially in

respect of bonds and fixed income securities. It is not desirable to invest in

such securities during inflationary periods. "urchasing power risk is

however, less in flexible income securities like equity shares or common

stock where rise in dividend income off$sets increase in the rate of inflation

and provides advantage of capital gains.

3& $*')** R*% %usiness risk emanates from sale and purchase of securities

affected by business cycles, technological changes etc. %usiness cycles

affect all types of securities i.e. there is cheerful movement in boom due to

bullish trend in stock prices whereas bearish trend in depression brings down

fall in the prices of all types of securities during depression due to decline in

their market price.

4& F'6'6 R*% It arises due to changes in the capital structure of the

company. It is also known as leveraged risk and expressed in terms of debt$

equity ratio. xcess of risk vis$D$vis equity in the capital structure indicates

that the company is highly geared. lthough a leveraged company6s earnings

per share are more but dependence on borrowings exposes it to risk of

winding up for its inability to honor its commitments towards lender or

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creditors. !he risk is known as leveraged or financial risk of which investors

should be aware and portfolio managers should be very careful.

5& S=*+)6+ R* , M6)+ R)6+)0 R*% Systematic risks affected from

the entire market are &the problems, raw material availability, tax policy or

government policy, inflation risk, interest risk and financial risk'. It is

managed by the use of %eta of different company shares.

"& U'*=*+)6+ R**% !he unsystematic risks are mismanagement,

increasing inventory, wrong financial policy, defective marketing etc. this is

diversifiable or avoidable because it is possible to eliminate or diversify

away this component of risk to a considerable extent by investing in a large

portfolio of securities. !he unsystematic risk stems from inefficiency

magnitude of those factors different form one company to another.

RISK RETURN ANALYSIS%

ll investment has some risk. Investment in shares of companies has its own risk

or uncertainty3 these risks arise out of variability of yields and uncertainty of

appreciation or depreciation of share prices, losses of liquidity etc

!he * ,() +)can be represented by the variance of the returns while the

)+' ,() +)is capital appreciation plus payout, divided by the purchase price

of the share.

Aormally, the higher the risk that the investor takes, the higher is the return.

!here is, however, a risk less return on capital of about +)H which is the bank, rate

charged by the (.%.I or long term, yielded on government securities at around +-H

to +H. !his risk less return refers to lack of variability of return and no uncertainty

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in the repayment or capital. %ut other risks such as loss of liquidity due to parting

with money etc., may however remain, but are rewarded by the total return on the

capital.

(isk$return is sub#ect to variation and the ob#ectives of the portfolio manager are

to reduce that variability and thus reduce the risk by choosing an appropriate

portfolio.

!raditional approach advocates that one security holds the better, it is according

to the modern approach diversification should not be quantity that should be related

to the quality of scripts which leads to quality of portfolio.

xperience has shown that beyond the certain securities by adding more

securities expensive.

RETURNS ON PORTFOLIO7

ach security in a portfolio contributes return in the proportion of its

investments in security. !hus the portfolio expected return is the weighted average

of the expected return, from each of the securities, with weights representing the

proportions share of the security in the total investment. >hy does an investor have

so many securities in his portfolio? If the security %@ gives the maximum return

why not he invests in that security all his funds and thus maximize return? !he

answer to this questions lie in the investor6s perception of risk attached to

investments, his ob#ectives of income, safety, appreciation, liquidity and hedge

against loss of value of money etc. this pattern of investment in different asset

categories, types of investment, etc., would all be described under the caption of

diversification, which aims at the reduction or even elimination of non$systematic

risks and achieve the specific ob#ectives of investors.

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RULES TO $E FOLLO/ED $EFORE IN#ESTMENT IN

PORTFOLIOS

1& @ompile the financials of the companies in the immediate past - years such

as turnover, gross profit, net profit before tax, compare the profit earning of

company with that of the industry average nature of product manufacture

service render and it future demand ,know about the promoters and their

back ground, dividend track record, bonus shares in the past - to J years

,reflects company6s commitment to share holders the relevant informationcan be accessed from the (5@ &(egistrant of @ompanies' published

financial results financed quarters, #ournals and ledgers.

2& >atch out the highs and lows of the scripts for the past ) to - years and

their timing cyclical scripts have a tendency to repeat their performance,

this hypothesis can be true of all other financial,

3& !he higher the trading volume higher is liquidity and still higher the chance

of speculation, it is futile to invest in such shares who6s daily movements

cannot be kept track, if you want to reap rich returns keep investment over

along horizon and it will offset the wild intraday trading fluctuation6s, theminor movement of scripts may be ignored, we must remember that share

market moves in phases and the span of each phase is K months to J years.

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CHAPTER 6

PERSONS IN#OL#ED IN PORTFOLIO MANAGEMENT

1& IN#ESTOR%

re the people who are interested in investing their funds?

2& PORTFOLIO MANAGERS%

Is a person who is in the wake of a contract agreement with a client, advices or

directs or undertakes on behalf of the clients, the management or distribution or

management of the funds of the client as the case may be.

3& DISCRETIONARY PORTFOLIO MANAGER%

*eans a manager who exercise under a contract relating to a portfolio

management exercise any degree of discretion as to the investment or management

of portfolio or securities or funds of clients as the case may be. !he relationship

between an investor and portfolio manager is of a highly interactive nature.

!he portfolio manager carries out all the transactions pertaining to the investor

under the power of attorney during the last two decades, and increasing

complexity was witnessed in the capital market and its trading procedures in this

context a key &uninformed' investor formed ' investor found himself in a tricky

situation , to keep track of market movement ,update his knowledge, yet stay in

the capital market and make money , therefore in looked forward to resuming help

from portfolio manager to do the #ob for him . !he portfolio management seeks to

strike a balance between risk6s and return.

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!he generally rule in that greater risk more of the profits but S..%.I. in its

guidelines prohibits portfolio managers to promise any return to investor.

"ortfolio management is not a substitute to the inherent risks associated with

equity investment.

/!O CAN $E A PORTFOLIO MANAGER

=nly those who are registered and pay the required license fee are eligible to

operate as portfolio managers. n applicant for this purpose should have necessary

infrastructure with professionally qualified persons and with a minimum of two

persons with experience in this business and a minimum net worth of (s. JLlakh6s.

!he certificate once granted is valid for three years. Fees payable for registration

are (s ).Jlakh6s every for two years and (s.+lakh6s for the third year. From the

fourth year onwards, renewal fees per annum are (s MJLLL. !hese are sub#ected to

change by the S..%.I.

!he S..%.I. has imposed a number of obligations and a code of conduct on

them. !he portfolio manager should have a high standard of integrity, honesty andshould not have been convicted of any economic offence or moral turpitude. /e

should not resort to rigging up of prices, insider trading or creating false markets,

etc. their books of accounts are sub#ect to inspection to inspection and audit by

S..%.I... !he observance of the code of conduct and guidelines given by the

S..%.I. are sub#ect to inspection and penalties for violation are imposed. !he

manager has to submit periodical returns and documents as may be required by the

S%I from time$to$ time.

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FUNCTIONS OF PORTFOLIO MANAGERS%

A0(*,= ,)% dvice new investments, review the existing ones,

identification of ob#ectives, recommending high yield securities etc.

C,'0+' 6)+ 6'0 ),', *)()% !his is essential for

recommending good yielding securities they have to study the current fiscal

policy, budget proposal3 individual policies etc further portfolio manager

should take in to account the credit policy, industrial growth, foreign

exchange possible change in corporate law6s etc.

F'6'6 6'6=**% /e should evaluate the financial statement of company

in order to understand, their net worth future earnings, prospectus and

strength.

S+0= ,; *+, 6)+ % /e should observe the trends at various stock

exchange and analysis scripts so that he is able to identify the right securities

for investment

S+0= ,; '0*+=% /e should study the industry to know its future prospects,

technical changes etc, required for investment proposal he should also see theproblem6s of the industry.

D)0) +) +=


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portfolio manager in the Indian context has been %rokers &%ig brokers' who

on the basis of their experience, market trends, Insider trader, helps the limited

knowledge persons.

!he one6s who use to manage the funds of portfolio, now being managed by the

portfolio of *erchant %ank6s, professional6s like *%6s @6s nd many financial

institution6s have entered the market in a big way to manage portfolio for their

clients.

ccording to S..%.I. rules it is mandatory for portfolio managers to get them

self6s registered.

(egistered merchant bankers can act6s as portfolio managers. Investor6s must

look forward, for qualification and performance and ability and research base of the

portfolio managers.

NEED AND ROLE OF PORTFOLIO MANAGER%

>ith the development of Indian Securities market and with appreciation in

market price of equity share of profit making companies, investment in the

securities of such companies has become quite attractive. t the same time, the

stock market becoming volatile on account of various facts, a layman is puzzled as

to how to make his investments without losing the same. /e has felt the need of an

expert guidance in this respect. Similarly non resident Indians are eager to make

their investments in Indian companies. !hey have also to comply with the

conditions specified by the (S(B %AN =F IA5I under various schemes

for investment by the non residents. !he portfolio manager with his background and

expertise meets the needs of such investors by rendering service in helping them to

invest their fund9s profitably.

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PORTFOLIO MANAGERS O$LIGATION%

!he portfolio manager has number of obligations towards his clients, some of

them are7

/e shall transact in securities within the limit placed by the client himself

with regard to dealing in securities under the provisions of (eserve %ank of

India ct, +-.

/e shall not derive any direct or indirect benefit out of the client6s funds or

securities.

/e shall not pledge or give on loan securities held on behalf of his client to a

third person without obtaining a written permission from such clients.

>hile dealing with his client6s funds, he shall not indulge in speculative

transactions.

/e may hold the securities in the portfolio account in his own name on behalf

of his client6s only if the contract so provides. In such a case, his records andhis report to his clients should clearly indicate that such securities are held by

him on behalf of his client.

/e shall deploy the money received from his client for an investment purpose

as soon as possible for that purpose.

/e shall pay the money due and payable to a client forthwith.

/e shall not place his interest above those of his clients.

/e shall not disclose to any person or any confidential information about his

client, which has come to his knowledge.

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CONCLUSION

From the above discussion it is clear that portfolio functioning is based on market

risk, so one can get the help from the professional portfolio manager or the

*erchant banker if required before investment because applicability of practical

knowledge through technical analysis can help an investor to reduce risk. In other

words Security prices are determined by money manager and home managers,

students and strikers, doctors and dog catchers, lawyers and landscapers, the

wealthy and the wanting. !his breadth of market participants guarantees an

element of unpredictability and excitement. If we were all totally logical and couldseparate our emotions from our investment decisions then, the determination of

price based on future earnings would work magnificently. nd since we would all

have the same completely logical expectations, price would only change when

quarterly reports or relevant news was released.

0I believe the future is only the past again, entered through another gate2 OSir

rthur wing "inero. +P-.

If price are based on investors6 expectations, then knowing what a security

should sell for become less important than knowing what other investors expect it

to sell for. 0!here are two times of a man6s life when he should not speculate3

when he can6t afford it and when he can2 O *ark !win, +PM.

@asino make money on a roulette wheel, not by knowing what number will

come up next, but by slightly improving their odds with the addition of a 0L2 and

0LL2. Cet many investors buy securities without attempting to control the odds. If

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we believe that this dealings is not a :ambling2 we have to start up it with

intelligent way.

I can conclude from this pro#ect that portfolio management has become an

important service for the investors to identify the companies with growth potential.

"ortfolio managers can provide the professional advice to the investors to make an

intelligent and informed investment.

"ortfolio management role is still not identified in the recent time but due it

expansion of investors market and growing complexities of the investors the

services of the portfolio managers will be in great demand in the near future.

!oday the individual investors do not show interest in taking professional help

but surely with the growing importance and awareness regarding portfolio6s

manager6s people will definitely prefer to take professional help.

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BIBLIOGRAPHY

REFERENCE $OOKS%

S)+= A'6=** 6'0 P,+;,, M6'6))'+ - D. P.K.$ANDGAR

I'()*+)'+ A'6=** 6'0 P,+;,, M6'6))'+

WEBLIOGRAPHY

SOURCES%

>>>.,,).,

>>>.=6,,.,

>>>.>

invst mgt risk and return of portfolio mgt

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