nidhi report

8/6/2019 Nidhi Report

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A

Project Study Report

On

Training Undertaken at

Standard Chartered Bank

Titled

Study of different of investment strategy and portfolio

management

Submitted in partial fulfillment for the

Award of degree of

Master of Business Administration

Submitted By: - supervised by:-

NIDHI BANSAL RAM PRAKASH SAGWA

MBA Part __ Designation

Submitted to:- RAJASTHAN TECHNICAL UNIVERSITY, KOTA

JIET SCHOOL OF ENGINEERING AND TECHNOLOGY

FOR GIRLS


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Certificates of project Report

This is to certify that Ms Nidhi bansal student ofMBA IV

semester (part II) 2009-2010; has successfully conducted a

project study entitled Study of different of investment

strategy and portfolio management for the fulfillment of

MBA degree.

I have examined the project work and impressed with his

ideas and suggestions.

The work is according to University guidelines.

Mr RAM PRAKASH SAGWA

PRAFACE


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MBA is a stepping-stone to the management carrier and to

develop good manager it is necessary that the theoretical

must be supplemented with exposure to the realenvironment.

Theoretical knowledge just provides the base and its not

sufficient to produce a good manager thats why practical

knowledge is needed.

Therefore the research product is an essential requirement

for the student of MBA. This research project not only helps

the student to utilize his skills properly learn field realities but

also provides a chance to the organization to find out talent

among the budding managers in the very beginning.

In accordance with the requirement of MBA course have

project on the topic study of different of investment

strategy and portfolio management.

The main objective of the research project was to study the

two instruments and make a detailed comparison of the two.

For conducting the research project sample size

of 50 customers of SBIMF and SBOP was selected. The

information regarding the project research was collected

through the questionnaire formed by me which was filled by

the customers there.

Acknowledgement


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I express my sincere thanks to my project guide, Mr. Ram

prakash Sagwa, Deptt Finance., for guiding me right

form the inception till the successful completion of theproject. I sincerely acknowledge him/her/them for extending

their valuable guidance, support for literature, critical reviews

of project and the report and above all the moral support

he/she/they had provided to me with all stages of this

project.

I would also like to thank the supporting staff

___________________________ Department, for their help

and cooperation throughout our project.

(Signature of Student)

NIDHI BANSAL

Abstract of the Report


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This report contains the different investment strategies taken

by the investors (mainly small investors) and the trends of

investment in different investment instruments. Projectfocused on findings of risk tolerance of investors and the

time horizon they want to remain invested n the market. The

project extended to find out the instrument in which different

investor is now investing evaluating the projecting risk in the

instrument.

To understand the trend of the investor I have gone

through a field survey, based on investment strategy

questionnaire. The result of the survey depicts a clear

picture of current investment trend in Indian market. The

analysis shows that the age groups of 18-30 years are more

adaptable to the high risk where as the age group of 41-50

are the safe players. Annual income and the disposable

income also played a major role in the investment strategies

in the investors mind. Results reveal that most investors

first priority to invest is the Tax Savings.

The project continues with the portfolio management

of the selected respondent of the field survey. To do the

portfolio management study have been done on different

investment instrument in details, like Savings bank A/c, ULIP

(Unit Linked Insurance Policy), Mutual Funds, Stocks, Term

Deposits of Standard Chartered Bank and other different


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private Banks and AMCs. After the study portfolio is

prepared for the selected respondent after revisiting them for

the portfolio management discussion. The portfolio is made

on the response of the respondent in the last

Contents


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1. Introduction to the Industry

2. Introduction to the Organization

3. Research Methodology

3.1 Title of the Study

3.2 Duration of the Project

3.3 Objective of Study

3.4 Type of Research

3.5 Sample Size and method

selecting sample

3.6 Limitation of Study


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4. SWOT

5. Conclusion

6. Recommendation and Suggestions

7. Appendix

8. Bibliography

Introduction to Banking Industry


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The Indian banking can be broadly categorized into

Nationalized, Private Banks and Specialized banking

institutions. The Reserve Bank of India acts a centralized

body monitoring any discrepancies and shortcoming in the

system. The need to become highly customer focused has

forced the slow-moving public sector banks to adopt a fast

track approach. The unleashing of products and services

through the internet has galvanized players at all levels of

the banking and financial institutions market grid to look a

new at their existing portfolio offerings. Indian banks are now

quoting all higher valuation when compared to banks in other

Asian countries (viz. Hong Kong, Singapore, Philippines

etc.). The reasons are numerous: the economy is growing at

a rate of 8%, Bank credit is growing at 30% per annum and

there is an ever-expanding middle class of between 250 and


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300 million people (larger than the population of the

US) in need of financial services.

Indian markets provide growth opportunities, which

are unlikely to be matched by the mature banking markets

around the world. Some of the high growth potential areas to

be looked at are: the market for consumer finance stands

at about 2%-3% of GDP, compared with 25% in some

European markets, the real estate market in India is

growing at 30% annually and is projected to touch $ 50

billion by 2008, the retail credit is expected to cross Rs

5,70,000 crore by 2010 from the current level of Rs 1,89,000

crore in 2004-05 and huge SME sector which contributes

significantly to Indias GDP.

Banks that employ IT solutions are perceived to be

futuristic and proactive players capable of meeting the

multifarious requirements of the large customer base.

The Indian banking has come from a long way from

being a sleepy business institution to a highly proactive and

dynamic entity. This transformation has been largely

brought about by the large dose of liberalization and

economic reforms that allowed banks to explore new

business opportunities rather than generating revenues from

conventional streams. The banking in India is highly

fragmented with 30 banking units contributing to almost 50%

of deposits and 60% of advances.

Industry estimates indicate that out of 274

commercial banks operating in India, 223 banks are in the

public sectorand 51 are in the private sector. The private

sector bank grid also includes 24 foreign banks that have


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started their operations here. Under the ambit of the

nationalized banks come the specialized banking

institutions. These co-operatives, rural banks focus on areas

of agriculture, rural development etc.

Currently banking in India is generally fairly mature in

terms of supply, product range and reach-even though reach

in rural India still remains a challenge for the private sector

and foreign banks.

Currently, India has 88 scheduled commercial

banks (SCBs) - 28 public sector banks (that is with the

Government of India holding a stake), 29 private banks

(these do not have government stake; they may be publicly

listed and traded on stock exchanges) and 31 foreign banks.

They have a combined network of over 53,000 branches and

17,000 ATMs. According to a report by ICRA Limited, a

rating agency, the public sector banks hold over 75 percent

of total assets of the banking industry, with the private and

foreign banks holding 18.2% and 6.5% respectively


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Company Profile

The Background of standard chartered Bank

The Standard Bank of British South Africa founded in 1863

and the Chartered Bank of India, Australia and China,

founded in 1853. The Standard Chartered Group was

formed in 1969 through a merger of these two banks.

Both companies were keen to capitalize on the huge

expansion of trade and to earn the handsome profits to be

made from financing the movement of goods from Europe to

the East and to Africa.

The Chartered Bank

Founded by James Wilson following the grant of aRoyal Charter by Queen Victoria in 1853.

Chartered opened its first branches in Mumbai

(Bombay), Calcutta and Shanghai in 1858, followed by Hong

Kong and Singapore in 1859.


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change. Provisions had to be made against third world debt

exposure and loans to corporations and entrepreneurs who

could not meet their commitments. Standard Chartered

began a series of divestments notably in the United States

and South Africa, and also entered into a number of asset

sales.

From the early 1990s, Standard Chartered has focused on

developing its strong franchises in Asia, the Middle East and

Africa using its operations in the United Kingdom and North

America to provide customers with a bridge between these

markets. Secondly, it would focus on consumer, corporateand institutional banking and on the provision of treasury

services - areas in which the Group had particular strength

and expertise.

In the new millennium they acquired Grind lays Bank from

the ANZ Group and the Chase Consumer Banking

operations in Hong Kong in 2000.

Since 2005, they have achieved several milestones with a

number of strategic alliances and acquisitions that will

extend our customer or geographic reach and broaden our

product range.

Principles & Values

At Standard Chartered success is built on teamwork,partnership and the diversity of the people.

At the heart of our values lie diversity and inclusion. They

are a fundamental part of our culture, and constitute a long-


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term priority in our aim to become the world's best

international bank.

Today we employ 73,000 people, representing 115

nationalities, and you'll find 61 nationalities among our 500

most senior leaders. We believe this diversity helps to fuel

creativity and innovation, supporting the development of

exciting new products and services for our customers

worldwide.

What Standard Chartered Bank Stand for

Strategic intent

The world's best international bank

Leading the way in Asia, Africa and the Middle East

Brand promise

Leading by Example to be The Right partner

Value

Responsive

Trustworthy

International

Creative

Courageous


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meet the diverse and ever-changing needs of individual,

corporate and institutional customers in some of the world's

most exciting and dynamic markets.

Personal banking

Through our global network of over 1,700 branches and

outlets, we offer personal financial solutions to meet the

needs of more than 14 million customers across Asia, Africa

and the Middle East.

Credit Cards

Accepted worldwide, our credit cards are designed to give

you greater financial freedom and flexibility.

Insurance

Enjoy peace of mind with comprehensive protection for you

and your family.

Investment Advisory Services

Take advantage of expert advice on how to preserve and

enhance your wealth.

International Banking

Our international banking centres provide a confidential

banking platform and global investment opportunities.


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Savings & Banking Services

We offer a wide choice of savings accounts and banking

services to suit you and your lifestyle

Loans & Mortgages

Our personal loans and award-winning mortgages are

helping people realise their aspirations in countries

across the world

SME Banking

SME Banking provides integrated financial solutions to

small and medium businesses, through a relationship

management approach. Its customer focused product

offerings include working capital finance, trade services,

foreign exchange, and cash management.

Wholesale Banking

Headquartered in Singapore and London, with on-the-

ground expertise that spans our global network, our

Wholesale Banking division provides corporate and

institutional clients with innovative solutions in trade

finance, cash management, securities services, foreign

exchange and risk management, capital rising, and

corporate finance.

Islamic Banking


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Standard Chartered Saadiq's dedicated Islamic Banking

team provides comprehensive international banking services

and a wide range of Shariah compliant financial products

that are based on Islamic values.

Private Banking

Our Private Bank advisors and investment specialists

provide customized solutions to meet the unique needs and

aspirations of high net worth clients.

Commercial banking

Standard Chartered has maintained a long local presence,

since 1858, with particular emphasis on relationship banking.

Significant networks have been established with vendors

and financial-related organizations to enable it to offer the

customers a comprehensive range of flexiblefinancial

services, with special focus on transactional banking

products. Supported by state-of-the-art operations, Standard

Chartered is pro-active in improving every part of services.Electronic Delivery system has been put in place to ensure

that transactions are handled speedily.


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PRODUCT OFFERED BY STANDARD

CHARTERED BANK

Differe nt Types of Savings Bank Account

Get instant cash at over 20,000 ATMs across India and over

1,000,000 ATMs across the world through the Visa network.

And get a globally valid Debit Card that lets you shop at over

326,000 outlets in India and at over 14 million outlets across

the world.

Unique Feature

FREE Unlimited Visa ATM transactions (Cash

withdrawal and balance enquiry)

FREE Standard Chartered Bank branch access across the

country.

FREE Doorstep Banking

FREE Demand Drafts/Pay Orders (drawn at SCB locations)

FREE Payable at Par Cheque-book

Other features available are;

International Debit Card

Phone Banking

Net Banking and

Extended Banking Hours.

.


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Super Value Account

Unique feature

Free globally valid Debit-cum-ATM card

Free Access to 6500 ATMs in India

Free Doorstep Banking

Free Bill pay

Free Inter Bank Funds Transfer

Free Foreign Inward Remittance Certificates

Other benefits of the Super Value account:

Globally valid debit card

Multicity Banking

24-hour branches, 365 day branches available at

select locations

Phone banking - available to you 365 days a year

on a 24-hour basis in the metros and everyday of the week

at other centers.

Inter Net banking - access and transact on your

accounts through the Internet from any part of the world.


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aaSaan

Unique Feature

No Minimum Balance requirement

Free unlimited access to any SCB branch across the

country for Customer-in-person

Unlimited Free access to Standard Chartered Bank

ATM's

Up to 4 free cash withdrawal transactions per month

at other domestic VISA ATMs

Nominal quarterly fee of Rs. 100 (reversed if the Average

Balance in the quarter is Rs 10,000 or more).

Other Facilities

International Debit Card

Phone banking

NetBanking

Extended banking hours


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Locker facility

Door-step banking.

INTRODUTION

Indian economy and Investment Sectorial

growth

India economy is developing at a fast rate and every sector

of India economy is showing a positive growth. The growth

development product in India in the year 2006-07 is 9.2%.

The rate of robust growth of in industrial development is

10.6%. The Economists have also observed high growth in

manufacturing sector and telecommunication sectors. The

Infrastructure sector is also showing impressive growth in

the year 2006-07. The secondary sectors as also shown

upward growth, the BSE and NSE sensex has closed at high

marks of 21000 and 7000 respectively. In this way all these

sectors have contributed to overall growth of Indian

economy.


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Behind China, India is the second fastest growing

economy. According to a survey by Goldman Sachs, India

will become the 3rd largest economy by 2035. This is

measured in $US. If we use PPP (purchasing power parity)

which takes into account local purchasing power, India

already has the 3rd largest economy.

The economy has been growing at an average growth rate

of 8.8 per cent in the last four fiscal years (2003-04 to 2006-

07), with the 2006-07 growth rate of 9.6 per cent being the

highest in the last 18 years. Significantly, the industrial and

service sectors have been contributing a major part of this

growth, suggesting the structural transformation underway in

the Indian economy.

Within the investment sector the real estate is raising sky

high due to

Strong Economic Growth: The worlds fourth largest

economy, growing at over 8% the last two years and

forecast to grow at over 7% over the next five; Growth

measures supported across the political spectrum; a boom in

the services sector with a strong revival of industry; powerfulinternal consumption and demand.

The Rise of the Middle-Class: 300 million and

growing with higher disposable incomes and even higher


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aspirations; educated, professional workforce driving

urbanization beyond the traditional metro cities

Before I start I have to explain what investment is and why

people want to invest? It is very important for me to

understand how people plan before investing. These things

are discussed below:

INVESTMENT

Investment = Cost Of Capital, like buying securities or other

monetary or paper (financial) assets in the money markets or

capital markets, liquid real assets, such as gold, real estate,

or collectibles. Types of financial investments include

shares, other equity investment, and bonds. These financial

assets are then expected to provide income or positive

future cash flows, and may increase or decrease in valuegiving the investor capital gains or losses.

People usually invest when they have good amount of

ideal money to spend. The main objective is to save money

for future uncertainties, capital appreciation, more income

and most of all tax savings.

Investing is not guesswork or prediction. It takes more

than just a tip; it needs training to plan, instinct to pick and

sheer intellect to make it work for the investor. Human nature

is fickle, his wants keep changing.

An investment can be described as perfect if it

satisfies all the needs of all investors. So, the starting point
http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Real_estate


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in searching for the perfect investment would be to examine

investor needs. If all those needs are met by the investment,

then that investment can be termed the perfect investment.

Most investors and advisors spend a great deal oftime understanding the merits of the thousands of

investments available in India. Little time, however, is spent

understanding the needs of the investor and ensuring that

the most appropriate investments are selected for him.

Why people invest?

Investors do invest in different instrument to simplify their

lifestyle and to make certain goals in future life. Most

investors invest for the long term to fulfill the inflation and for

the capital appreciation. By and large the investors have

typical requirement to fill, and those are:-

Capital preservation: - The chance of losing some

capital has been a primary need. This is perhaps the

strongest need among investors in India, who have sufferedregularly due to failures of the financial system.

Wealth generation: - This is largely a factor of

investment performance, including both short-term

performance of an investment and long-term performance of

a portfolio. Wealth accumulation is the ultimate measure of

the success of an investment decision.

Life Cover:- Many investors look for investments that

offer good return with adequate life cover to manage the

situations in case of any eventualities. Recent days investors

do invest in the endowment policies and ULIPs.


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Tax savings: Legitimate reduction in the amount of

tax payable is an important part of the Indian psyche. Every

rupee saved in taxes goes towards wealth accumulation.

Income: This refers to money distributed at intervalsby an investment, which are usually used by the investor for

meeting regular expenses. Mostly daily traders invest for

income.

Future Uncertainty: - No one has seen the future so

every person personally save money for any contingencies.

People invest in short term for this. There must be an easy

cash withdraw for the contingencies

Ease of withdrawal: This refers to the ability to invest

long term but withdraw funds when desired. This is strongly

linked to a sense of ownership. It is normally triggered by a

need to spend capital, change investments or cater to

changes in other needs.

Beat inflation: - inflation is a major player in the

economy. It reduced the valuation of rupee. Investors do in

vest to maintain the buying capacity of them.

Retirement planning: - most of the service person

do invest to get return after the vesting period, for that the

investment such a manner that the returns comes at the time

of retirement.

Investment Planning

Investors need to identify the financial goals

throughout life or for the next 10 to 15 years depending upon


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the time horizon selected by the investor, and prioritizing

them. Investment Planning is important because it helps in

deriving the maximum benefit from the investments.

Success as an investor depends upon his investmentin right instrument in right time and for the right period. This,

in turn, depends on the requirements, needs and goals. For

most investors, however, the three prime criteria of

evaluating any investment option are liquidity, safety and

level of return.

Investment Planning also helps to decide upon the right

investment strategy. Besides individual requirement,

investment strategy would also depend upon age, personal

circumstances and risk appetite.

Investment Planning also helps in striking a balance

between risk and returns. By prudent planning, it is possible

to arrive at an optimal mix of risk and returns, which suits

particular needs and requirements.

Investment means putting the ideal money to work to earn

more money. Done wisely, it can help you meet financial

goals. Investing even a small amount can produce

considerable rewards over the long-term, especially if you do

it regularly. But one needs to decide about how much he /

she wants to invest and where.

Options before investment

Investors choose wisely before investing which solely

depends on the present market conditions, future prospect of

the instrument, the return offered by the company and the

season to invest in that particular instrument. For example, a


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good investment for a long-term life insurance plan may not

be a good investment for higher education expenses. In

most cases, the right investment is a balance of three things:

Liquidity, Risk tolerance and Return.

Liquidity How easily an investment can be converted to

cash, since part of invested money must be available to

coverfinancialemergencies.

Risk tolerance - The biggest risk is the risk of losing the

money that has been invested, but the main thing is to how

much investor can cover up and sustain with that. Another

equally important risk is that investments may not provide

enough growth or income to offset the impact of inflation,

which could lead to a gradual increase in the cost of living.

There are additional risks as well (like decline in economic

growth). But the biggest risk of all is not investing at all.

Return - Investments are made for the purpose of

generating returns. Safe investments often promise a

specific, though limited return. Those that involve more risk

offer the opportunity to make - or lose - a lot of money.

The Investment Process

Investors like to invest through the instinct and want

to gain profit from the market by investing. However, while

financial institutions are undoubtedly a part of the process of

investing. As investors, it is not surprising that we focus so

much of our energy and efforts on investment philosophies

and strategies, and so little on the investment process. It is

far more interesting to read about how Peter Lynch picks


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stocks and what makes Warren Buffett a valuable investor,

than it is to talk about the steps involved in creating a

portfolio or in executing trades. Though it does not get

sufficient attention, understanding the investment process is

critical for every investor for several reasons:

1. Investment planning centrally depends upon the portfolio of

the investor; as a result the primary step of the investment process is to

make a portfolio. By emphasizing the sequence, it provides for an orderly

way in which an investor can create his or her own portfolio or a portfolio

for someone else.

2. The investment process provides a structure that allows

investors to see the source of different investment strategies and

philosophies. By so doing, it allows investors to take the hundreds of

strategies that they see described in the common press and in investment

newsletters and to trace them to their common roots.

The investment process emphasizes the different

components that are needed for an investment strategy

but strategies that look good on paper never work for those

who use them.

STEPS INVOLVED IN INVESTMENT PLANNING

Investment is not only prediction it has its own reasons

behind every up and down in the market. So it is has its own

theory to move in particular directions. To get in to the

market investors must go through the following process.

Analysis and profiling of the instrument: - The first

step is performing a Need Analysis check. The

requirements and expectations of the investor should be

met by the instrument. During the profiling investor


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a savings account is a safe, convenient and affordable way

to save money. Banks generally put some restrictions on the

total number of withdrawals permitted during specific time

periods. Banks also stipulate certain minimum balance to be

maintained in savings accounts. Normally a higher minimum

balance is stipulated in cheque operated accounts as

compared to non-cheque operated accounts.

Features:

The minimum amount to open an account in a nationalized

bank is Rs 500. If cheque books are also issued, the

minimum balance of Rs 1000 has to be maintained.However in some private or foreign bank the minimum

balance is Rs 5,000 or more and can be up Rs. 10,000. One

cheque book is issued to a customer at a time.

A Savings account can be opened either individually or

jointly with another individual. In a joint account only the sign

of one account holder is needed to write a cheque. But at the

time of closing an account, the sign of the both the account

holders are needed.

Certain non-profit welfare organizations are also permitted to

open Savings bank accounts with banks.

Return

Interest @ 3.5 % p.a. with effect from 1/3/2003.

The amount of interest will be calculated for each calendar

month on the lowest balance in credit of any account

between the close of the tenth day and the last day of each

month. In Savings Bank account, bank follows the simple


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interest method. The rate of interest may change from time

to time according to the rules of Reserve Bank of India.

One can withdraw his/her money by submitting a cheque in

the bank and details of the account, i.e. the Money

deposited, withdrawn along with the dates and the balance,

is recorded in a passbook.

Advantages

It's much safer to keep your money at a bank than to keep a

large amount of cash in your home.

Bank deposits are fairly safe because banks are subject to

control of the Reserve Bank of India with regard to several policy

and operational parameters, many of the banks also give internet

banking facility through with one do the transactions like

withdrawals, deposits, statement of account etc.

Banks provide Auto-Mated Teller machine(ATM) for

24 hours cash withdrawn, some banks also have 24 hours

open branches in very few selected cities.

How to open a SB account


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Savings Bank Account can be opened in the name of

an individual or in joint names of the depositors by filling

up the appropriate forms.

A minor who have completed ten years of age can

also open and operate the account.

At the time of opening an account one must submit

the documents like photocopy of passport or Electoral

card, Postal identification card as address proof and two

passport size photos.

Most banks also require an introduction for opening

an SB account. The introduction may be obtained either

from an existing account holder or from a respectable

citizen, well known to the bank, which should normally

call on the bank and sign in the column specially

provided for the purpose of introduction in the account

opening form.


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Mutual fund in India

A mutual fund is nothing more than a collection of stocks

and/or bonds. You can think of a mutual fund as a company

that brings together a group of people and invests their

money in stocks, bonds, and other securities. Each investor

owns shares, which represent a portion of the holdings of the

fund.

You can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and internet

on bonds. A fund pays out nearly all of the income it receives

over the year to fund owners in the form of a distribution.


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2) If the fund sells securities that have increased in price, the

fund has a capital gain. Most funds also pass on these gains

to investors in a distribution.

3) If fund holdings increase in price but are not sold by the

fund manager, the fund's shares increase in price. You can

then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a

check for distributions or to reinvest the earnings and get

more shares. .

Advantages of Mutual Funds:

Professional Management - The primary advantage of

funds (at least theoretically) is the professional management

of your money. Investors purchase funds because they do


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not have the time or the expertise to manage their own

portfolios. A mutual fund is a relatively inexpensive way for a

small investor to get a full-time manager to make and

monitor investments.

Diversification - By owning shares in a mutual fund

instead of owning individual stocks or bonds, your risk is

spread out. The idea behind diversification is to invest in a

large number of assets so that a loss in any particular

investment is minimized by gains in others. In other words,

the more stocks and bonds you own, the less any one of

them can hurt you (think about Enron). Large mutual funds

typically own hundreds of different stocks in many different

industries. It wouldn't be possible for an investor to build this

kind of a portfolio with a small amount of money.

Economies of Scale- Because a mutual fund buys and

sells large amounts of securities at a time, its transaction

costs are lower than what an individual would pay forsecurities transactions.

Liquidity- Just like an individual stock, a mutual fund

allows you to request that your shares be converted into

cash at any time.

Simplicity - Buying a mutual fund is easy! Pretty well anybank has its own line of mutual funds, and the minimum

investment is small. Most companies also have automatic

purchase plans whereby as little as $100 can be invested on

a monthly basis.


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Disadvantages of Mutual Funds:

Professional Management - Did you notice how we

qualified the advantage of professional management with the

word "theoretically"? Many investors debate whether or not

the so-called professionals are any better than you or I at

picking stocks. Management is by no means infallible, and,

even if the fund loses money, the manager still takes his/her

cut. We'll talk about this in detail in a later section.

Costs - Mutual funds don't exist solely to make your life

easier - all funds are in it for a profit. The mutual fund

industry is masterful at burying costs under layers of jargon.

These costs are so complicated that in this tutorial we have

devoted an entire section to the subject

.

Dilution - It's possible to have too much

diversification. Because funds have small holdings in so

many different companies, high returns from a few

investments often don't make much difference on the overall

return. Dilution is also the result of a successful fund getting

too big. When money pours into funds that have had strong

success, the manager often has trouble finding a good

investment for all the new money.

Taxes When making decisions about your money, fund

managers don't consider your personal tax situation. For

example, when a fund manager sells a security, a capital-


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gains tax is triggered, which affects how profitable the

individual is from the sale. It might have been more

advantageous for the individual to defer the capital gains

liability.

No matter what type of investor you are, there is bound to be

a mutual fund that fits your style. According to the last count

there are more than 10,000 mutual funds in North America!

That means there are more mutual funds than stocks.

It's important to understand that each mutual fund has

different risks and rewards. In general, the higher the

potential return, the higher the risk of loss. Although some

funds are less risky than others, all funds have some level of

risk - it's never possible to diversify away all risk. This is a

Fact for all investments.

Each fund has a predetermined investment objective that

tailors the fund's assets, regions of investments and

investment strategies. At the fundamental level, there are

three varieties of mutual funds:

1) Equity funds (stocks)

2) Fixed income funds (bonds)

3) Money market funds.

All mutual funds are variations of these three asset classes.

For example, while equity funds that invest in fast-growing

companies are known as growth funds, equity funds that


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invest only in companies of the same sector or region are

known as specialty funds.

Let's go over the many different flavors of funds. We'll start

with the safest and then work through to the more risky.

Money Market Funds:

The money market consists of short-term debt instruments,

mostly Treasury bills. This is a safe place to park your

money. You won't get great returns, but you won't have to

worry about losing yourprincipal. A typical return is twice the

amount you would earn in a regular checking/savings

account and a little less than the average certificate of

deposit (CD).

Bond/Income Funds:

Income funds are named appropriately: their purpose is to

provide current income on a steady basis. When referring to

mutual funds, the terms "fixed-income," "bond," and

"income" are synonymous. These terms denote funds that

invest primarily in government and corporate debt. While

fund holdings may appreciate in value, the primary objective

of these funds is to provide a steady cash flow to investors.

As such, the audience for these funds consists of

conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates

of deposit and money market investments, but bond funds

aren't without risk. Because there are many different types of

bonds, bond funds can vary dramatically depending on
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The idea is to classify funds based on both the size of the

companies invested in and the investment style of the

manager. The term value refers to a style of investing that

looks for high quality companies that are out of favor with the

Market. These companies are characterized by low P/E and

price-to-book ratios and high dividend yields. The opposite of

value is growth, which refers to companies that have had

(and are expected to continue to have) strong growth in

earnings, sales and cash flow. A compromise between value

and growth is blend, which simply refers to companies that

are neither value nor growth stocks and are classified as

being somewhere in the middle.

For example, a mutual fund that invests in large-cap

companies that are in strong financial shape but have

recently seen their share prices fall would be placed in the

upper left quadrant of the style box (large and value). The

opposite of this would be a fund that invests in startup

technology companies with excellent growth prospects. Such

a mutual fund would reside in the bottom right quadrant

(small and growth).


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Global/International Funds:

An international fund (or foreign fund) invests only outside

your home country. Global funds invest anywhere around

the world, including your home country.

It's tough to classify these funds as either riskier or safer

than domestic investments. They do tend to be more volatile

and have unique country and/or political risks. But, on the flip

side, they can, as part of a well-balanced portfolio, actually

reduce risk by increasing diversification. Although the world's

economies are becoming more inter-related, it is likely that

another economy somewhere is outperforming the economy

of your home country.

Specialty Funds:

This classification of mutual funds is more of an all-

encompassing category that consists of funds that have

proved to be popular but don't necessarily belong to the

categories we've described so far. This type of mutual fund

forgoes broad diversification to concentrate on a certain

segment of the economy.

Sector funds are targeted at specific sectors of the economy

such as financial, technology, health, etc. Sector funds are

extremely volatile. There is a greater possibility of big gains,

but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of

the world. This may mean focusing on a region (say LatinAmerica) or an individual country (for example, only Brazil).

An advantage of these funds is that they make it easier to

buy stock in foreign countries, which is otherwise difficult and

expensive. Just like for sector funds, you have to accept the


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high risk of loss, which occurs if the region goes into a bad

recession.

Socially-responsible funds (or ethical funds) invest only in

companies that meet the criteria of certain guidelines or

beliefs. Most socially responsible funds don't invest in

industries such as tobacco, alcoholic beverages, weapons or

nuclear power. The idea is to get a competitive performance

while still maintaining a healthy conscience.

Index Funds:

The last but certainly not the least important are index funds.

This type of mutual fund replicates the performance of a

Broad market index such as the S&P 500 or Dow Jones

Industrial Average (DJIA). An investor in an index fund

figures that most managers can't beat the market. An index

fund merely replicates the market return and benefits

investors in the form of low fees.

Costs are the biggest problem with mutual funds. Thesecosts eat into your return, and they are the main reason why

the majority of funds end up with sub-par performance.

What's even more disturbing is the way the fund industry

hides costs through a layer of financial complexity and

jargon. Some critics of the industry say that mutual fund

companies get away with the fees they charge only because

the average investor does not understand what he/she is

paying for.

Fees can be broken down into two categories:
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when you sell mutual fund shares. Tax is one of the main

concerns during the sell. The tax gain or loss from mutual

fund sales is calculated by comparing your tax basis in the

shares sold to the sales proceeds net of any transaction

costs. In general, the tax-planning objective is to maximize

the basis in the shares being sold to minimize the gain, or

maximize the loss.

The Tax Code allows four methods:

First-in, first-out (FIFO) method;

Specific identification (specific ID) method;

Single-category or "regular" average basis method; and

Double-category average basis method.

FIFO Method

This method assumes that shares you sell come out of the

earliest-acquired blocks you own. In a rising market, FIFO

tends to generate the biggest tax bill, because the oldest,

cheapest shares are considered sold first. However, FIFO

also increases the odds that your gains will be long term and

therefore qualify for the 20% maximum rate.

FIFO is the "default" method. In other words, you must use

FIFO to calculate mutual fund gains and losses,

Specific ID Method

Under this method, one specifies exactly which block (or

blocks) of mutual fund shares you intend to sell, so you can


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minimize gains or maximize losses by selling your highest-

cost shares first.

Selling the most expensive shares could mean his/her gains

will be short term and therefore taxed at regular income taxrate rather than the long-term capital gains rate of 15%.

However, if you are selling losers, it's generally better to sell

short-term shares. Your short-term losses will then offset

short-term gains that would otherwise be taxed at your

income tax rate.

Single-Category Average Basis Method

This method is available when one leaves his/her mutual

fund shares on deposit in an account with an agent or

custodian, but not when he/she actually has possession of

share certificates.

Each time investor makes a sale, he simply figures his

average presale basis for shares of that fund. For holding

period purposes, investor is considered to sell the oldest

shares first.

Double-Category Average Basis Method

Here you separate shares into two pools one consisting of

all long-term shares (held over 12 months), and the other

consisting of all short-term shares. Then each time you sell,

you calculate the average per-share basis for each pool. You

can then sell strictly out of one pool or the other, or mix and

match as you see fit. The advantage is you have more

flexibility to control the basis of the shares being sold and


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whether the resulting gains will be taxed at 15% or your

regular rate.

Wide variety of Mutual Fund Schemes exists to cater to the

needs such as financial position, risk tolerance and returnexpectations etc. The table below gives an overview into the

existing types of schemes in the Industry.

TYPES OF MUTUAL FUND SCHEMES1

By Structure

o Open - Ended Schemes

o Close - Ended Schemes

o Interval Schemes

By Investment Objective

o Growth Schemes

o Income Schemes

o Balanced Schemes

o Money Market Schemes

Other Schemes

o Tax Saving Schemes

o Special Schemes

Index Schemes

1


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Sector Specific Schemes


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payments (premiums) in an amount that depends on medical

history, age, gender, and occupation.

Background2

Though the history of insurance dates back to 1818 with the

establishment of the Oriental Life Insurance company in

Calcutta, and then when LIC was established in the year

1956. For private life insurance sector in particular things

started taking shape after the recommendation ofMalhotra

committee which put forward a proposal for the

establishment of the regulatory body and also encouraged to

set up unit linked insurance pension plan. It was after his

recommendation that IRDA (Insurance regulatory and

development authority) was established in April 2000. After

that in the year 2001 the sector was finally opened for the

private players and foreign private. They are allowed to have

26% share in Indian company. The real innovation happened

in this time only, when Life insurance companies introduced

ULIPs with greater flexibilities. After making a magnificent

entry and becoming the most popular life insured product.

The other decision taken simultaneously to provide the

supporting systems to the insurance sector and in particular

the life insurance companies was the launch of the IRDAs

online service for issue and renewal of licenses to agents.

Due to IRDA the transparency and rules and regulations arestill here in the insurance market.

2


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Fig: growth of insurance sector in last 10 years

ULIP AND ENDOWMENT PLANS3

Endowment plans are life insurance plans, which not only

cover the individuals life in case of eventuality but also offer

a maturity benefit at the end of the term.

In the event of the individuals demise, his/her nominees

receive the sum assured with accumulated profits/bonus on

investments (till the time of his demise). In case the

individual survives the tenure, he/she receives the sum

assured and accumulated profits/bonus.

ULIPs attempts to fulfill investment needs of an

investor with protection/ insurance needs of an insurance

seeker. ULIPs work on the premise that there is a class of

investors who regularly invest their savings in products like

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fixed deposits, bonds, debt funds, diversified equity funds

and stocks. There is another class of individuals who take

insurance to provide for their family in case of an eventuality.

So typically both these categories of individuals have a

portfolio of investment as well as life insurance.

ULIP as a product combines both these products

(investment and life insurance) into single product. This

saves the investor/insurance seeker the hassles of

managing and tracking a portfolio of product.

Taking into account the changing socio-economic

demographics, rate of GDP growth, changing consumer

behavior and occurrences of natural calamities at regular

intervals, the Indian life insurance market is expected to

reach the value of around Rs 1683 Billion in the year 2009.

The market is expected to grow at a CAGR of more than

200% YOY from the year 2006.

In 2006-07, pension premium contributed about 22.11% to

total premium income of insurers. Interestingly, the figure in

the first nine months to December 2005 was 25.22%.

Insurance sector in India is one of the booming sectors of

the economy and is growing at the rate of 15-20 per cent

annum. Together with banking services, it contributes to

about 7 per cent to the country's GDP.

Key Players

This section provides an overview of some of the key players

in this industry like Bajaj Allianz, ING Vysya, SBI Life, Tata

AIG Life, HDFC Standard, ICICI Prudential Life Insurance,

Birla Sunlife, Aviva Life Insurance, Kotak Mahindra Old

Mutual, Max New York Life, Met Life, Sahara Life, LIC, Tata-


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AIG General, Reliance General, IFFCO-Tokio, ICICI-

Lombard, HDFC Chubb, New India Assurance Company

Limited, National Insurance Company Limited, United India

Insurance Company Limited and Oriental Insurance Limited.

ULIP - KEY FEATURES (IN GENERAL):

1. Premiums paid can be single, regular or variable. The

payment period too can be regular or variable. The risk

cover can be increased or decreased.

2. As in all insurance policies, the risk charge (mortality rate)

varies with age.

3. The maturity benefit is not typically a fixed amount and the

maturity period can be advanced or extended.

4. Investments can be made in gilt funds, balanced funds,

money market funds, growth funds or bonds.

5. The policyholder can switch between schemes, for

instance, balanced to debt or gilt to equity, etc.

6. The maturity benefit is the net asset value of the units.

7. The costs in ULIP are higher because there is a life

insurance component in it as well, in addition to the

investment component.

8. Insurance companies have the discretion to decide on

their investment portfolios.

9. They are simple, clear, and easy to understand.

10. Being transparent the policyholder gets the entire

episode on the performance of his fund.


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11. Lead to an efficient utilization of capital.

12. ULIP products are exempted from tax and they provide

life insurance.

13. Provides capital appreciation.

14. Investor gets an option to choose among debt, balanced

and equity funds.

ULIPs vs. Mutual Funds

Unit Linked Insurance Policies (ULIPs) as an investment

avenue are closest to mutual funds in terms of their structure

and functioning. As is the case with mutual funds, investors

in ULIPs is allotted units by the insurance company and a

net asset value (NAV) is declared for the same on a daily

basis.

Similarly ULIP investors have the option of investing across

various schemes similar to the ones found in the mutual

funds domain, i.e. diversified equity funds, balanced funds

and debt funds to name a few.

Mutual fund investors have the option of either making lump

sum investments or investing using the systematic

investment plan (SIP) route which entails commitments over

longer time horizons. The minimum investment amounts are

laid out by the fund house.

ULIP investors also have the choice of investing in a lump

sum (single premium) or using the conventional route, i.e.

making premium payments on an annual, half-yearly,

quarterly or monthly basis. In ULIPs, determining the


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premium paid is often the starting point for the investment

activity.

ULIPs Mutual Funds


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Investment

amounts

Determined by the

investor and can be

modified as well

Minimum investment

amounts are determined by

the fund house

Expenses

No upper limits,

expenses determined

by the insurance

company

Upper limits for expenses

chargeable to investors

have been set by the

regulator

Portfolio

disclosure Not mandatory*

Quarterly disclosures are

mandatory

Modifying

assetallocation

Generally permitted for

free or at a nominalcost

Entry/exit loads have to beborne by the investor

Tax benefits

Section 80C benefits

are available on all

ULIP investments

Section 80C benefits are

available only on

investments in tax-saving

funds

MAJOR DIFFERENCES IN ULIPs AND MUTUAL

FUNDs

If a mutual fund investor in a diversified equity fund wishes to

shift his corpus into a debt from the same fund house, he

could have to bear an exit load and/or entry load.

On the other hand most insurance companies permit their

ULIP inventors to shift investments across various

plans/asset classes either at a nominal or no cost (usually, a

couple of switches are allowed free of charge every year and

a cost has to be borne for additional switches).

With these comparable there are certain factors where in

these two differ. Mutual funds are essentially short to


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medium term products. The liquidity that these products offer

is valuable for investors. ULIPs, in contrast, are positioned

as long-term products and going ahead, there will be

separate playing fields for ULIPS and MFs, with the product

differentiation between them becoming more pronounced.

ULIPs do not seek to replace mutual funds, they offer

protection against the risk of dying too early, and also help

people save for retirement. Insurance has to be an integral

part of one's wealth management portfolio. Further,

exposure of Indian households to capital markets is limited.

ULIPs and mutual funds are, therefore, not likely to

cannibalize each other in the long run. The primary objective

of an insurance product is protection. The whole reason why

it has evolved as a savings plan in the minds of certain

people is because there is a significant savings component

attached to it; however, it is still not the primary purpose of

the plan. Second, there are various kinds of insurance

products; the element of protection in each varies. In certain

plans the level of protection is low and the savings

component high, but that is a choice to the customer.

While ULIPs as an investment avenue is closest to mutual

funds in terms of their functioning and structure, the first and

foremost purpose of insurance is and will always be

'protection'. The value that it provides cannot be downplayed

or underestimated. As an instrument of protection, insurance

provides benefits that no investment can offer. It is important

for an investor to understand his financial goals and horizon

of investment in order to make an informed investment

decision. The decision to invest in either a mutual fund or a

ULIP should depend on the time period of investment,


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individual financial goals as well as risk taking appetite, and

its about time the industry and customer realise it.

ULIP vs. ENDOWMENT PLANS

It wasn't too long back, when the good old endowment plan

was the preferred way to insure oneself against an

eventuality and to set aside some savings to meet one's

financial objectives. Then insurance was thrown open to the

private sector. The result was the launch of a wide variety of

insurance plans, including the ULIPs.

Two factors were responsible for the advent of ULIPs on the

domestic insurance horizon. First was the arrival of private

insurance companies on the domestic scene. ULIPs were

one of the most significant innovations introduced by private

insurers. The other factor that saw investors take to ULIPs

was the decline of assured return endowment plans. Of

course, the regulator -- IRDA (Insurance and Regulatory

Development Authority) was instrumental in signaling the

end of assured return plans.

Today, there is just one insurance plan from LIC (Life

Insurance Corporation) -- Komal Jeevan -- that assures

return to the policyholder.

These were the two factors most instrumental in marking the

arrival of ULIPs, but another factor that has helped their

cause is a booming stock market. While this now appears asone of the primary reasons for their popularity, we believe

ULIPs have some fundamental positives like enhanced

flexibility and merging of investment and insurance in a

single entity that have really endeared them to individuals.


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A. EXPENSES

ULIPs are considered to be very expensive when compared

to traditional endowment plans. This notion is rooted more in

perception than reality.

Sale of a traditional endowment plan fetches a commission

of about 30% (of premium) in the first year and 60% (of

premium) over the first five years. Then there is ongoing

commission in the region of 5%.

Sale of a ULIP fetches a relatively lower commission ranging

from as low as 5% to 30% of premium (depending on the

insurance company) in the first 1-3 years. After the initial

years, it stabilizes at 1-3%. Unlike endowment plans, there

are no IRDA regulations on ULIP commissions.

Broadly speaking, ULIP expenses are classified into three

major categories:

1) Mortality charges

Mortality expenses are charged by life insurance companies

for providing a life cover to the individual. The expenses vary

with the age, sum assured and sum-at-risk for the individual.

There is a direct relation between the mortality expenses

and the abovementioned factors. In a ULIP, the sum-at-risk

is an important reference point for the insurance company.

Put simply, the sum-at-risk is the difference between the

sum assured and the investment value the individual's

corpus as on a specified date.

2) Sales and administration expenses


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Insurance companies incur these expenses for operational

purposes on a regular basis. The expenses are recovered

from the premiums that individuals pay towards their

insurance policies. Agent commissions, sales and marketing

expenses and the overhead costs incurred to run the

insurance business on a day-to-day basis are examples of

such expenses.

3) Fund management charges (FMC)

These charges are levied by the insurance company to meet

the expenses incurred on managing the ULIP investments. A

portion of ULIP premiums are invested in equities, bonds,

and money market instruments. Managing these

investments incurs a fund management charge, similar to

what mutual funds incur on their investments. FMCs differ

across investment options like aggressive, balanced and

debt ULIPs; usually a higher equity option translates into

higher FMC.

Apart from the three expense categories mentioned above,

individuals may also have to incur certain expenses, which

are primarily 'optional' in nature- the expenses will be

incurred if certain choices that are made available to

individuals are exercised.

a) Switching charges

Individuals are allowed to switch their ULIP options. For

example, an individual can switch his fund money from

100% equities to a balanced portfolio, which has say, 60%

equities and 40% debt. However, the company may charge

him a fee for 'switching'. While most life insurance


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Another innovative feature with ULIPs is the 'top-up' facility.

A top-up is a one-time additional investment in the ULIP over

and above the annual premium. This feature works well

when you have a surplus that you are looking to invest in a

market-linked avenue, rather than stash away in a savings

account or a fixed deposit.

ULIPs also have a facility that allows you to skip premiums

after regular payment in the initial years. For instance, if you

have paid your premiums religiously over the first three

years, you can skip the fourth year's premium. The

insurance company will make the necessary adjustments

from your investment surplus to ensure the policy does not

lapse.

With traditional endowment, there are no investment options.

You select the only option you have and must remain with it

till maturity. There is also no concept of a top-up facility.

Your premium amount cannot be enhanced on a one-time

basis and skipped premiums will result in your policy lapsing.

A. LIQUIDITY

Another flexibility that ULIPs offer the individual is liquidity.

Since ULIP investments are NAV-based it is possible to

withdraw a portion of your investments before maturity. Of

course, there is an initial lock-in period (3 years) after which

the withdrawal is possible.

Traditional endowment has no provision for pre-mature

withdrawal. You can surrender your policy, but you won't get

everything you have earned on your policy in terms of

premiums paid and bonuses earned. If you are clear that you


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will need money at regular intervals then it is recommended

that you opt for money-back endowment.

B. TAX BENEFITS

Taxation is one area where there is common ground

between ULIPs and traditional endowment. Premiums in

ULIPs as well as traditional endowment plans are eligible for

tax benefits under Section 80C subject to a maximum limit of

Rs 100,000. On the same lines, monies received on maturity

on ULIPs and traditional endowments are tax-free under

Section 10.


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Indian Stock Market overview

The Bombay Stock Exchange (BSE) and the National

stock Exchange India Ltd. (NSE) are the two primary

exchanges in India. In addition, there are 22 regional stock

exchanges. However, the BSE and NSE have established

themselves as the two leading exchanges and account for

about 80% of equity volume traded in India. The average

daily turnover

NSE has around 1500 shares listed with a total market

capitalization of around Rs. 9,21,500 crore. The BSE has

over 6000 stocks listed and has a market capitalization of

around Rs. 9, 68,000 crore.

Most key stocks are traded on both the exchanges and

hence the investor could buy them on either exchange. Both

exchanges have a different settlement cycle, which allows

investors to sift their positions on the bourses. The primaryindex of BSE is BSE Sensex comprising of 30 stocks. NSE

has the S&P NSE 50 Index (Nifty) which consists of fifty

stocks.

The BSE Sensex is the older and more widely followed

index. Both these indices are calculated on the basis of

market capitalization and contain the heavily traded shares

from key sectors.

Both exchanges have switched over from the open outcry

trading system to a fully automated computerized mode of

trading known as BOLT (BSE online trading) and NEAT

(National Exchange Automated Trading) system. It facilitates


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more efficient processing, automatic order matching, faster

execution of trades and transparency.

The scripts traded on the BSE have been classified into

A,B1,B2,C, F,Z groups. The A group sharesrepresent those, which are in the carry forward system

(Badla).

The F group represents the debt market (fixed income

securities) segment.

The Z groups scripts are the blacklisted companies.

The C group covers the odd lot securities in A, B1, & B2

groups and rights renunciations.

Term deposits4

A deposit held at a financial institution that has a fixed

term. These are generally short-term with maturities

ranging anywhere from a fifteen days to a few years. When a

term deposit is purchased, the lender (the customer)

understands that the money can only be withdrawn after the

term has ended or by giving a predetermined number of

days notice.

Term deposits are an extremely safe investment and are

therefore very appealing to conservative, low-risk investors.

By having the money tied up investors will generally get a

higher rate with a term deposit compared with a demand

deposit.

4 Investopedia.com


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Investor some time pledge these term deposits to

take house loan, personal load, education load, etc. these

works as the security deposits or asset of the debtor.

Here is a list of Term deposit rates of different Banks I havestudied:-

Tenure Standard

Chartered

ICICI HDFC ABN -AmroK otak

Mahind

15 days - 59 days 5.25% 4% 5.50% 4%-5.5% 4%

60 days 89 days 5.75% 4% 5.50% 5.50% 5.50%

90 days 360 days 6.25% 6.25% 6.75% 6%-8% 8.50%

361 days 8.50% 6.25% 8% 6% 8.50%

362 days< 1year 6.25% 6.25% 6.75% 6% 8.50%

1 year < 2years 6.50% 8% 8% 6%-8% 9.25%


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Bonds in India.

A bond is just an organization's IOU; i.e., a promise to repay

a sum of money at a certain interest rate and over a certain

period of time. In other words, a bond is a debt instrument.

Other common terms for these debt instruments are notes

and debentures. Most bonds pay a fixed rate of interest for a

fixed period of time.

Why do organizations issue bonds?

A company needs funds to expand into new market,

while Government needs money for everything from

infrastructure to social programs. Whatever the need, a large

sum of money will be needed to get the job done.

One way is to arrange for banks or others to lend the money.

But a generally less expensive way is to issue (sell) bonds.

The organization will agree to pay some interest rate on the

bonds and further agree to redeem the bonds (i.e., buy them

back) at some time in the future (the redemption date).

The price of a bond is a function of prevailing interest rates.

As rates go up, the price of the bond goes down, because

that particular bond becomes less attractive (i.e., pays less

interest) when compared to current offerings. As rates go

down, the price of the bond goes up, because that particular

bond becomes more attractive (i.e., pays more interest)

when compared to current offerings.

A bearer bondis a bond with no owner information upon it;

presumably the bearer is the owner. Bearer bonds included


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coupons which were used by the bondholder to receive the

interest due on the bond.

Another type of bond is a convertible bond. This security can

be converted into shares of the company that issues the

bond if the bondholder chooses. Of course, the conversion

price is usually chosen so as to make the conversion

interesting only if the stock has a pretty good rise.

Different types of bonds5

In general there are few types of bonds available in the

market to buy, like;

Government bonds: - these bonds are issued by the

government to raise money from the public.

Bills - Debts securities maturing in less than one year.

Notes - Debt securities maturing in one to ten years.

Bonds - Debt securities maturing in more than ten years.

Marketable securities from the Indian government known

collectively as Treasuries and are as Treasury bonds,

Treasury notes and Treasury bills.

Municipal Bonds Municipal bonds, known as munis, are

the next progression in term of risk. The major advantage in

munis is that the returns are free from State/central tax.

Local government some time makes their debt non-taxable

for residents, thus making some municipal bonds completely

tax free. Because of the tax-savings yield in munis is lower

than the taxable bonds.

5 Security analysis and portfolio management by Ritu Ahuja


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Corporate bonds A company can issue bonds just as it

can issue stock. Generally, a short term corporate bond is

less than five years; intermediate is five to twelve years, and

long term is over 12 years.

Corporate bonds are characterized by higher yields because

there is a higher risk of a company defaulting than a

government. The companys credit quality is most important:

the higher the credit quality, lower the interest rate the

investor receives.

Bondholders are not owners of the corporation. But if the

company gets in financial trouble and needs to dissolve,

bondholders must be paid off in full before stockholders get

anything.

Zero coupon Bonds: - This is a type of bond that make no

coupon payments but instead is issued at a considerable

discount to par value. For example, let us say, a zero

coupon bond with a Rs. 1,000 par value and 10 years to

maturity is trading at Rs. 600; then investor would be paying

Rs.600 today that will worth Rs. 1,000 after 10 years.

A Portfolio management


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A portfolio management is a collection of investments held

by an institution or a private individual. Kolding a portfolio is

part of an investment and risk-limiting strategy called

Diversification. By owning several assets, certain types of

risk (in particular specific risk) can be reduced.

The aim of portfolio management is to achieve the

maximum return from a portfolio which has been delegated

to be managed by an individual manager or financial

institution. The manager has to balance the parameters

which define a good investment i.e. security, liquidity, and

return. The goal is to obtain the highest return for the client

of the managed portfolio.

While doing the portfolio management of customers it is

ensured that the portfolio has objectives and achieves a

sound balance between the competing objectives, which

are:-

Safety of investment

Stable current return

Appreciation in capital value

Liquidity

Tax planning

Minimizing the risk

Diversification


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Portfolio Expected Return

The expected rate of return is the weighted average of the

expected rates of return on assets comprising the portfolio.

The weights, which add up to 1, reflect the fraction of total

portfolio invested in each asset. Thus, there are two

determinants of portfolio returns:

I. Expected rate of return on each assets and

II. Relative share of each asset in the portfolio.

Symbolically:

E (rp) =w E (ri)

Where,

E (rp) =expected return from the portfolio.

w = proportion invested in the portfolio.

E (ri) =expected return from the assets i.

Portfolio Risk

Total risk is measured in terms of variance or standard

deviation of return. Unlike portfolio expected return, portfolio


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variance is not the weighted average of variance of returns

on individual assets in the portfolio.

Symbolically:

p= (w1)(1)+ (w2)(2)+2(w1) (w2) (12)

Where,

= Variance of returns of the portfolio

(w1)= Fraction of the portfolio invested in asset 1

(w2)= Fraction of the portfolio invested in asset 2

(1)= Variance of asset 1

(2)= Variance of asset 2

(12)= Covariance between returns of two assets.

Return is not fixed for any investment instrument it depends

upon the market liquidity, interest rate, and some other

economic situation of that country. For the calculation of the

risk & return I have chosen the historic data.

I have also showed the risk profile which have been ranging

from Low to very high.

List of return expected on the basis of Historical

data

Types of

investments

Historical returns Risk profile


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Company Bonds 6%-8% Medium-high

Bond Mutual Funds 8%-10% Medium

Equity Mutual Funds 15%-20% High

Equities 15%-20% Very high

Fixed Deposits 7%-8% Low

PPF 8% Low

Post Office 8% Low

Government

Securities

5%-6% Low

ELSS 15%-20% Medium-high

Note: higher returns for lower risk (because of Govt.

guarantees there) that PPF and similar A/c appear to have,

is misleading. These do not have much liquidity, and since

that is an important measure of risk.

CREATING PORTFOLIO

Making a portfolio is depends on the risk measurement of

the investment and the time horizon he/she prefer to invest.

But from the point of view of the portfolio manager, choosing

a investment intrument or a fund is more difficult than to

measure the risk tolerence and time horizon.

For the portfolio managers calculating the risk and return is

the main area where they focused. As an investors before

investing alwways watch for the risk and return for his/her


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securities, treasury bills, and also the Benchmark index

would determine how safer and more profitable your fund is.

Here is an analysis of the ratios that can help investors

gauge the performance of your fund as regards investing in

less riskier investment avenues.

Standard Deviation

Standard deviation throws light on a fund's volatility in terms

of rise and fall in its returns. Maximum volatility in a security

is the riskiest, considering the unevenness it brings about in

its performance. Standard deviation of a fund measures this

risk by measuring the degree to which the fund fluctuates in

relation to its mean return. That is the average return of a

fund over a period of time.

A fund that has a consistent four-year return of 3%, for

example, would have a mean or average of 3%. The

standard deviation for this fund would then be zero because

the fund's return in any given year does not differ from its

four-year mean of 3%. On the other hand, a fund that in

each of the last four years returned -5%, 17%, 2% and 30%

will have a mean return of 11%. The fund will also exhibit a

high standard deviation because each year the return of the

fund differs from the mean return. This fund is therefore

riskier because it fluctuates widely between negative and

positive returns within a short period.

To determine how well a fund is maximising its returns

received for its volatility, a comparison can be done for

similar investment and similar risky mutual funds. The fund

with the lower standard deviation would be more optimal


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because it is maximising the return received for the amount

of risk acquired.

Sharpe ratio

This ratio describes how much return you are receiving for

the extra volatility that you endure for holding a riskier asset.

Remember, you always need to be properly compensated

for the additional risk you take for not holding a risk-free

asset.

It is defined as S(x) = (rx-Rf)/Std dev(x)

Where 'x' is the investment,

'rx' is average rate of return of x

Rf is the best available rate of return of a risk-free security

like government securities

Std dev(x) is the standard deviation of rx.

Sharpe ratio is a risk-adjusted measure of return that is often

used to evaluate the performance of a portfolio. The ratio

helps to make the performance of one portfolio comparable

to that of another portfolio by making an adjustment for risk.

For example, if manager A generates a return of 15% while

manager B generates a return of 12%, it would appear that

manager A is a better performer. However, if manager A,who produced the 15% return, took much larger risks than

manager B, it may actually be the case that manager B has

a better risk-adjusted return.


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Say that the risk free-rate is 5%, and manager A's portfolio

has a standard deviation of 8% (considering high risk/return),

while manager B's portfolio has a standard deviation of 5%.

The Sharpe ratio for manager A would be 1.25 while

manager B's ratio would be 1.4, which is better than

manager A. Based on these calculations, manager B was

able to generate a higher return on a risk-adjusted basis. A

ratio of more than or equal to 1 is good, more than or equal 2

is very good, and more than or equal 3 is excellent.

Sharpe ratio is broken down into three components: asset

return, risk-free return, and standard deviation of return.

After calculating the excess return, it's divided by the

standard deviation of the risky asset to get its Sharpe ratio.

The idea of the ratio is to see how much additional return

you are receiving for the additional volatility of holding the

risky asset over a risk-free asset - the higher the better.

Beta

Beta determines the volatility, or risk, of a fund in

comparison to that of its index or benchmark. A fund with a

beta very close to 1 means the fund's performance closely

matches the index or benchmark. A beta greater than 1

indicates greater volatility than the overall market, and a beta

less than 1 indicates less volatility than the benchmark.

If, for example, a fund has a beta of 1.05 in relation to the

Sensex, the fund has been moving 5% more than the index.

Therefore, if the Sensex has increased 15%, the fund would

be expected to increase 15.75%.


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On the other hand, a fund with a beta of 2.4 would be

expected to move 2.4 times more than its corresponding

index. So if the Sensex moved 10%, the fund would be

expected to rise 24%, and, if the Sensex declined 10%, the

fund would be expected to lose 24%.

Investors can choose funds exhibiting high betas, which

increase chances of beating the market. Also if the market is

bearish the funds that have betas less than 1 are a good

choice because they would be expected to decline less in

value than the index. For example, if a fund had a beta of 0.5

and the Sensex declined 6%, the fund would be expected todecline only 3%. However, you must note that beta by itself

is limited and there may be factors other than the market risk

affecting your fund's volatility.

These 33 funds are the top funds in respective fund sector,

the 1st year return and 3 years are calculated.

Then with 60% weightage given to 3 years return and 40%weightage given to 1st year return. Thus I have got the total average return

score of the respective funds.

Beta & Sharpe ratio being calculated. Then I calculate adjusted risk

by dividing Sharpe ratio by beta.

Then adjusted risk is multiplied by the total return score of

individual funds. Then I got the adjusted risk & return.

The highest scorer is the best fund to invest respect to the fund

type. So I have ranked the funds in the respective category.


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These funds are recommended to the investors depending the risk

tolerence.

Portfolio of Investor

WITH 70% AGGRESSIVE & 30% DEFENSIVE RISK

PROFILE

Investable amount = 500,000 Rs.

Aggressive investment= 500,000x.7= 350,000 Rs

Defensive investment= 500,000x.3= 150,000 Rs

Aggressive investment

ELSS= 100,000 Rs.

Aggressive mutual funds= 200,000 Rs.

NFO= 50,000

Explanation :

ELSS is a type of mutual funds where investor can get the Tax

shield of 80(C), which means upto investment of Rs 100,000 is tax free.

There is no need invest in ULIPs or any endowment insurance, because

ELSS gives on an average return of 25%-30%6. For the secure life

investor must do an insurance that will give only insurance plan. This will

be a expence of the investor but in the long run ELSS will give morereturn than a ULIP plan.

NFO is the emerging mutual funds that is going to flurish in the

future. It is difficult to predict which NFO will be good, because it is time

6 See Annexure no. 4


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constrain. But investor must evaluate the background of the NFO and the

fund manager.

Aggressive mutual funds, are the most volatily mutual funds respect

to the market. I have recommended top five mutual funds each with

amount 40,000 Rs. The funds are:

Tata Infrastructure, DSPML T.I.G.E.R. Regular, Reliance

Growth, Birla Mid Cap, Sundaram BNP Paribas Select

Midcap Regular.

In these funds DSP ML T.I.G.E.R. Regular high liquid as

there is no tenure. Reliance Growth and Birla Mid Capminimum tenure is 1 year. So there is no liquidity problem for

the investor.

Defensive investment

Balanced funds,Debt funds= 50,000

Government securities= 50,000

Fixed deposits=50,000

Explanation:

This investor has 30% in defensive investment. I have

distributed all investment equally to balanced funds,

Government securities, Fixed deposits.

Fixed deposits are for 1 years, Kotak Mahindra offers 9.25%

for 1 years fixed deposits.

Government securities for 5 years, it will yield 8%.


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Return after one years of the above investment

INVESTMENT CALCULATION EXPECTED

RETURN

ELSS 100,000X35% 35,000AGGRESSIVE

FUNDS

200,000X40% 80,000

NFO 50,000X15% 7,500BALANCED FUNDS 50,000X 25% 12,500FIXED DEPOSITS 50,000X9.25% 4625GOVT.SECURITIES 50,000X8% 4,000TOTAL 143625

On an average the return =143,625/500,000= 28.25% which

good for the investorof very high risk.

Portfolio of Investor

WITH 60% AGGRESSIVE & 40% DEFENSIVE RISK

PROFILE

Investable amount = 500,000 Rs.

Aggressive investment= 500,000x.6= 300,000 Rs

Defensive investment= 500,000x.4= 200,000 Rs

Aggressive

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