portfolio chapter1

7/31/2019 Portfolio Chapter1

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A PROJECT REPORT

On

PORTFOLIO MANAGEMENT


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PORTFOLIO MANGEMNT SERVICES (PMS)

Portfolio means a collection of investments held by an institution or a private

individual. Holding a portfolio is often part of an investment and risk-limiting strategy called

diversification. Portfolios which are aimed at taking high risks these are called concentrated

portfolios.

Investment management is the professional management of various securities

(shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the

benefit of the investors. Investors may be institutions or private investors.

Asset management is often used to refer to the investment management of

collective investments, whilst the more generic fund management may refer to all forms of

institutional investment as well as for private investors. Investment managers who specialize in

advisory or discretionary management on behalf of private investors may often refer to their

services as wealth management or portfolio management often within the context of so-called

"private banking".

The provision of 'investment management services' includes elements of

financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring

of investments. Investments are often meant to include projects, brands, patents and many things

other than stocks and bonds.

Need of PMS

The PMS gives investors periodically review their asset allocation across different assets

as the portfolio can get skewed over a period of time. This can be largely due to appreciation /

depreciation in the value of the investments. As the financial goals are diverse, the investmentchoices also need to be different to meet those needs. No single investment is likely to meet all

the needs, so one should keep some money in bank deposits and liquid funds to meet any urgent

need for cash and keep the balance in other schemes that would maximize the return and

minimize the risk.


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OBJECTIVES OF PMS

The objective ofportfolio managementis to invest in securities is securities in such a way that

one maximizes ones returns and minimizes risks in order to achieve ones investment objective.

A goodportfolioshould have multiple objectives and achieve a sound balance among them. Any

one objective should not be given undue importance at the cost of others. Presented below are

some important objectives of portfolio management.

1. Stable Current Return: -

Once investment safety is guaranteed, the portfolio should yield a steady current income. The

current returns should at least match the opportunity cost of the funds of the investor. What we

are referring to here current income by way of interest of dividends, not capital gains.

2. Marketability: -

A good portfolio consists of investment, which can be marketed without difficulty. If there are

too many unlisted or inactive shares in your portfolio, you will face problems in encasing them,

and switching from one investment to another. It is desirable to invest in companies listed on

major stock exchanges, which are actively traded.

3. Tax Planning: -

Since taxation is an important variable in total planning, a good portfolio should enable its owner

to enjoy a favorable tax shelter. The portfolio should be developed considering not only income
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tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at is tax planning, not

tax evasion or tax avoidance.

4. Appreciation in the value of capital:

A good portfolio should appreciate in value in order to protect the investor from any erosion in

purchasing power due to inflation. In other words, a balanced portfolio must consist of certain

investments, which tend to appreciate in real value after adjusting for inflation.

5. Liquidity:

The portfolio should ensure that there are enough funds available at short notice to take care of

the investors liquidity requirements. It is desirable to keep a line of credit from a bank for use in

case it becomes necessary to participate in right issues, or for any other personal needs.

6. Safety of the investment:

The first important objective of a portfolio, no matter who owns it, is to ensure that the

investment is absolutely safe. Other considerations like income, growth, etc., only come into the

picture after the safety of your investment is ensured.

Investment safety or minimization of risks is one of the important objectives of portfolio

management. There are many types of risks, which are associated with investment in equity

stocks, including super stocks. Bear in mind that there is no such thing as a zero risk investment.

More over, relatively low risk investment give correspondingly lower returns.


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PORTFOLIO CONSTRUCTION

The Portfolio Construction of Rational investors wish to maximize the returns on their

funds for a given level of risk. All investments possess varying degrees of risk. Returns come in

the form of income, such as interest or dividends, or through growth in capital values.

PROCESS OF PORTFOLIO CONSTRUCTION:

1. Setting objectives:

The first step in building a portfolio is to determine the main objectives of the fund given

the constraints (i.e. tax and liquidity requirements) that may apply. Each investor has different

objectives, time horizons and attitude towards risk.

2. Defining Policy:

A suitable investment policy must be established. The standard procedure is for the

money manager to ask clients to select their preferred mix of assets. Clients are then asked to

specify limits or maximum and minimum amounts they will allow to be invested in the different

assets available. The main asset classes are cash, equities, Gilts/bonds and other debt

instruments, derivatives, property and overseas assets.

3. Applying portfolio strategy:

There are active and passive strategies. An active strategy involves predicting trends and

changing expectations about the likely future performance of the various asset classes and

actively dealing in and out of investments to seek a better performance. A passive strategy

usually involves buying securities to match a preselected market index. Alternatively, a portfolio


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can be set up to match the investors choice of tailor-made index. Passive strategies rely on

diversification to reduce risk.

4. Asset selections:

Once the strategy is decided, the fund manager must select individual assets in which to

invest. Usually a systematic procedure known as an investment process is established, which sets

guidelines or criteria for asset selection. Active strategies require that the fund managers apply

analytical skills and judgment for asset selection in order to identify undervalued assets and to

try to generate superior performance.

5. Performance assessments:

The performance of the fund is periodically measured against a pre-agreed benchmark

perhaps a suitable stock exchange index or against a group of similar portfolios. The portfolio

construction process is continuously iterative, reflecting changes internally and externally.

Steps to Stock Selection Process:


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NEED AND ADVANTAGES OF PORTFOLIO MANAGEMENT

Balanced Portfolio:

Professional research and advice will help you with information on the best investment options

and ideas for your portfolio.

Maximum Returns, Minimum Risks:

Portfolio management services assure you of the best downside protection for your portfolio.

You will benefit with practical financial advice that can help convert all paper gains into real

profits in the shortest time.

Adjust Your Portfolio To Market Trends:

When you avail of portfolio management services you enjoy greater freedom and flexibility to

diversify your investments. Professionals will help you with prudent advice and financial

solutions so that your portfolio is in sync with the latest market trends.

There are, however, minimum values to be maintained if youre looking for portfolio

management services. Most companies will not help you if you are a small investor with a

portfolio of shares in one or two companies. But if you are willing to invest a considerable

amount through portfolio management services, your portfolio manager will ensure that your

portfolio is balanced, and unaffected by market fluctuations.

Today, the financial market is increasingly complex and managing your own portfolio will take

up a lot of your time and effort. Instead you can simply assign your investments to portfoliomanagement services who will report to you regularly on your portfolio performance. Dont feel

lost in this complex world of investments.


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Types of Assets

The portfolio structure takes into account a range of factors, including the investors time

horizon, attitude to risk, liquidity requirements, tax position and availability of investments. The

main asset classes are cash, bonds and other fixed income securities, equities, derivatives,

property and overseas assets.

Cash and cash instruments

Cash can be invested over any desired period, to generate interest income, in a range of

highly liquid or easily redeemable instruments, from simple bank deposits, negotiable certificates

of deposits, commercial paper and Treasury bills to money market funds, which actively manage

cash resources across a range of domestic and foreign markets. Cash is normally held over the

short term. Returns on cash are driven by the general demand for funds in an economy, interest

rates, and the expected rate of inflation. A portfolio will normally maintain at least a small

proportion of its funds in cash in order to take advantage of buying opportunities.

Bonds

Bonds are debt instruments on which the issuer (the borrower) agrees to make interest

payments at periodic intervals over the life of the bond this can be for two to thirty years or,

sometimes, in perpetuity. Interest payments can be fixed or variable, the latter being linked to

prevailing levels of interest rates. The bond markets are highly liquid. Corporate bonds are bonds

that are issued by companies to assist investors and to help in the efficient pricing of bond issues,

many bond issues are given ratings by specialist agencies such as Standard & Poors and

Moodys. The highest investment grade is AAA, going all the way down to D, which is graded

as in default.

Future interest rates are driven by the likely demand/ supply of money in an economy,

future inflation rates, political events and interest rates elsewhere in world markets. Investors


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with short-term horizons and liquidity requirements may choose to invest in bonds because of

their relatively higher return than cash and their prospects for possible capital appreciation.

Equities

Equity consists of shares in a company representing the capital originally provided by

shareholders. An ordinary shareholder owns a proportional share of the company and an ordinary

share carries the residual risk and rewards after all liabilities and costs have been paid. Ordinary

shares carry the right to receive income in the form of dividends and any residual claim on the

companys assets once its liabilities have been paid in full. Preference shares are another type of

share capital.

They differ from ordinary shares in that the dividend on a preference share is usually

fixed at some amount and does not change. These shares usually do not carry voting rights and,

in the event of firm failure, preference shareholders are paid before ordinary shareholders.

Returns from investing in equities are generated in the form of dividend income and capital gain

arising from the ultimate sale of the shares

.

Derivatives

Derivative instruments are financial assets that are derived from existing primary assets

as opposed to being issued by a company or government entity. The two most popular

derivatives are futures and options. The extent to which a fund may incorporate derivatives

products in the fund will be specified in the fund rules and, depending on the type of fund

established for the client and depending on the client, may not be allowable at all.

A futures contract is an agreement in the form of a standardized contract between two

counterparties to exchange an asset at a fixed price and date in the future. The underlying asset of

the futures contract can be a commodity or a financial security. Each contract specifies the type


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and amount of the asset to be exchanged, and where it is to be delivered. The buyer of a futures

contract takes a long position, and will make a profit if the value of the contract rises after the

purchase. The seller of the futures contract takes a short position and will, in turn, make a profit

if the price of the futures contract falls.

An option contract is an agreement that gives the owner the right, but not obligation, to

buy or sell (depending on the type of option) a certain asset for a specified period of time. A call

option gives the holder the right to buy the asset. A put option gives the holder the right to sell

the asset. Buying an option involves paying a premium; selling an option involves receiving the

premium. Options have the potential for large gains or losses, and are considered to be high risk

instruments.

Property

Property investment can be made either directly by buying properties, or indirectly by

buying shares in listed property companies. Only major institutional investors with long-term

time horizons and no liquidity pressures tend to make direct property investments. These

institutions purchase freehold and leasehold properties as part of a property portfolio held for the

long term, perhaps twenty or more years. Returns are generated from annual rents and any

capital gains on realization. These investments are often highly illiquid.

Exchange Traded Funds (ETF)

Exchange Traded Fund is a security that tracks an index, a commodity or a sector like an index

fund or a sectoral fund but trades like a stock on an exchange. It is similar to a close-ended

mutual fund listed on stock exchanges. ETF's experience price changes throughout the day as

they are bought and sold.

1. Currently there are three types of ETF's which can be traded in BSE. These are :

Equity ETF's.

Gold ETF's.

Liquid ETF's.


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Equity ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty

or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks

that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price

that changes throughout the day. Currently there are eleven equity ETF's which can be traded in

BSE.

Gold ETF is a special type of Exchange traded fund that tracks the price of gold. Currently

there are six gold ETF's which can be traded in BSE.

Liquid ETF's are the money market ETF's, the investment objective of which is to provide

money market returns. Liquid BeES launched by benchmark mutual fund is the first money

market ETF in the world. Liquid BeES will invest in a basket of call money, short-term

government securities and money market instruments of short and medium maturities.

Gold, as an asset class has given best returns by rising 17 per cent compound year-on-year over

the last 12 years, equivalent to about 650 per cent over the course of the gold Bull Run.

Monetary debasement, and financial and political instability, Central Bank Buying and

Investment Demand have pushed an investor flight to safety in Gold.

Indian Gold prices have already risen more than 8% this year and are currently trading at 2012

high of around Rs 29000 /10 gm. And this year too, we expect this Bull Run to continue and

prices may trade above Rs 30000/10 gm by this year end. So one should try to accumulate and

buy on dips and allocate at least 10% of portfolio investment in Gold and therefore should

definitely start accumulating Gold on this auspicious day of Akshaya Tritya through Gold ETFs,MCX Futures or NSEL E-Gold.

Risk and Risk Aversion

Portfolio theory also assumes that investors are basically risk adverse, meaning that,

given a choice between two assets with equal rates of return they will select the asset with lower

level of risk. Any portfolio that is being developed will have certain risk constraints specified in

the fund rules, very often to cater to a particular segment of investor who possesses a particular

level of risk appetite.

Definition of Risk


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Risk anduncertainty, most financial literature the two terms areused interchangeably. In

fact, one way to define risk is the uncertainty of future outcomes. An alternative definition

might be the probability of an adverse outcome.

Composite risks involve the different risk as explained:-

(1) Interest rate risk: It occurs due to variability cause in return by changes in level of interest

rate. These changes affect the value of security. RBI, in India, is the monitoring authority which

effectalises the change in interest rate. Any upward revision in interest rate affects fixed income

security, which carry old lower rate of interest and thus declining market value. Thus it

establishes an inverse relationship in the prize of security.

TYPES RISK EXTENT

Cash equivalent Less vulnerable to interest rate risk

Long term Bond More vulnerable to interest rate risk.

(2) Purchasing power risk: It is also known as inflation risk. This risk emanates from the very

fact that inflation affects the purchasing power adversely. Purchasing power risk is more in

inflationary times in bonds and fixed income securities. It is desirable to invest in such securities

during deflationary period or a period of decelerating inflation. Purchasing power risk is less in

flexible income securities like equity shares or common stuffs where rise in dividend income

offset increase in the rate of inflation and provide advantage of capital gains.

(3) Business risk: Business risk emanates from sale and purchase of securities affected by

business cycles, technological change etc. Business cycle affects all the type of securities viz.

there is cheerful movement in boom due to bullish trend in stock prizes where as bearish trend in

depression brings downfall in the prizes of all types of securities. Flexible income securities arenearly affected than fix rate securities during depression due to decline n the market prize.

(4) Financial risk: Financial risk emanates from the changes in the capital structure of the

company. It is also known as leveraged risk and expressed in term of debt equity ratio. Excess of

debts against equity in the capital structure indicates the company to be highly geared or highly


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levered. Although leveraged companys earnings per share (EPS) are more but dependence on

borrowing exposes it to the risk of winding up. Maximize returns, minimize risks.

RISK versus RETURN

Risk versus return is the reason why investors invest in portfolios. The ideal goal in portfolio

management is to create an optimal portfolio derived from the best riskreturn opportunities

available given a particular set of risk constraints. To be able to make decisions, it must be

possible to quantify the degree of risk in a particular opportunity. The most common method is

to use the standard deviation of the expected returns. This method measures spreads, and it is the

possible returns of these spreads that provide the measure of risk. The presence of risk means

that more than one outcome is possible. An investment is expected to produce different returns

depending on the set of circumstances that prevail.


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How to create a Smart Portfolios to Customers in SIP

Business Standard started Smart Portfolios three years ago as an educational

initiative for our readers. Smart Portfolios is a year-long exercise where four professional

investors run phantom portfolios of Rs 10 lakh each. We have finished three years of the

season and from September 5, 2011, we have launched Smart Portfolios Season IV on

smartinvestor.in, a group site dedicated to investing.

This year we have taken Smart Portfolios a step ahead, with a new set of rules and

also roped in six fund managers from different brokerage and research houses from the

world of markets. Our readers can continue to enjoy the benefit of learning how to

manage portfolios by keeping tab on the fund managers movements.

The Experts will continue to provide guidance and leadership to SmartInvestors

and our visitors on how they pick stocks and allocate funds across sectors and

investments. This educational initiative will help you understand the nuances of the

market and take more informed investment decisions. Keep up with what the experts are

doing every day on www.smartinvestor.in/smartportfolio and every Friday in the

Business Standard newspaper.

Rules

The duration of the activity will be for one year, starting September 01, 2011 and

ending at August 31, 2012. The transaction cost is fixed at 0.25% for each leg of trade.


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Each of the fund manager will have a phantom portfolio of Rs 10 lakh in notional

value, which can be invested either in stocks or held in cash.

The fund manager can hold 100 per cent cash in his portfolio, though it will not

earn any return. The fund manager cannot invest more than 10% of the corpus at any time

in one stock. However, there is no limitation on the number of stocks a fund manager can

hold in the portfolio.

The fund manager cannot invest more than 50% of his portfolio value, in mid-

caps. However, the fund manager can continue holding on to mid-cap stocks in case the

value appreciates over 50% post his investment.

The fund manager can invest up to 100% in Large-caps - Which is a fixed list of

NSE 100 index components, as of August 31, 2011. Mid-caps or other stocks available

for trading will be on basis of two criteria. (1) Free float market-cap has to be in excess of

Rs 100 crore. (2) The average traded value in the last two weeks has to be minimum Rs

50 lakh, on a combined basis (BSE+NSE). This will be updated on a weekly basis.

The S&P CNX 500 remains as the benchmark index for Smart Portfolios.

Trading will not be allowed on the Listing day of a particular security. The

security will be made available the next day, only if the free-float m-cap is above Rs 100

crore.

The fund manager is only allowed to trade in the cash market and cannot take a

short position.

The fund manager will carry his phantom trades on smart investor (business-

standard.com). The stock price for transactions will be the NSE price available on the

website, which is delayed by at least five minutes.


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The fund manager will have to hold a stock for seven calendar days before selling.

The fund managers shall send at least two / three comments to justify his investment in a

particular stock. For the same, will be used in the write up (updates) on site and print.

Smart investor may cancel/ reverse transactions if they violate the spirit of fair play.

Monthly Winners

The winners will be declared based on their percentage returns every month. The returns

will be calculated as a percentage of gains in the net worth over previous month. Net

worth is calculated as the sum of cash in hand and the closing value of the stock portfolio.

The last trading day of the month will be considered in choosing the winner.

Smart Investors who have played Smart Portfolios for at least three weeks are eligible. A

Smart Investor should have registered at least on the 8th of the month to be eligible for

that month's prizes. If the contestant starts playing the game after the month has begun,

the net worth for the previous month will be taken as Rs 10 lakh. Only those players who

have made a minimum of FIVE transactions in Smart Portfolios during the month will

qualify for the monthly prize.The first SmartInvestors award-winners will be declared on

November 4, 2011, based on the portfolio value on October 31, 2011 and participants

who have begun playing Smart Portfolios before October 14 will be eligible. The starting

value of the portfolio will be taken as their net worth on September 30, 2011 for existing

participants or Rs 10 lakh for new participants in the first month.

The award-winners will be declared on the 4th of the next month.


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Winners will be chosen by a draw of lots in case of multiple winners. Monthly prizes will

be awarded in October and November 2011; the first monthly prize winner will get a

Blackberry Curve 8520 mobile handset.

The second prize winner will get Sony Cybershot DSC S3000 camera and the next ten

winners will get a SmartInvestor T-shirt each.

OTHER RULES

The Smart Portfolios game is open to resident Indians except the staff and family

members of Business Standard and the four Expert fund managers.

Winners will be chosen by a draw of lots in case of multiple winners.

Winners will be required to produce identity and address verification to claim their prize.

Experts and Smart Investors are allowed to trade between 09:30 am to 3:45 pm.

Prize Disbursal

Winners will be intimated individually over email

The prize(s) to the winner shall be given subject to:

(a) the compliance by winner with all applicable statutory legislations

/processes/formalities in connection with the prize(s);

(b) on payment of all relevant government/statutory taxes/levies by the winner;


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(c) on production all such documents/papers as required by us before accepting the

delivery of the prize (such as PAN Card), valid visual (photograph) and photo id proof of

identity, residence address, etc;

(d) providing details pertaining to unique email id and/or unique phone number, etc and

(e) complying with all relevant T&C. Any failure on the part of the winner(s) to comply

with afore-mentioned, or in the event of any ambiguity/uncertainty/unavailability of the

winner(s), Smart Investor in, in its own discretion will be entitled to cancel the prize(s)

for the said winner(s).

(f) In the event the selected winner does not provide the relevant documents (such as

PAN Card, valid visual (photograph), photo id proof of identity, residence address,

details pertaining to unique email id and/or unique phone number, etc.) as required by us,

within a period of thirty (30) days of receipt of winning intimation, we may, in our sole

discretion, cancel the entitlement of the said winner and may award the prize to the

second winner.

(g) The decision of SmartInvestor in respect of all prizes/transactions under this contest

shall be final and binding.

(h) In case of unforeseen or unavoidable circumstances by which the announced prize is

unavailable, we reserve the right to substitute the prize with another of similar value or

closer value.

(i) Neither us nor our directors/officers/affiliated/group companies will, in no way, be

responsible for circumstances beyond our control, which hinder the completion of the

contest.

(j) The prizes cannot and will not be negotiated upon, transferred, replaced or altered for

cash etc.


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(k) We reserve the exclusive right to use the Winner's name, scoring etc for any form of

publicity or advertisement.

(l) Business Standard does not undertake to provide any guarantees or warranties on the

products offered as prizes, in the event of a defect or functional issue no replacement or

monetary compensation will be provided. Winners are expected to contact the

manufacturer directly

BUY

Buyback (reacquired stock) is a stock which is bought back by the issuing company,

reducing the amount of outstanding stock on the open market Stock repurchases are often

used as a tax-efficient method to put cash into shareholders' hands, rather than pay

dividends. Sometimes, companies do this when they feel that their stock is undervalued

on the open market .

SELL

Rules

The duration of the activity will be for one year. Each of the four fund manager will have

a phantom portfolio of Rs 10 lakh in notional value, which can be invested either in

stocks or held in cash.

The fund manager can follow any investment style, be it large-cap, mid-cap or small-

cap; value, growth or blend, short-term, medium-term or long-term. He will only need to

specify the style he will follow and stick by it.

The fund manager can hold 100 per cent cash in his portfolio, though it will not earn any

return.


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The fund manager is only allowed to trade in the cash market and cannot take a short

position

The fund manager will report his phantom trades on business-standard.com, which will

be reflected immediately on business-standard.com. The stock price for transactions will

be the BSE price available on the website, which is delayed by at least ten minutes.

There is no limitation on trades except that the fund manager will have to hold a stock

for seven calendar days. This is to prevent speculation.

There is no limitation on the number of stocks a fund manager will hold in the portfolio.

The returns will be calculated on a pre-tax basis, and the BSE 200 is the benchmarkindex.

Why DIYSIP?

Equity markets are by nature cyclical. They can also be volatile in the short-term. Timing

the market is a futile exercise. An investor has to follow the disciplined way of investing.

An analysis of the past data proves that over a longer time horizon (five to seven years),

equities have proved to be the most rewarding asset class. Stability is a relative term.

The Systematic Investment Plan (SIP) is a simple and time-honored investment strategy

for accumulation of wealth in a disciplined manner over long term period.

Benefits of SIP

Lighter on the wallet.

Makes timing of market irrelevant. Power Of Compounding.

Rupee cost averaging

What is D.I.Y SIP?


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DIYSIP stands for: Do It Yourself Systematic Investment Plan.

It is a product through which, you can enter the equity market & build your own portfolio

using the market volatility for your own benefit.

Why D.I.Y SIP?

Its a disciplined way of investing in equities.

It helps you to accumulate stocks of your choice in your portfolio on a regular

basis.

It benefits you on Rupee cost averaging concept.

It gives the power of compounding to your investment.

portfolio chapter1

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