portfolio management service

103
Vivekanand Education Society’s Institute Of Management Studies & Research (VESIMSR) Mumbai UNIVERSITY OF MUMBAI PROJECT REPORT ON Portfolio Management ServicesSUBMITTED BY Mr. Jayesh K Changlani UNDER THE GUIDANCE OF Mr. Nikesh Ruparel Corporate Trainer 1

Upload: bharti-bolwani

Post on 06-Mar-2015

293 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Portfolio Management Service

Vivekanand Education Society’s Institute Of Management Studies & Research

(VESIMSR)

Mumbai

UNIVERSITY OF MUMBAI

PROJECT REPORT

ON

“Portfolio Management Services”

SUBMITTED BY

Mr. Jayesh K Changlani

UNDER THE GUIDANCE

OF

Mr. Nikesh Ruparel

Corporate Trainer

For partial fulfillment of MMS course

MASTER OF MANAGEMENT STUDIES

YEAR 2010 – 12

1

Page 2: Portfolio Management Service

A

PROJECT REPORT

ON

“Portfolio Management Services”

IN

BirlaSun Life Insurance

SUBMITTED BY

Mr. Jayesh K Changlani

MMS (Finance)

2010-2012

Vivekanand Education Society’s

Institute of Management Studies & Research (VESIMSR)

Chembur, Mumbai

2

Page 3: Portfolio Management Service

DECLARATION

I, Jayesh K Changlani, student of Vivekanand Education Society’s Institute of Management Studies

and Research, have completed Summer Internship Project in BirlaSun Life Insurance, Mumbai on

the topic “Portfolio Management Services”, from 2nd may 2011 to 15th July 2011.

I hereby declare that this project submitted to University of Mumbai, in partial fulfillment of MMS

course, is true and original to the best of my knowledge.

Date:

Place:

3

(Jayesh .K. Changlani)

Page 4: Portfolio Management Service

ACKNOWLEDGEMENT

It is indeed a matter of great pleasure and privilege to work on the project titled “Portfolio

Management Services”. I would like to express special thanks to and for providing me an excellent

opportunity to complete my summer internship at BirlaSun Life Insurance.

I would like to express my indebtedness to Mr. Nikesh Ruparel [Corporate Trainer], my

project guide, who has played a pivotal role in the success of this summer internship program and

has always been a source of inspiration to me.

I would also like to express my deepest & sincerest thanks to the entire staff of Birla Sun

Life Insurance Company Ltd. for their co-operation.

Very special thanks to Prof. Nupur Gupta (Finance Faculty Head, VESIMSR), whose

valuable inputs went a long way in refining this project.

I would like to thank all those people who provided valuable inputs throughout my

internship. Without the support of everyone mentioned above, this project wouldn’t have been

possible.

__________________

(Jayesh .K. Changlani)

DATE:

4

Page 5: Portfolio Management Service

EXECUTIVE SUMMARYEXECUTIVE SUMMARY

In today’s world, every individual wants to secure his future and one of the way is investment.

While investing their money they expect capital appreciation along with security and minimum risk

involved in it.

Some investment avenues involve huge risk and some less risk. Depending on the changing risk

environment and emerging investment opportunities, investments need to be evaluated on a regular

basis and form strategies which will help in minimizing the risk and maximizing the returns to the

investor. Portfolio management helps in predicting the relationship between the risk of a security

and its returns. This in turn helps the investment avenues to stay ahead of risk return curve and

generate positive returns for a long period of time. Portfolio management service helps in

diversification of funds. It basically involves risk profiling, goal setting, asset allocation and

reviewing of the investment.

So, to study Portfolio Management Service as an overview is our objective of doing this project.

This project considers and includes various markets like Equity Markets, Debt Markets, Mutual

Funds, Insurance, Gold for investments and also Fundamental and Technical Analysis of stock to

evaluate their performance and growth.

5

Page 6: Portfolio Management Service

Table of Contents

1) About Birla Sun Life……………………………………………. 07

2) Portfolio Management Services…………………………………. 09

3) Fund Manager…………………………………………………… 13

4) Asset Classes……………………………………………………. 15

5) Equity Markets………………………………………………….. 16

6) Indian Debt Markets…………………………………………….. 23

7) Mutual Funds……………………………………………………. 29

8) Insurance Sector in India………………………………………... 39

9) Fundamental Analysis…………………………………………... 43

10) Technical Analysis…………………………………………… 48

11) Sectoral Analysis

i) Banking Sector……………………………………………52

ii) Overview of telecom Sector………………………………54

iii) Cement Sector……………………………………………57

12) Gold…………………………………………………………….59

13) Case Study

a) Risk Profiling………………………………………………61

b) Goal Setting………………………………………………...68

c) Portfolio of the client……………………………………….69

14) Recommendation………………………………………………..73

15) Experience…………………………………………………… 74

16) Biblography……………………………………………………..75

6

Page 7: Portfolio Management Service

1. About Birla Sun Life

Established in 2000, Birla Sun Life Insurance Company Limited (BSLI) is a joint venture between the Aditya Birla Group, a well known and trusted name globally amongst Indian conglomerates and Sun Life Financial Inc, leading international financial services organization from Canada. The local knowledge of the Aditya Birla Group combined with the domain expertise of Sun Life Financial Inc., offers a formidable protection for its customers' future.

With an experience of over 10 years, BSLI has contributed significantly to the growth and development of the life insurance industry in India and currently ranks amongst the top 6 private life insurance companies in the country.

Known for its innovation and creating industry benchmarks, BSLI has several firsts to its credit. It was the first Indian Insurance Company to introduce "Free Look Period" and the same was made mandatory by IRDA for all other life insurance companies. Additionally, BSLI pioneered the launch of Unit Linked Life Insurance plans amongst the private players in India.

Add to this, the extensive reach through its network of 600 branches and 1, 47,900 empanelled advisors. This impressive combination of domain expertise, product range, reach and ears on ground, helped BSLI cover more than 2.4 million lives since it commenced operations and establish a customer base spread across more than 1500 towns and cities in India.

Mission and Vision of the Company:

Vision:

To be a leader and role model in a broad based and integrated financial services business.

Mission:

To help people mitigate risks of life, accident, health, and money at all stages and under all circumstances

Enhance the financial future of our customers including enterprises

7

Page 8: Portfolio Management Service

About Aditya Birla Group:

Aditya Birla Group through Aditya Birla Financial Services Group (ABFSG), has a strong presence across various financial services verticals that include life insurance, fund management, distribution & wealth management, security based lending, insurance broking, private equity and retail broking The seven companies representing Aditya Birla Financial Services Group are Birla Sun Life Insurance Company Ltd., Birla Sun Life Asset Management Company Ltd., Aditya Birla Finance Ltd., Aditya Birla Capital Advisors Pvt. Ltd., Aditya Birla Money Ltd., Aditya Birla Money Mart Ltd, and Aditya Birla Insurance Brokers Ltd. In FY 2009-10, ABFSG reported consolidated revenue from these businesses at Rs. 5871 Cr., registering a growth of 43%. It is anchored by an extraordinary force of 130,000 employees, belonging to 40 different nationalities. The group operates in 27 countries across six continents – truly India's first multinational corporation.

About Sun Life Insurance Inc:

Sun Life Financial is a leading international financial services organization providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. As of March 31, 2011, the Sun Life Financial group of companies had total assets under management of $469 billion.

8

Page 9: Portfolio Management Service

2. Portfolio Management Service

Portfolio Management in simpler terms can also be referred as Investment Management. Investing is both an Art and Science. Every individual has their own specific financial needs and expectations based on their risk taking capabilities whereas some needs and expectation are universal. Regardless of the money involved, everyone desires capital protection and generation of positive absolute returns. Successful Investing demands expertise and time. In today’s fast paced developing world, many investment opportunities are present.

Depending on the changing risk environment and emerging investment opportunities, investments

need to be evaluated continuously and strategies are formed accordingly. The idea of Portfolio

management is to overcome the pace of change in business landscape and provide investment

avenues to stay ahead of the risk return curve and generate positive returns consistently over a

period of time.

Portfolio Management Service is a Customized investment vehicle that offers a range of specialized

investment strategies to capitalize on the current Investment opportunities in the market.

Managing investments in equities requires time, knowledge, experience and constant monitoring of stock market. Those who need an expert to help to manage their investments,

Portfolio management services (PMS) comes as an answer.

The business of portfolio management has never been an easy one. Juggling the limited choices at hand with the twin requirements of adequate safety and sizeable returns is a task fraught with complexities.

Given the unpredictable nature of the share market it requires solid experience and strong research to make the right decision. In the end it boils down to make the right move in the right direction at the right time.

9

Page 10: Portfolio Management Service

Portfolio Management broadly covers the following area:

Risk profile and client analysis.

Goal setting.

Asset Allocation.

Measuring & Evaluating Performance

Basic Principles of Portfolio Management:

Two basic principles of Finance form the basis of Portfolio theory, namely, Time value of Money

and Safety of Money.

Rupee today is worth more than rupee of tomorrow or a year hence and as parting with money

involves the loss of present consumption; it has to be rewarded by a return commensurate with time

of waiting. Secondly, a safe rupee is preferred to an unsafe rupee at any point of time. Due to risk

aversion of investor, they feel risk is inconvenient and has to be rewarded by a return. The higher

the risk taken, the higher should be the return.

As regards the risk factor, there is a direct relationship between the expected return and unavoidable

risk. Avoidable risk can be reduced or even eliminated by measures like diversification.

10

Page 11: Portfolio Management Service

Objectives of Portfolio Management

Various Objectives of Portfolio Management are mentioned below:

Security / Safety of principal: Security not only involves keeping the principal sum

intact but also keeping its purchasing power.

Stability of income so as to facilitate planning more accurately and systematically the

reinvestment or consumption of income.

Capital growth, which can be attained by reinvesting in growth securities or through

purchase of growth securities.

Marketability i.e. the case with which a security can be bought or sold. This is

essentially for providing flexibility to investment portfolio.

Liquidity i.e. nearness to money. It is desirable for the investor so as to take advantage

of attractive opportunities upcoming in the market.

Diversification: The basic objective of building a portfolio is to reduce the risk of loss of

capital and/or income by investing in various types of securities and over a wide range

of securities.

Favorable tax status: The effective yield an investor gets from his investment depends

on tax to which he is subject. By minimizing the tax burden, yield can be effectively

improved.

11

Page 12: Portfolio Management Service

Factors Affecting Investment Decisions in Portfolio Management

Objectives of Investment Portfolio:

This is the crucial point, which an investor must consider. There can be many objectives

of making an investment. The objectives of an investment portfolio are normally

expressed in terms of risk and return. Risk and return have direct relationship. Higher the

return that one wishes to have from the investment portfolio, higher could be the risk

that one has to take.

The investor can look for security (low risk) and may be satisfied with low returns. As

aggressive investor may, however, be willing to take higher risk in order to have capital

appreciation. How the objectives can affect in investment decision can be seen from the

fact that Birla SunLife Insurance Limited has various funds like- Assure Fund (major

investment into Government securities. Low returns, more safety), Enhancer Fund (a

balanced fund investing in both equity and Government securities) and Maximiser Fund

(with maximum exposure in equity. High return, high risk)

The investor can invest in any of these funds depending upon his objective and risk

taking ability.

It is obvious; therefore, that the objectives must be clearly defined before an investment

decision is taken. It is on this basis of the objectives that a fund manager decides upon

the type of investment to be purchased.

3. Fund Manager12

Page 13: Portfolio Management Service

Definition: The fund manager (also known as the "portfolio manager") is a person who manages a

fund.  They're responsible for deciding what stocks and bonds to purchase and how much to

purchase.  They typically have a team of analysts advising them and analyzing the fund's holdings.

They are the individuals responsible for making decisions related to any portfolio of investments

(often a mutual fund, pension fund, or insurance fund), in accordance with the stated goals of the

fund

The whole point of investing in a fund is to leave the security picking to professionals. Therefore,

the fund manager is one of the most important factors to consider when looking at any particular

fund. Researching a fund manager's past performance in the last five or more years will tell you a

lot. Have they had consistent performance? Have they bounced around from fund to fund? Do they

have a history of underperforming?

FUNTIONS OF PORTFOLIO MANAGERS

They study economic environment affecting the capital market and clients investment.

They study securities market and evaluate price trend of shares and securities in which

investment is to be made.

They maintain complete and updated financial performance date of blue chip and other

companies.

They study problems of industry affecting securities market and the attitude of investors.

They study the financial behaviors of development financial institutions and other players in

the capital markets to find out sentiments in the capital market.

13

Page 14: Portfolio Management Service

They counsel the prospective investors on share market and suggest investments in certain

assured securities.

They carry out investment in securities or sale or purchase of securities on behalf of the

client to attain maximum return at lesser risk.

4. Asset Classes

14

Page 15: Portfolio Management Service

5. Equity Markets

15

Asset Classes

Equity Debt

Mutual Fund

Insurance

Page 16: Portfolio Management Service

What Does Equity Market Mean?

The market in which shares are issued and traded, either through exchanges or over-the-counter

markets. Also known as the stock market, it is one of the most vital areas of a market economy

because it gives companies access to capital and investors a slice of ownership in a company with

the potential to realize gains based on its future performance.

Primary and the Secondary Market

Primary Market in India (EQUITY)

16

Primary Market

New Securities

Raising fresh resources

All companies can Enter

Subject to outside control by SEBI, SE, & Companies Act

Page 17: Portfolio Management Service

The primary market is that part of the capital markets that deals with the issuance of new securities.

Companies, governments or public sector institutions can obtain funding through the sale of a new

stock or bond issue. This is typically done through a syndicate of security dealers. The process of

selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an

initial public offering (IPO). Dealers earn a commission that is built into the price of the security

offering, though it can be found in the prospectus.

Once the initial sale is complete, further trading is said to conduct on the secondary market, which

is where the bulk of exchange trading occurs each day.

What Does Equity Mean?

A stock or any other security representing an ownership interest.

On a company's balance sheet, the amount of the funds contributed by the owners (the

stockholders) plus the retained earnings (or losses). Also referred to as "shareholders'

equity".

In the context of margin trading, the value of securities in a margin account minus what has

been borrowed from the brokerage.

In the context of real estate, the difference between the current market value of the property

and the amount the owner still owes on the mortgage. It is the amount that the owner would

receive after selling a property and paying off the mortgage.

In terms of investment strategies, equity (stocks) is one of the principal asset classes. The

other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset

allocation planning to structure a desired risk and return profile for an investor's portfolio.

Players in Primary Market

There are three categories of participants in the Primary Market.

17

Page 18: Portfolio Management Service

1. Issuers of securities

2. Investors in securities

3. Intermediaries

i) Issuers of securities are:

Central governments

State governments

Public Sector Units and Municipals Corporations

Development Financial Institutions

Banks/ Mutual Funds

Corporate entities

(ii) Investors in securities are:

Individuals

Firms and Corporates

Trusts and associations

Banks/ Mutual Funds

(iii) Intermediaries are:

Merchant Banker / Lead Manager

Underwriters

Bankers to an issue

Brokers to an Issue

Registrars to an issue and Share Transfer Agents

Debenture Trustees

Portfolio managers

Benefits of Investing in the Primary Market:

18

Page 19: Portfolio Management Service

It is safer to invest in the primary markets than in the secondary markets as the scope for

manipulation of price is smaller.

The investor does not have to pay any kind of brokerage or transaction fees or any tax such

as service tax, stamp duty and STT.

No need to time the market as all investors will get the shares at the same price.

Some of the major drawbacks are as following:

In case of over subscription, the shares are allotted in proportionate basis. Thus, small

investors hardly get any allotment in such a case.

Money is locked for a long time and the shares are allotted after a few days where as in case

of purchase from the secondary market the shares are credited within three working days.

Indian Stock Market (Secondary Market)

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years

ago. The earliest records of security dealings in India are meager and obscure. The East India

19

Page 20: Portfolio Management Service

Company was the dominant institution in those days and business in its loan securities used to be

transacted towards the close of the eighteenth century.

Thus, at present, there are totally twenty-one recognized stock exchanges in India excluding the

Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India

Limited (NSEIL).

Initial Public Offering (IPO)

An initial public offering (IPO) referred to simply as an "offering" or "flotation," is when a

company (called the issuer) issues common stock or shares to the public for the first time. They are

often issued by smaller, younger companies seeking capital to expand, but can also be done by large

privately-owned companies looking to become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it

determine what type of security to issue (common or preferred), best offering price and time to

bring it to market.

An IPO can be a risky investment. For the individual investor, it is tough to predict what the

stock or shares will do on its initial day of trading and in the near future since there is often little

historical data with which to analyze the company. Also, most IPOs are of companies going through

a transitory growth period, and they are therefore subject to additional uncertainty regarding their

future value.

Reasons for listing

When a company lists its shares on a public exchange, it will almost invariably look to issue

additional new shares in order at the same time. The money paid by investors for the newly-issued

shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the 20

Page 21: Portfolio Management Service

money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock

market investors to provide it with large volumes of capital for future growth. The company is

never required to repay the capital, but instead the new shareholders have a right to future profits

distributed by the company and the right to a capital distribution in case of dissolution.

The existing shareholders will see their shareholdings diluted as a proportion of the company's

shares. However, they hope that the capital investment will make their shareholdings more valuable

in absolute terms. In addition, once a company is listed, it will be able to issue further shares via a

rights issue, thereby again providing itself with capital for expansion without incurring any debt.

This regular ability to raise large amounts of capital from the general market, rather than having to

seek and negotiate with individual investors, is a key incentive for many companies seeking to list.

Benefits of an IPO from investor’s point of view

For the investor, IPOs are attractive mainly because they may be undervalued. Initially, to make

IPOs more attractive, many companies will offer their initial public offering at a low rate. This

helps to encourage investors, and investors will often buy IPOs, thinking that the new company or

the newly public company will be the next big thing with a huge profit margin. As prices grow and

demand for the IPOs grows, early investors stand to make a lot of profit -- and very quickly.

Differences between Primary Market and Secondary Market:-

PRIMARY MARKET SECONDARY MARKET

1. Market for new securities. 1. Market for existing securities.

21

Page 22: Portfolio Management Service

2. No fixed geographical location. 2. Located at a fixed place.

3. Results in raising fresh resources for the

corporate sector.

3. Facilitates transfer of securities from one

corporate investor to another.

4. All companies can enter in primary market. 4. Securities only listed companies can be

traded at Stock exchanges.

5. No tangible form or administrative set-up.

Recognized only the services it renders.

5. Have a definite administrative set-up and a

tangible form.

6. Subjected to outside control by SEBI Stock

exchanges and Companies Act.

6. Subjected to control both from within and

outside.

6. INDIAN DEBT MARKET

Debt market refers to the financial market where investors buy and sell debt securities, mostly in the

form of bonds. These markets are important source of funds, especially in a developing economy

like India. India debt market is one of the largest in Asia. Like all other countries, debt market in

India is also considered a useful substitute to banking channels for finance. 22

Page 23: Portfolio Management Service

The most distinguishing feature of the debt instruments of Indian debt market is that the return is

fixed. This means, returns are almost risk-free. This fixed return on the bond is often termed as the

'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a fixed

interest rate, which equals to the coupon rate.

The debt securities are issued by the eligible entities against the money borrowed by them from the

investors in these instruments. Therefore, most debt securities carry a fixed charge on the assets of

the entity and generally enjoy a reasonable degree of safety by way of the security of the fixed

and/or movable assets of the company. The investors benefit by investing in fixed income securities

as they preserve and increase their invested capital or also ensure the receipt of dependable interest

income. The investors can even neutralize the default risk on their investments by investing in Govt.

securities, which are normally referred to as risk-free investments due to the sovereign guarantee on

these instruments. Debt Markets in India and all around the world are dominated by Government

securities, which account for between 50 – 75% of the trading volumes and the market

capitalization in all markets. Government securities (G-Secs) account for 70 – 75% of the

outstanding value of issued securities and 90-95% of the trading volumes in the Indian Debt

Markets.

Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Government Securities Market (G-Sec Market): It consists of central and state government

securities. It means that, loans are being taken by the central and state government. It is also the

23

Page 24: Portfolio Management Service

most dominant category in the Indian Debt Market

Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures and

Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and

hence remove uncertainty in financial costs.

Debt Instruments

There are various types of debt instruments available that one can find in Indian debt market.

Government Securities

It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the

Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer fixed

interest rate, where interests are payable semi-annually. For shorter term, there are Treasury Bills or

T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.

Corporate Bonds

These bonds come from PSUs and private corporations and are offered for an extensive range of

tenures up to 15 years. There are also some perpetual bonds. Comparing to G-Secs, corporate bonds

carry higher risks, which depend upon the corporation, the industry where the corporation is

currently operating, the current market conditions, and the rating of the corporation. However, these

bonds also give higher returns than the G-Secs

24

Page 25: Portfolio Management Service

Certificate of Deposit

These are negotiable money market instruments. Certificate of Deposits (CDs), which usually offer

higher returns than Bank term deposits, are issued in demat form and also as a Usance Promissory

Notes. There are several institutions that can issue CDs. Banks can offer CDs which have maturity

between 7 days and 1 year. CDs from financial institutions have maturity between 1 and 3 years.

There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are

available in the denominations of Rs. 1 Lac and in multiple of that.

Commercial Papers

There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate entities

at a discount to face value.

25

Page 26: Portfolio Management Service

Importance of the Debt Market to the economy

The key role of the debt markets in the Indian Economy stems from the following reasons:

• Efficient mobilization and allocation of resources in the economy.

• Financing the development activities of the Government.

• Transmitting signals for implementation of the monetary policy.

• Facilitating liquidity management in tune with overall short term and long term

objectives.

Since the Government Securities are issued to meet the short term and long term financial needs of

the government, they are not only used as instruments for raising debt, but have emerged as key

instruments for internal debt management, monetary management and short term liquidity

management.

26

Page 27: Portfolio Management Service

Different types of risks with regard to debt securities

The following are the risks associated with debt securities:

Default Risk: This can be defined as the risk that an issuer of a bond may be unable to make

timely payment of interest or principal on a debt security or to otherwise comply with the

provisions of a bond indenture and is also referred to as credit risk.

Interest Rate Risk: can be defined as the risk emerging from an adverse change in the

interest rate prevalent in the market so as to affect the yield on the existing instruments. A

good case would be an upswing in the prevailing interest rate scenario leading to a situation

where the investors’ money is locked at lower rates whereas if he had waited and invested in

the changed interest rate scenario, he would have earned more.

.

Reinvestment Rate Risk: can be defined as the probability of a fall in the interest rate

resulting in a lack of options to invest the interest received at regular intervals at higher rates

at comparable rates in the market.

The following are the risks associated with trading in debt securities:

Counter Party Risk: is the normal risk associated with any transaction and refers to the

failure or inability of the opposite party to the contract to deliver either the promised

security or the sale-value at the time of settlement.

Price Risk: refers to the possibility of not being able to receive the expected price on any

order due to an adverse movement in the prices.

Advantages

The biggest advantage of investing in Indian debt market is its assured returns. The returns that the

market offer is almost risk-free (though there is always certain amount of risks, however the trend

says that return is almost assured). Safer are the government securities. On the other hand, there are

certain amounts of risks in the corporate, FI and PSU debt instruments. However, investors can take

help from the credit rating agencies which rate those debt instruments. The interest in the

27

Page 28: Portfolio Management Service

instruments may vary depending upon the ratings. Another advantage of investing in India debt

market is its high liquidity. Banks offer easy loans to the investors against government securities.

Disadvantages

As there are several advantages of investing in India debt market, there are certain disadvantages as

well. As the returns here are risk free, those are not as high as the equities market at the same time.

So, on one hand you are getting assured returns, but on the other hand, you are getting less return at

the same time compared to equity market.

Retail participation is also very less here, though increased recently. There are also some issues of

liquidity and price discovery as the retail debt market is not yet quite well developed.

7. MUTUAL FUNDS

Introduction

A mutual fund is simply a financial intermediary that allows a group of investors to pool their

money together with a predetermined investment objective. The mutual fund will have a fund

manager who is responsible for investing the pooled money into specific securities (usually stocks

or bonds). When one invests in a mutual fund, he is buying shares (or portions) of the mutual fund

and becoming a shareholder of the fund.

The income earned through these investments and the capital appreciations realized are shared by

its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the

most suitable investment for the common man as it offers an opportunity to invest in a diversified,

professionally managed basket of securities at a relatively low cost.

While the concept of individuals coming together to invest money collectively is not new, the

mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained

28

Page 29: Portfolio Management Service

popularity only after the Second World War. Globally, there are thousands of firms offering mutual

funds with different investment objectives. Today, mutual funds collectively manage almost as

much as or more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies

the investment objectives of the fund, the risk associated, the costs involved in the process and the

broad rules for entry into and exit from the fund and other areas of operation.

In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities

exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial

strength in granting approval to the fund for commencing operations. A sponsor then hires an Asset

Management company to invest the funds according to the investment objective. It also hires

another entity to

be the Custodian of the assets of the fund and perhaps a third one to handle registry work for the

unit holders (subscribers) of the fund.

Concept of Mutual Funds

A Mutual fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as

shares, debentures and other securities. The income earned through these investments and the

capital appreciation realized is shared by its unit holders in proportion to the number of units earned

by them. Thus a mutual fund is the most suitable investment for the common man as it offers an

opportunity to invest in the diversified professionally managed basket of securities at a relatively

low cost. The flow chart bellow describes broadly working of a mutual fund:

29

Page 30: Portfolio Management Service

Structure & Constituents

30

3-Tier Structure

Page 31: Portfolio Management Service

Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier), who thinks of

starting a mutual fund. The sponsor approaches the securities & Exchange Board of India (SEBI),

which is the market regulator and also the regulator for mutual funds.

Not everyone can start a mutual fund. SEBI checks whether then person is of integrity, whether he

has enough experience in then financial sector, his net worth etc. Once SEBI is convinced, the

Sponsor creates a Public Trust (the second tier)as per the Indian Trusts Act, 1882. Trusts are the

people authorized to act on behalf of the trust. Contracts are entered into in the name of the trustees.

Once the trust is created, it is registered with SEBI after which this trust is known as the mutual

fund.

It is important to understand the difference between the Sponsor and the Trust. They are two

separate entities. Sponsor is not the trust; i.e Sponsor is not the Mutual Fund. It is the trust which is

the mutual fund.

The trustees’ role is not to manage the money. Their job is only to see, whether the money is being

managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund. 31

Sponsor

Trustee

AMC

Page 32: Portfolio Management Service

Asset Management Company ( the Third tier). Trustees appoint the Asset Management

Company (AMC), to manage investor’s money. The AMC in return charges a fee for the

services provided and this fee is borne by the investors as it is deducted from the money

collected from them.

Net Asset Value of a Scheme:

The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV).

Mutual Funds invest the money collected from the investors in securities markets. In simple words,

Net Asset Value is the market value of the securities held by the scheme. Since market value of

securities changes every day, NAV of a scheme also varies on a day to day basis. The NAV per unit

is the market value of securities of a scheme divided by the total number of units of the scheme on

any particular date.

Calculation of NAV:

The most important part of the calculation is the valuation of the assets owned by the fund. Once it

is calculated, the NAV is simply the net value of assets divided by the number of units outstanding.

The detailed methodology for the calculation of the asset value is given below.

M.V of investments+Receivables+Accr. Income– Liabilities-Accr. Expenses

          Number of Outstanding units

ANNUALIZING THE RATE OF RETURN

If NAV on

Jan 1, 2001 was Rs. 12.75

June 30, 2001 was Rs. 14.35

32

Page 33: Portfolio Management Service

Percentage change in NAV = (14.35-12.75)/12.75*100=12.55%

Annualized return=12.55*12/6=25.10%

PERCENTAGE CHANGE IN NAV

Assume that change in NAV is the only source of return.

Example:

NAV of a fund was Rs.23.45 at the beginning of a year

Rs.27.65 at the end of the year.

Percentage change in NAV=(27.65-23.45)23.45*100=17.91%

Different Types of Mutual Funds

33

Page 34: Portfolio Management Service

On the basis of Objective

EQUITY FUNDS/GROWTH FUNDS

Funds that invest in equity shares are called equity funds. They carry the medium to long-term. The

returns in such funds are volatile since they are directly linked to the stock markets. They are best

suited for investors who are seeking capital appreciation. There are different types of equity funds

such as large cap funds, mid cap funds, small cap funds, multi-cap funds, sector funds, contra funds,

arbitrage funds, index based funds.

INDEX FUNDS

These funds invest in the pattern as popular market indices like S&P 500 and BSE Index. The value

of the index fund varies in proportion to the benchmark index.

TAX SAVING FUNDS

These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under

this scheme are in the form of tax rebates U/s 88 as well saving in Capital Gains U/s 54EA and

54EB. They are best suited for investors seeking tax concessions.

DEBT/INCOME FUNDS

34

Classificationof Mutual Fund

On the Basis of Objective On the Basis of Flexibility

Page 35: Portfolio Management Service

These Funds invest predominately in high-rated fixed income bearing instruments like bonds,

debentures, government securities, commercial paper and other money market instruments. They

are best suited for the medium to long-term investors who are averse to risk and seek capital

preservation. They provide regular income and safety to the investor.

HEDGE FUNDS

These funds adopt highly speculative trading strategies. They hedge risks in order to increase the

value of the portfolio.

On the basis of flexibility

Open-ended Funds

These funds do not have a fixed date of redemption. Generally they are open for subscription and

redemption throughout the year. Their prices are linked to the daily Net Asset Value (NAV). From

the investor’s perspective, they are much more liquid than closed-ended funds. Investors are

permitted to join or withdraw from the fund after an initial lock-in period.

Close-ended Funds

These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter

closed for entry as well as exit. These funds have a fixed date of redemption. One of the

characteristics of the closed ended schemes is that they are generally traded at a discount to NAV;

but the discount narrows as maturity nears. These funds are open for subscription only once and can

be redeemed only on the fixed date of redemption. The units of these funds are listed (with certain

exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at

anytime through the secondary market.

Importance of Mutual Fund

Small investors face a lot of problems in the share market, limited resources, lack of professional

advice, lack of information etc. Mutual funds have come as a much needed help to these investors.

It is a special type of institutional device or an investment vehicle through which the investors pool

35

Page 36: Portfolio Management Service

their savings which are to be invested under the guidance of a team of experts in wide variety of

portfolios of corporate securities in such a way, so as to minimize risk, while ensuring safety and

steady return on investment. It forms an important part of the capital market, providing the benefits

of a diversified portfolio and expert fund management to a large number, particularly small

investors. Now-a-days, mutual fund is gaining its popularity due to the following reasons:

With the emphasis on increase in domestic savings and improvement in deployment of

investment through markets, the need and scope for mutual fund operation has increased

tremendously. The basic purpose of reforms in the financial sector was to enhance the

generation of domestic Mutual Fund in India.

An ordinary investor who applies for share in a public issue of any company is not assured

of any firm allotment. But mutual funds who subscribe to the capital issue made by

companies get firm allotment of shares. Mutual fund latter sell these shares in the same

market and to the Promoters of the company at a much higher price. Hence, mutual fund

creates the investors’ confidence.

The psyche of the typical Indian investor has been summed up by Mr. S.A. Dave, Chairman

of UTI, in three words; Yield, Liquidity and Security. The mutual funds, being set up in the

public sector, have given the impression of being as safe a conduit for investment as bank

deposits. Besides, the assured returns promised by them have given the Indian investors a

great appeal.

As mutual funds are managed by professionals, they are considered to have a better

knowledge of market behaviors. Besides, they bring a certain competence to their job. They

also maximize gains by proper selection and timing of investment.

Mutual Fund has option either the investor receives dividend or it periodically gets

reinvested.

The mutual fund operation provides a reasonable protection to investors. Besides, presently

all Schemes of mutual funds provide tax relief under Section 80 L of the Income Tax Act

and in addition, some schemes provide tax relief under Section 88 of the Income Tax Act

lead to the growth of importance of mutual fund in the minds of the investors.

36

Page 37: Portfolio Management Service

Mutual funds creates awareness among urban and rural middle class people about the

benefits of investment in capital market, through profitable and safe avenues, mutual fund

could be able to make up a large amount of the surplus funds available with these people.

The mutual fund attracts foreign capital flow in the country and secures profitable

investment avenues abroad for domestic savings through the opening of off shore funds in

various foreign investors. Lastly another notable thing is that mutual funds are controlled

and regulated by SEBI and hence are considered safe.

Recent Trends in Mutual Fund Industry

The most important trend in the mutual fund industry is the aggressive expansion of the foreign

owned mutual fund companies and the decline of the companies floated by nationalized banks and

smaller private sector players. Many nationalized banks got into the mutual fund business in the

early nineties and got off to a good start due to the stock market boom prevailing then. These banks

did not really understand the mutual fund business and they just viewed it as another kind of

banking activity. Few hired specialized staff and generally chose to transfer staff from the parent

organizations. The performance of most of the schemes floated by these funds was not good. Some

schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs

by paying large amounts of money as the difference between the guaranteed and actual returns. The

service levels were also very bad. Most of these AMCs have not been able to retain staff, float new

schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of

continuing the activity in a major way. The experience of some of the AMCs floated by private

sector Indian companies was also very similar. They quickly realized that the AMC business is a

business, which makes money in the long term and requires deep-pocketed support in the

intermediate years. Some have sold out to foreign owned companies, some have merged with others

and there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the expectation of a

long haul. They can be credited with introducing many new practices such as new product

innovation, sharp improvement in service standards and disclosure, usage of technology, broker

37

Page 38: Portfolio Management Service

education and support etc. In fact, they have forced the industry to upgrade itself and service levels

of organizations like UTI have improved dramatically in the last few years in response to the

competition provided by these.

8. INSURANCE SECTOR IN INDIA

38

Page 39: Portfolio Management Service

Insurance is the means of managing risk and protection against financial loss arising as a result of

contingencies, which may or may not occur.

In other words, insurance is the act of providing assurance, against a possible loss, by entering into

a contract, with one who is willing to give assurance. Through this contract the person willing to

give assurance binds himself to make good such loss, if it occurs.

With largest number of life insurance policies in force in the world, Insurance happens to be a mega

opportunity in India. It’s a business growing at the rate of 15-20 per cent annually and presently is

of the order of Rs. 450 billion. Together with banking services, it adds about 7 percent to the

country’s GDP. Gross premium collection is nearly 2 per cent of GDP and funds available with LIC

for investment are 8 per cent of GDP.

Yet, nearly 80 per cent of Indian population is without life insurance cover while health insurance

and non-life insurance continues to be below international standards. And this part of the population

is also subject to weak social security and pension systems with hardly any old age income security.

This is an indicator that growth potential for the insurance sector is immense.

A well-developed and evolved insurance sector is needed for economic development as it provides

long term funds for infrastructure development and at the same time strengthens the risk taking

ability. It is estimated that over the next ten years India would require investments of the order of

one trillion US dollar. The Insurance sector, to some extent, can enable investments in infrastructure

development to sustain economic growth of the country. Insurance is a federal subject in India.

There are two legislations that govern this sector- The Insurance Act-1938 and the IRDA Act-1999.

39

Page 40: Portfolio Management Service

In India, insurance is generally considered as tax-saving device instead of its other implied long

term financial benefits. Indian people are prone to investing in properties and gold followed by bank

deposits. They selectively invest in shares also but the percentage is very small. Even to this day,

Life Insurance Corporation of India dominates Indian insurance sector. With the entry of private

sector players backed by foreign expertise, Indian insurance market has become more vibrant.

Present Scenario

The Government of India liberalized the insurance sector in March 2000 with the passage of the

Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for

private players and allowing foreign players to enter the market with some limits on direst foreign

ownership. Under the current guidelines, there is a 26 percent equity cap for foreign partners in an

insurance company. There is a proposal to increase this limit to 49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of insurance in India

and this may also include restructuring and revitalizing of the public sector companies. In the

private sector 12 life insurance and 8 general insurance companies have been registered. A host of

private insurance companies operating in both life and non-life segments have started selling their

insurance policies since 2001.

Life Insurance Market

The Life Insurance market in India is an underdeveloped market that was only tapped by the state

owned LIC till the entry of private insurers. The penetration of life insurance products was 19

percent of the total 400 million of the insurable population. The state owned LIC sold insurance as a

tax instrument, not as a product giving protection. Most customers were under-insured with no

flexibility or transparency in the products. With the entry of the private insurers the rules of the

game have changed.

40

Page 41: Portfolio Management Service

The growing popularity of the private insurers shows in other ways. They are coining money in new

niches that they have introduced. The state owned companies still dominate segments like

endowments and money back policies. But in the annuity or pension products business, the private

insurers have already rested over 33 percent of the market. And in the popular unit-linked insurance

schemes they have a virtual monopoly, with over 90 percent of the customers.

The year 1998 saw a revolution in the Indian Insurance sector, as major structural changes took

place with the ending of government monopoly and the passage of the Insurance Regulatory and

Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing

foreign players to enter the market with some limits on direct foreign ownership.

General Rules:

Mis- Declaration

The insurance policy shall be void and all the premiums paid by insured may be forfeited by the

insurance company in the event of mis-presentation or mis-declaration and/or non-disclosure of any

material facts.

Reasonable care:

The insured shall take all reasonable steps to safeguard the property insured against any loss or

damage. Insured shall exercise reasonable care that only competent employees are employed and

shall take all reasonable precautions to prevent all accidents and shall comply with all statuary or

other regulations.

Fraud:

If any claim under the policy may be in any respect fraudulent or if any fraudulent means or device

are used by the insured or any one acting on the insured’s behalf to obtain any benefit under the

insurance policy, all the benefits under the insurance policy may be forfeited.

Few basic principles of general insurance are:

41

Page 42: Portfolio Management Service

1. Insurable interest

2. Utmost good faith

3. Subrogation

4. Contribution

5. Indemnity

Risk of loss not covered under general insurance are:

The loss or damage or liability or expenses whether direct or indirect occasion by happening

through or arising from any consequences of war, invasion, act of foreign enemy, hostilities

(whether war be declared or not), civil war, rebellion revolution, civil commotion or loot or pillage

in connection therewith and loss or damage caused by depreciation or wear and tear.

9. FUNDAMENTAL ANALYSIS

42

Page 43: Portfolio Management Service

Fundamental analysis is the examination of the underlying forces that affect the well being of the

economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast

and profit from future price movements. At the company level, fundamental analysis may involve

examination of financial data, management, business concept and competition. At the industry

level, there might be an examination of supply and demand forces for the products offered. For the

national economy, fundamental analysis might focus on economic data to assess the present and

future growth of the economy.

General Steps to Fundamental Evaluation

Even though there is no one clear-cut method, a breakdown is presented below in the order an

investor might proceed. This method employs a Top-down approach that starts with the overall

economy and then works down from industry groups to specific companies. As part of the analysis

process, it is important to remember that all information is relative. Industry groups are compared

against other industry groups and companies against other companies. Usually, companies are

compared with others in the same group. For example, a telecom operator (Airtel) would be

compared to another telecom operator (Reliance Telecom), not to an oil company (ONGC).

Another approach is Bottom-up approach where an analyst starts the search with specific

businesses, irrespective of industry/ region.

Economic Forecast

43

Page 44: Portfolio Management Service

First and foremost in a top-down approach would be an overall evaluation of the general economy.

When the economy expands, most industry groups and companies benefit and grow. When the

economy declines, most sectors and companies usually suffer.

If the prognosis is for an expanding economy, then certain groups are likely to benefit more than

others. An investor can narrow the field to those groups that are best suited to benefit from the

current or future economic environment to assess an industry group's potential; an investor would

want to consider the overall growth rate, market size, and importance to the economy. While the

individual company is still important, its industry group is likely to exert just as much, or more,

influence on the stock price.

“Many times it is more important to be in the right industry than in the right stock”

Company Analysis

With a shortlist of companies, an investor might analyze the resources and capabilities within each

company to identify those companies that are capable of creating and maintaining a competitive

advantage. The analysis could focus on selecting companies with a sensible business plan, solid

management and sound financials.

Business Plan

The business plan, model or concept forms the bedrock upon which all else is built. If the plan,

model or concepts stink, there is little hope for the business. For a new business, the questions may

be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For

an established business, the questions may be: Is the company's direction clearly defined? Is the

company a leader in the market? Can the company maintain leadership?

Management

44

Page 45: Portfolio Management Service

In order to execute a business plan, a company requires top-quality management. Investors might

look at management to assess their capabilities, strengths and weaknesses. Even the best-laid plans

in the most dynamic industries can go to waste with bad management.

Financial Analysis

The final step to this analysis process would be to take apart the financial statements and come up

with a means of valuation.

Following is a list of potential inputs into a financial analysis.

45

Page 46: Portfolio Management Service

Accounts Payable Good WillAccounts Receivable Gross Profit MarginAcid Ratio GrowthAmortization IndustryAssets - Current Interest CoverAssets – Fixed InternationalBook Value InvestmentBrand Liabilities - CurrentBusiness Cycle Liabilities - Long-termBusiness Idea ManagementBusiness Model Market GrowthBusiness Plan Market ShareCapital Expenses Net Profit MarginCash Flow Page-view GrowthCash on hand Page-viewsCurrent Ratio PatentsCustomer Relationships Price/Book ValueDays Payable Price/EarningsDays Receivable PEGDebt Price/SalesDebt Structure ProductDebt: Equity Ratio Product PlacementDepreciation RegulationsDerivatives-Hedging R & DDiscounted Cash Flow RevenuesDividend SectorDividend Cover Stock OptionsEarnings StrategyEBITDA Subscriber GrowthEconomic Growth SubscribersEquity Supplier RelationshipsEquity Risk Premium TaxesExpenses Trademarks

---- Weighted Average Cost of Capital

Putting it All Together

46

Page 47: Portfolio Management Service

After all is said and done, an investor will be left with a handful of companies that stand out from

the pack. Over the course of the analysis process, an understanding will develop of which

companies stand out as potential leaders and innovators. In addition, other companies would be

considered laggards and unpredictable. The final step of the fundamental analysis process is to

synthesize all data, analysis and understanding into actual picks.

47

Page 48: Portfolio Management Service

10. TECHNICAL ANALYSIS

Technical analysis is all about studying stock price graphs and a few momentum oscillators derived

thereof. It must be understood that technical studies are based entirely on prices and do not include

balance sheets, P&L accounts (fundamental analysis), the assumption being that the markets are

efficient and all possible price sensitive information is built into the price graph of a security /

index.

Technical analysis is the examination of past price movements to forecast future price movements.

Technical analysts are sometimes referred to as chartists because they rely almost exclusively on

charts for their analysis.

BENEFITS

Technical analysis focuses on price movement.

The primary focus of technical analysis is on the movement of prices. Charts show how prices are

moving (or not moving), when prices are trending, and the strength of those trends. Volume,

oscillators and momentum give a clearer picture of market action. And this information can be

obtained at a glance.

Unlike fundamentalists, technicians do not use economic reports that analyze the demand for a

currency.

Trends are easily found.

Taking a look at a moving average line quickly displays a price that is trending or stuck in a

range. Whether it is up, down, or sideways, a chart can quickly display a currency that is

exhibiting a trend. Trends are critical to technicians because a currency is likely to continue

moving in the direction of the trend. Charts show them clearly and quickly.

Patterns are easily identified.

48

Page 49: Portfolio Management Service

One of the basic tenets of market action is that it repeats itself in clear, unmistakable patterns.

Using charts helps the trader to find patterns and predict price movements based on these

patterns. Like star constellations, patterns can be complex and complicated.

Head-and-shoulders patterns, rounding tops and bottoms, ascending and descending triangles,

and double and triple tops are proven patterns that many currency prices will follow. Hence, they

have strong predictive powers. They can be impossible to detect without using a chart.

Charting is quick and inexpensive.

Computers have relieved us from the burden of performing complex mathematical operations.

The Internet has a wealth of different technical indicators available that can help the trader to

make more profitable and more reliable trades. Many brokers offer these types of technical

indicators to their clients as part of their package.

Technical analysis is less time consuming and less costly than fundamental analysis. It can be

performed in less than five minutes and the services are very often offered for free or at a nominal

cost.

Charts provide a wealth of information.

Charts and indicators can provide a huge amount of information in only a few moments. Trends

are easily found. Support and resistance levels are quickly identified. Momentum, volatility, and

trading patterns appear quickly and easily. There are more than fifty kinds of indicators and they

each provide information on different aspect of how a currency is moving. This information is

critical to technicians to make sound and profitable trades

TYPES OF CHARTS

Candlestick49

Page 50: Portfolio Management Service

Line charts

Bar Chart

50

Page 51: Portfolio Management Service

51

Page 52: Portfolio Management Service

11. SECTORAL ANALYSIS

A brief Research on the following Sectors has been undertaken in Birla SunLife.

11(a). Banking Sector

Influenced by the global financial turmoil and repercussion of the subprime crisis, the global

banking sector has been witness to some of the largest and best known names succumb to multi-

billion dollar write-offs and face near bankruptcy. However, the Indian banking sector has been

well shielded by the Central Bank and has managed to sail through most of the crisis with relative

ease. Further with the economic buoyancy the world over showing signs of cooling off, the

investment cycle has also been wavering. Having said that, the latent demand for credit (both from

the food and non food segments) and structural reforms have paved the way for a change in the

dynamics of the sector itself. Besides gearing up for the compliance with Basel II accord, the sector

is also looking forward to consolidation and investments on the FDI front.

Public sector banks have been very proactive in their restructuring initiatives be it in technology

implementation or pruning their loss assets. While the likes of SBI have made already attempts

towards consolidation, others are keen to take off in that direction. Incremental provisioning made

for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottom

lines.

Retail lending (especially mortgage financing) that formed a significant portion of the portfolio for

most banks in the last two years lost some weight age on the banks' portfolios due to their risk

weight age. However, on the liabilities side, with better penetration in the semi urban and rural

areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost

of funds.

Apart from streamlining their processes through technology initiatives such as ATMs, telephone

banking, online banking and web based products, banks also resorted to cross selling of financial

products such as credit cards, mutual funds and insurance policies to augment their fee based

income.

52

Page 53: Portfolio Management Service

Major Operators and Top Performing Banks in IndiaPublic Sector

BanksPrivate Sector Banks Foreign Banks

State Bank of India HDFC Bank Citi BankState Bank of Mysore UTI Bank

Standard Chartered Bank

Allahabad Bank ICICI Bank HSBC Bank

Vijaya Bank Axis Bank ABN Amro BankPunjab National Bank

Centurion Bank of Punjab American Express Bank

Dena Bank Kotak Mahindra Bank  

Future Prospects of Banking Sector

With banks having complied with Basel II and having sufficient capital in their books; it

will be a challenge to deploy the same safely and profitably in the event of persistence of

economic slowdown. Banks are likely to concentrate more on non-funded income in this

scenario.

Banks, especially the private sector ones, are likely to face penetration concerns. The lack

of credit penetration and the geographic concentration of bank credit are evident from the

fact that 5 states having the highest proportion of per capita credit enjoy 55% of the total

credit disbursals in the country.

RBI's roadmap for the entry of foreign banks and the acquisition of stake by the foreign

entities in Indian private banks has been deferred for the time being. However, the tussle

for higher market share in the already fragmented sector is only set to aggravate.

The proposal for Cabinet's approval to allow PSU banks to bring down the government's

stake in them below the stipulated 51%, which is yet to be tabled, can help the bank raise

substantial capital without borrowing at high rates and give the entities an opportunity to

enhance their capital adequacy ratios besides competing with their private sector peers.

53

Page 54: Portfolio Management Service

11 (b). Overview of Telecom Sector

The Indian telecommunications industry is one of the fastest growing in the world. India is now the

second largest wireless network in the world, overtaking the US and second only to China

According to the Telecom Regulatory Authority of India (TRAI), the number of telecom

subscribers in the country reached 621.28 million as on March 31, 2010. With this the overall tele

density (telephones per 100 people) has touched 52.74. The wireless subscriber base has increased

to 584.32 million at the end of March 2010

The booming domestic telecom market has been attracting huge amounts of investment and it has

witnessed the entry of new players and launch of new services. The attractiveness of Indian telecom

sector has resulted in many international players lining up to form joint ventures with Indian

counterparts.

Despite the financial slowdown, the industry continued its high growth rate. In 2009 the Indian

Telecom sector contributed 5.65% to the country’s Gross Domestic Product (GDP) and attracted a

Foreign Direct Investment (FDI) of over USD 2 Bln.

54

Page 55: Portfolio Management Service

Major Operators in Indian Telecom Sector

Major operators in Indian Telecom sector include Bharti Airtel, Vodafone, Reliance

Communications, and Tata Tele services, BSNL, MTNL and Idea Cellular.

There are many other operators who operate at limited circles like Aircel, Uninor, MTS, Spice,

Loop, Videocon etc.

Uninor1% Vodafone

17%

LOOP (BPL)1%

Idea11%

Bharti22%

Reliance Comm17.63%

Tata Tele Servcie11%

Aircel6%

MTNL1%

BSNL12%

Market Share

Source: Capital Line Plus

Future Prospects

As far as the fixed line business goes, the low penetration levels in the country and the

increasing demand for data based services such as the Internet will act as major catalysts in

the growth of this segment

The huge market share of public sector behemoths, MTNL and BSNL is likely to get

reduced further as the penetration by private players spreads. In spite of this, the PSUs will

continue to retain their dominant position

55

Page 56: Portfolio Management Service

The industry has set out a target to cross the total subscriber base of 500 m by 2010 and 600

m the year after. Going by the current pace of subscriber additions, the target does not seem

too farfetched. Cellular subscribers will continue to propel the subscriber growth. 

With growing competitive pressure on all fronts and the inevitable need to keep pace with

emerging technologies globally, telecom operators are re-examining their traditional

business models and are making substantial investments in upcoming technologies. These

include 3G Band Allocation, Worldwide Interoperability for Microwave Access (WiMax)

and Future Generation Networks.

The arrival of new service providers in the market may lead to mergers and acquisitions

which will bring consolidation in the market.

56

Page 57: Portfolio Management Service

11 (c). Cement Sector

OverviewIndia is the second largest producer of cement in the world after China. The cement industry in

India, without showing any signs of recession, continues to expand rapidly, attracting large capacity

addition by major players over the past few months. The Indian cement industry with a total

capacity of about 200 m tonnes (MT) in FY09 is the second largest market after China. Although

consolidation has taken place in the Indian cement industry with the top five players controlling

almost 60% of the capacity, the balance capacity still remains pretty fragmented.

Despite the fact that the Indian cement industry has clocked production of more than 100 MT for

the last five years, registering a growth of nearly 9% to 10%, the per capita consumption of around

134 kgs compares poorly with the world average of over 263 kgs, and more than 950 kgs in China.

Future Prospects

The industry is likely to maintain its growth momentum and continue growing at around 8%

to 9% in the medium to long term.

Government initiatives in the infrastructure sector and the housing sector are likely to be the

main drivers of growth for the industry.

Infrastructure spending has been a boon; there was also a strong cushion from the steady

growth of the construction sector.

Growth of Indian cement industry has remained directly proportional to the growth of the

country’s economy. However, in fiscal 2008-09, despite the economic slowdown, India

produced around 181 Million Metric Tons of cement, representing a growth of around 7.8%

over the fiscal 2007-08. Consumption has also increased with the same pace during the last

fiscal.

57

Page 58: Portfolio Management Service

We expect that the cement production and consumption both will grow substantially during

our forecast period (2009-10 to 2011-12). Moreover, housing sector accounts for more than

50% of the total cement consumption in India and the same trend is expected to continue in

coming years.

Key Players Analyzed: Prominent Players in the Indian Cement Sector, like Associated Cement

Company Ltd (ACC), Grasim Industries Ltd, Ambuja Cement Ltd, UltraTech Cement Ltd, J.K.

Cement Limited, Madras Cements Ltd, and Jaypee Group.

58

Key Notes: Domestic Demand for cement has been increasing at a fast pace in India and it has surpassed the economic growth rate of the country. Among the states, Maharashtra has the highest share in consumption at 12.8%, followed by Uttar Pradesh. In terms of production, Andhra Pradesh is leading with 14.72% of Total Production followed by Rajasthan. Housing Sector is expected to remain the largest cement consumer in coming years.

Page 59: Portfolio Management Service

12. Gold

Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and

partly a commodity. As much as two-third of gold’s total accumulated holdings relate to “store of

value” considerations. Holdings in this category include the central bank reserves, private

investments, and high-cartage jewelry bought primarily in developing countries as a vehicle for

savings. Thus, gold is primarily a monetary asset. Less than one-third of gold’s total accumulated

holdings can be considered a commodity, the jewelry bought in Western markets for adornment, and

gold used in industry.

The distinction between gold and commodities is important. Gold has maintained its value in after-

inflation terms over the long run, while commodities have declined. Some analysts like to think of

gold as a “currency without a country’. It is an internationally recognized asset that is not dependent

upon any government’s promise to pay. This is an important feature when comparing gold to

conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.

What makes Gold Special?

• Timeless and Very Timely Investment: For thousands of years, gold has been prized for its rarity,

its beauty, and above all, for its unique characteristics as a store of value. Nations may rise and fall,

currencies come and go, but gold endures. In today’s uncertain climate, many investors turn to gold

because it is an important and secure asset that can be tapped at any time, under virtually any

circumstances. But there is another side to gold that is equally important, and that is its day-to-day

performance as a stabilizing influence for investment portfolios. These advantages are currently

attracting considerable attention from financial professionals and sophisticated investors worldwide.

• Gold is an effective diversifier: Diversification helps protect your portfolio against fluctuations in

the value of any one-asset class. Gold is an ideal diversifier, because the economic forces that

determine the price of gold are different from, and in many cases opposed to, the forces that influence

most financial assets.

59

Page 60: Portfolio Management Service

• Gold is the ideal gift: In many cultures, gold serves as a family treasure or a wealth transfer vehicle

that is passed on from generation to generation. Gold bullion coins make excellent gifts for birthdays,

graduations, weddings, holidays and other occasions. They are appreciated as much for their intrinsic

value as for their mystical appeal and beauty. And because gold is available in a wide range of sizes

and denominations, you don’t need to be wealthy to give the gift of gold.

• Gold is highly liquid: Gold can be readily bought or sold 24 hours a day, in large denominations

and at narrow spreads. This cannot be said of most other investments, including stocks of the world’s

largest corporations. Gold is also more liquid than many alternative assets such as venture capital, real

estate, and timberland. Gold proved to be the most effective means of raising cash during the 1987

stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your

portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or

other needs.

• Gold responds when you need it most: Recent independent studies have revealed that traditional

diversifiers often fall during times of market stress or instability. On these occasions, most asset

classes (including traditional diversifiers such as bonds and alternative assets) all move together in the

same direction. There is no “cushioning” effect of a diversified portfolio — leaving investors

disappointed. However, a small allocation of gold has been proven to significantly improve the

consistency of portfolio performance, during both stable and unstable financial periods. Greater

consistency of performance leads to a desirable outcome — an investor whose expectations are met.

60

Page 61: Portfolio Management Service

13. CASE STUDY - I

ASSET MANAGEMENT

Risk Profiling

13 (a). Risk Profile Questionnaire

Information Provided By

Full Name

Address

Planner

Your Attitude to Investing

This Questionnaire aims to uncover your attitude to investing, your understanding of financial markets and how you may react during certain investment market and economic conditions. Financial planning is a long-term process, and many investments that can be used to help achieve long-term financial goals are also long-term in nature. However, while long-term growth is generally achieved, it may come with periods of negative returns. To ensure your financial goals are reached, generally you must remain invested true to your financial plan during these periods. The following questions help us to understand your tolerance for financial risk. The information gives us an overall understanding of your investment profile and helps us to understand what investment mix and products will be appropriate, or inappropriate, in helping to achieve your financial goals.

61

Page 62: Portfolio Management Service

1 What is your major investment objective? CLIENT 1

Client 2 Points

a) Avoid any fluctuation in the value of my investments. 0

b) Maintain the security of my investments with regular income on which to live.

10

c) Maintain regular income with some exposure to capital growth.

20

d) Maximise the growth of my investments. 40

2 How would you react if your investments were to decline in value by 20% over a one-year period?

CLIENT 1

Client 2 Points

a) Withdraw all my funds immediately and move them to bank deposits.

10

b) Withdraw part of my money and move it to an alternative strategy.

20

c) Wait until I recovered the 20% loss and then consider alternative strategies.

20

d) Remain invested and follow the recommended strategy. 30

e) Increase the amount invested if possible because the market has become cheaper.

40

3 What is your willingness to risk shorter-term losses for the prospect of higher longer-term returns?

CLIENT 1

Client 2 Points

a) High. 40

b) Moderate. 30

c) Not sure. 20

d) Low. 10

4 An investment portfolio with high exposure to growth assets CLIENT Client 2 Points

62

Page 63: Portfolio Management Service

tends to generate higher returns, albeit with some volatility (fluctuations in value). To what extent are you willing to experience volatility to generate higher returns?

1

a) I’m very comfortable. I understand that to generate higher returns there is risk of fluctuation of my investments in the short-term. However, over the long-term, there is a low risk of capital loss.

40

b) I’m somewhat comfortable, assuming there is a limit to the volatility.

30

c) I’m a little uncomfortable seeing my investments fluctuate. 20

d) I’m much more comfortable with investments that have minimal volatility.

10

63

Page 64: Portfolio Management Service

5 Which of the following best describes your attitude towards investment losses?

CLIENT 1

Client 2 Points

a) I would check the value of my investments at least several times a month and feel very uneasy if I began to lose money.

10

b) Daily losses make me uncomfortable, but are no cause for alarm. I would, however, start to feel very uneasy if I made a loss on my investments over a 12-month period.

20

c) I take substantial day-to-day changes in my stride. However, I would start to feel very uneasy if I didn’t recover any significant losses with a 1 to 2 year time frame.

30

d) If my investments suffered significant losses over a two-year period and I still believed in my long-term strategy, I would remain fully confident of a recovery in performance.

40

6 My preferred strategy for managing investment risk is: CLIENT 1

Client 2 Points

a) I don’t want to reduce it as investment risk leads to higher returns over the long-term.

40

b) To have a diversified investment portfolio across a range of asset classes to minimise risk.

30

c) To invest mainly in capital stable investments. 10

d) I don’t understand the definition of ‘investment risk’. I rely on my financial planner to achieve this.

0

7 In the past, how would you describe your overall investment decisions?

CLIENT 1

Client 2 Points

a) I’ve had some losses and am reluctant to invest in anything that fluctuates in value.

0

b) Good, I have stuck to stable and safe investments. 10

c) Not applicable. I’m a first time investor or have only ever invested via my superannuation fund.

20

d) Fair, however I would like to improve my returns. 20

e) I’ve had some losses, but am willing to give it another go. 30

f) Good, I have been rewarded for making investments that can fluctuate in value.

40

8 Which of the following best describes your understanding of CLIENT Client 2 Points

64

Page 65: Portfolio Management Service

the investment market? 1

a) I am an experienced investor and constantly keep up to date with the investment market. I’ve had exposure to various asset classes and am fully aware of the risks involved to gain high returns.

40

b) My awareness of the financial market is limited to information passed on by my broker or financial planner. I rely on the professionals to keep me updated.

30

c) I have little awareness of the investment market. However, I have a desire to build my knowledge and understanding.

20

d) I’m not familiar with investments or financial markets. 10

9 Have you ever borrowed money to make an investment other than your own home (for example: an investment property; holiday home; share portfolio; margin loan; etc)?

CLIENT 1

Client 2 Points

a) No. 0

b) Yes. 30

c) No, but I’m willing to consider it now. 20

d) Yes, but I’m not prepared to borrow at the moment to invest. 10

GRAND TOTAL 200 330

65

Page 66: Portfolio Management Service

Investor Risk Profile Summary

Total Points

0% Growth Portfolio

Protection of capital or certainty of income is your only objective. You do not wish to attain higher returns if your capital is at risk. This portfolio is suitable for investors with an investment term of less than 2 years or who are seeking a guaranteed level of income for a specified time duration.

-

30% Growth Portfolio

You are a defensive investor. Risk must be very low and you are willing to accept lower returns to protect the value of your capital. The negative effects of tax and inflation will not concern you. The recommended minimum investment term is 2 years. If investing for less than 2 years, you should consider the 0% Growth Portfolio option.

50 – 110

40% Growth Portfolio

You are a cautious investor seeking better than basic returns, but, risk must continue to be low. Therefore, you will maintain a greater weighting to defensive assets within your portfolio, but, will consider the inclusion of some of the less aggressive growth investments. Generally you are willing to chase improved short-term returns while accepting some, limited short-term volatility. The recommended minimum investment term is 3 years. If you are investing for less than 3 years, you should consider the 30% Growth Portfolio option.

111 – 160

50% Growth Portfolio

You are a cautious investor seeking a combination of income and growth from your investment portfolio. Generally, you are willing to chase medium to long-term goals while accepting the risk of short-medium term negative returns. Your investment mix is likely to include an equal mix of the defensive assets and the less aggressive range of growth investments. Typically, this mix is suited to the investor seeking to protect the ‘real’ value of wealth that has already been created. The recommended minimum investment term is 4 years. If you are investing for less than 4 years, you should consider the 40% Growth Portfolio option.

161 – 210

70% Growth Portfolio 211 – 260

66

Page 67: Portfolio Management Service

You are a growth investor. You are willing to consider assets with higher volatility in the short-term (such as shares and property) to achieve capital growth over the medium-longer term. Your investment mix will comprise a greater share of growth assets; allowing it to cope with the negative impacts of tax and inflation over time. The recommended minimum investment term is 5 years. If you are investing for less than 5 years, you should consider the 50% Growth Portfolio option.

85% Growth Portfolio

You are a growth investor. You are probably earning sufficient income from other sources to enable your investments to focus on capital growth. Prepared to accept higher volatility and moderate risks, your primary concern is to accumulate growth assets over the medium to long-term. You require a diversified investment mix, spread across all asset sectors, which may also include some exposure to the more aggressive range of growth investments. The minimum investment term is 7 years. If you are investing for less than 7 years, you should consider the 70% Growth Portfolio option.

261 – 310

100% Growth Portfolio

Your primary objective is capital growth. You are an aggressive growth investor and are prepared to compromise your portfolio balance to pursue greater long-term returns. You are willing to accept higher levels of risk. Fluctuation in capital is acceptable in the short-medium term for the greater potential for wealth accumulation. With the exception of a minimal level of cash for liquidity purposes, your investment mix will only consist of growth assets such as international and domestic shares and property. The minimum investment term is 7+ years.

311 – 350

Based on the above Questionnaire we have analyzed that that ‘Client 1’ is Balanced Person

who is willing to take Moderate Risk and ‘Client 2’ is aggressive and willing to take High

Risk.

67

Page 68: Portfolio Management Service

13 (b). Goal Setting

Client 1: Balanced type (moderate risk taker)

Goals: Medium to long term goals.

Minimum investment term should be more than 10 years.

Primary objective: Capital appreciation with minimal risk.

Diversified portfolio: Debt Content (65%-80%) and Equity Content (20%-35%)

Investment objective: Child Education, Child Marriage and Retirement Plans, Tax Saving.

Client 2: Aggressive type (high risk taker)

Goals: Short to medium term goals.

Maximum investment should be around 5 years.

Primary objective: Capital appreciation in short term.

Diversified portfolio: Equity Content (80%- 100%) and Debt Content (0%-20%).

Investment objective: Purchase of residential property, Car, Marriage.

68

Page 69: Portfolio Management Service

13 (c). Portfolio of Client 1 : Enhancer Fund

Investment Objective

To grow your capital through enhanced returns over a medium to long term period through

investments in equity and debt instruments, thereby providing a good balance between risk and

return.

Investment Strategy

To earn capital appreciation by maintaining diversified equity portfolio and seek to earn regular

return on fixed income portfolio by active management resulting in wealth creation for

policyholders.

Asset Allocation

Equity : 20% - 35%

Debt : 65% - 80%

Risk Return Profile

Risk: Moderate

Return: Moderate

69

Page 70: Portfolio Management Service

Sectorial Allocation

70

Page 71: Portfolio Management Service

Portfolio of Client 2 : Maximizer Fund

Investment Objective

To provide long-term capital appreciation by actively managing a well diversified equity

portfolio of fundamentally strong blue chip companies and provide a cushion against the

volatility in the equities through investment in money market instruments.

Investment Strategy

Active Fund Management with potentially 100% equity exposure. Maintaining High Quality

Diversified Portfolio with Dynamic blend of Growth and Value Stocks- so that portfolio does not

suffer from style bias. Focus on large-caps and quality mid-caps to ensure liquidity and reduce

risk.

Asset Allocation

Equity : 80% - 100%

Debt : 0% - 20%

Risk Return Profile

Risk : High

Return : High

71

Page 72: Portfolio Management Service

Sectorial Allocation

72

Page 73: Portfolio Management Service

14. RECOMMENDATIONS

We all have different requirements at various phases in our lifespan. To meet all these

requirements we must be financially capable.

Financial Capability is not gained, it is achieved. To achieve it, we must plan wisely and

realistically.

We should know our goals, and must take appropriate steps in order to achieve it.

Simple way of achieving our goals is Investing.

Investing is an art as well as science. There are various questions like when to invest, where to

invest and how much to invest which need to be answered. An individual may not be able to

answer these.

Therefore it is advisable to opt for Portfolio Management Service, where a specialized expert

(fund manager) looks after the funds and through sound investments, helps us achieve our goals.

We Recommend:

One should start financial planning and investing early.

Take advice of professional fund managers if the investor does not have appropriate

knowledge about the financial market.

Regularly analyze investments and track their performance.

73

Page 74: Portfolio Management Service

15. EXPERIENCE

Every morning brings new hopes and every sunset ends with new experience.

Our days at Birla Sunlife started with a new ray of hope and ended with great satisfaction of

acquiring knowledge required to enter and conquer the so called Corporate world.

How useful the training is to us cannot be quantified or expressed in words. It provided us an

insight into what we must excel in when we enter the job market where the competition is

immense.

The subjects covered in the training programme have enhanced our understanding of Finance

and PMS in particular.

The trip to BSE & NSE was very educative. We learned about the functioning of both the stock

markets, future of stock market, available opportunities and various courses offered by them to

equip students and other individuals with the financial knowledge and make them financially

literate.

We sincerely thank Birla Sunlife for their support and guidance

74

Page 75: Portfolio Management Service

BIBLIOGRAPHY

www.birlasunlife.com

www.bloomberg.com

www.karvy.com

www.indiainfoline.com

Business Today

Business World

Economic Times

75