priya dissertation 2003
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CHAPTER NO. 1
INTRODUCTION
The main objective of this project is to know the Awareness of Financial
Instrument among investors and also to know the investment pattern of people in different
Financial Project.
KARVY operates in various financial products and services like, Consultancy,
Stock Broking, Mutual Fund, Insurance, Registrar, and Research the evaluation of
financial planning has been increased through decades, which is best seen in customer
rise. Now a days investment of saving has assumed great importance.
Successful development of new service has become a complex process involving
contributions from different disciplines. Rarely is one individual responsible for the
concept, design, development and marketing of new service, for today the inherentcomplexity of products, their markets and therefore their processes through which they
are developed, dictates that a no. of different people, each with there own roles, work
together to create the service.
This project represents information regarding companys brand awareness
and the customer perceptions about the various services which the organization provides.
The main objective of the project is to understand the customer investment preferences
more effectively and efficiently. For execution of the project methodology adopted is thecollection of data through questionnaire, processing and analyzing the data.
The natures of respondent, who are selected, are the professionals and having a
handsome salary. Karvy is the only personalized service provider offering a range of
investment services depending on the customer requirements.
In this project the great emphasis is given to the investors mind in respect to
investment in all type of financial instrument where he can maximize his wealth. The
needs and wants of the client are taken into consideration.
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1.1 PORTFOLIO MANAGEMENT:
The aim of Portfolio Management is to achieve the maximum return from a
portfolio, which has been delegated to be managed by an individual manager or financial
institution. The manager has to balance the parameters which define a Good investment
i.e. security, liquidity and return. The goal is to obtain the highest return for the client of
the managed portfolio. The basis for constructing a portfolio should reflect the
enterprises particular needs.
In finance, a portfolio is a collection of investments held by an institution or a
private individual. In building up an investment portfolio a financial institution will
typically conduct its own investment analysis, whilst a private individual may make use
of the services of a financial advisor or a financial institution that offers portfolio
management services. Holding a portfolio is part of an investment and risk-limiting
strategy called diversification. By owning several assets, certain types of risk (in
particular specific risk) can be reduced. The assets in the portfolio could include stocks,
commodities, insurance etc.
1.2 PORTFOLIO MANAGEMENT SERVICES:
PMS gives investors access to an institutional process of money management
Provides a customized solution by matching the unique circumstances and
objectives of each investor.
Wealth creation based on disciplined investment process is the crux of PMS
Effective diversification helps reduce portfolio volatility and enhances risk-
adjusted returns over long term
PMS gives investor direct ownership of the individual securities in the portfolio
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1.3 BENEFITS OF PMS:
1. Professional Management
The service provides professional management of equity portfolios designed to deliver
consistent long-term performance while identifying and controlling risks.
2. Continued Monitoring
We at Karvy understand the need to constantly monitor your portfolios and bring in
periodic changes to optimize the results.
3. Research Support
A research team responsible for establishing our investment strategy and providing us real
time information backs our portfolio managers.
4. Identifying Investor Objectives
The foundation of every financially sound portfolio is the ability to identify ones
investment objective. Its a process that requires expertise. Karvy provides every investor
a Relationship manager who comes with the required expertise and experience to
understand an investors financial goals.
5. Hassle free operation
Karvy ensures investors enjoy healthy portfolios without having to involve themselvespersonally in monitoring and maintaining them. We provide you with a customized
service. All the administrative aspects of your portfolio is taken care of by us for you.
6. Transparency
A dedicated website allows you access to all information relating to your investment. You
will also receive quarterly account performance statement on the overall status of the
portfolio and Karvy research reports.
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.
CHAPTER NO. 2
RESEARCH METHODOLOGY
MEANING OF RESEARCH METHODOLOGY:
Research can defined as a systemized effort to gain new knowledge. A research is
carried out by different methodologies which have their own pros & cons. Research
Methodology is a way to solve research in study & solving problems along with logic
Behind them are defined through research methodology. We can also say that Research
Is a careful search systematic investigation, towards increasing the sum of knowledge.
In short research consists of formulating a hypothesis, collecting the fact &
Regarding certain generalization for some formulation.
2.1 DATA SOURCE:
Information can be gathered through primary and secondary sources.
Secondary data are data were collected for another purpose and already exist somewhere.
Primary data are gathered for a specific research project.
Primary sources
Primary sources are those where researcher get insight of its consumer by the way
of this can be done by-
1) Questionnaire
2) Interview
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According to these results obtained from Primary research is done and which is
the main part of this study with this secondary research an data is for analyzing the people
perception towards various investment instruments.Secondary data
To understand FINANCIAL concepts researcher has referred study materials of
financial institute of India. The economic times websites like ICICIpulife.com,
bimonline.com, karvy.com etc to know the various product features and benefits
researcher has referred foundation product module. Before starting the fieldwork
researcher had done the financial products providers in yavatmal and all over India. This
information was available through product leaf lets of different companies, their officials,
company website and through different search engines.
2.2 RESEARCH APPROACH:
The most suitable approach in this reason was the survey. The survey method is
the data collection is suited for descriptive research. Survey usually include research
instrument, sampling plans and contact methods.
2.3 RESEARCH INSTRUMENT:
Research has a main research instruments in collecting primary data: Questionnaire.
A questionnaire consists of a set of questions presented to the respondent for their
answers. Because of its flexibility, the questionnaire is by far the most common
instrument used to collect primary data. The questionnaire has its own inherent
advantages. The major benefits of the questionnaire include the following:
1. The questionnaire contained the question that touched upon every aspect of the study
and are rendered in the status of being complete in proving full information needed for
the study.
2. Multiple option questions made the interview easier as all the options were in front of
user.
3. The question was straightforward in easy language and clear meaning. No question was
ambiguous to confuse the subject.
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4. Due to the general nature of the topic, questionnaire could be administered with the
customer with equal ease and labor.
Sampling plan:
After deciding on the research approach and instruments, the research must design a
sampling plan. This plan calls following decisions.
1) Sampling unit (who is to be surveyed)
It gives the target population that will be sampled. The target population of this research
was mainly in yavatmal city & nearer to the other area those are near to the city.
2) Universe
The universe of the research was potential investor of yavatmal city.
Sample method:
Non probability convenience sampling method was used for selecting the
respondents. Since universe i.e. yavatmal city is easy to find out the researcher selected
the respondents that were most accessible population members.
Contact method:
Once the sampling plan has been determined the researcher must decide how the
subject should be contacted i.e mail, telephone or personal interviews.
In this project considering the objective and time available the researcher used
personal and telephone interviews. The researcher made cold calls to the samples and
introduced about Karvy. The researcher explained about purpose of his calling and seeks
for appointment with the contacted person. The appointment schedule was maintained
and followed by the researcher.
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2.4 OBJECTIVE OF THE PROJECT:
The portfolio management is vast in nature. It is intended to provide a birds-eye
view of the client assets. The portfolio manager has to have bottomless knowledge of
markets funds etc. Considering this fact, the scope of the study is defined to satisfy
following objectives:
Understand the necessity of portfolio management.
Identify various investment alternatives that can fit in clients profile.
Study & compare various investment & attributes.
To know the concept of financial product.
2.5 SCOPE OF THE STUDY:
Karvy is the leading organization in terms of providing the personalized advisory
services in investment sector. It focuses extensively in providing the quality service to its
customers. So the company commissioned to understand the customer behavior and their
investment pattern. Karvy is recently entered in the Commodity Market, which is having
a very good future in India and Karvy can encase opportunities.
2.6 JUSTIFICATION OF THE PROBLEM :
The survey aimed to bringing about awareness in the various services provided by
the Karvy consultancy & suggesting services according to their needs & requirement
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CHAPTER NO. 3
COMPANY PROFILE
3.1 MISSION OF KARVY:
Their mission is to be a leading, preferred service provider to our customer,
and they aim To achieve this leadership position by building an innovative, enterprising,
and technology drive organization which will set the highest standards of service and
business ethics.
3.2 INTRODUCTION:
The birth of Karvy was on a modest scale in 1981. It began with the vision and
enterprise of a small group of practicing Chartered Accountants who founded the flagship
company Karvy Consultants Limited. We started with consulting and financial
accounting automation, and carved inroads into the field of registry and share accounting
by 1985.Karvy Stock Broking Ltd is a member of National Stock Exchange (NSE), The
Bombay Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE).
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows
freely towards attaining diverse goals of the customer through varied services. Creating a
plethora of opportunities for the customer by opening up investment vistas backed by
research-based advisory services. Here, growth knows no limits and success recognizes
no boundaries. Helping the customer create waves in his portfolio and empowering the
investor completely is the ultimate goal.It is an undisputed fact that the stock market is
unpredictable and yet enjoys a high success rate as a wealth management and wealth
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accumulation option. The difference between unpredictability and a safety anchor in the
market is provided by in-depth knowledge of market functioning and changing trends,
planning with foresight and choosing options with care.
Karvy offers services that are beyond just a medium for buying and selling
stocks and shares. Instead they provide services which are multi dimensional and multi-
focused in their scope. There are several advantages in utilizing their Stock Broking
services, which are the reasons why it is one of the best in the country.
Karvy offer trading on a vast platform; National Stock Exchange, Bombay Stock
Exchange and Hyderabad Stock Exchange. More importantly, they make trading safe to
the maximum possible extent, by accounting for several risk factors and planning
accordingly. They are assisted in this task by their in-depth research, constant feedback
and sound advisory facilities. Their highly skilled research team, comprising of technical
analysts as well as fundamental specialists, secure result-oriented information on market
trends, market analysis and market predictions. This crucial information is given as a
constant feedback to their customers, through daily reports delivered thrice daily; The
Pre-session Report, where market scenario for the day is predicted, The Mid-session
Report, timed to arrive during lunch break, where the market forecast for the rest of theday is given and The Post-session Report, the final report for the day, where the market
and the report itself is reviewed. To add to this repository of information, they publish a
monthly magazine; Karvy;
The Fin polis; which analyzes the latest stock market trends and takes a close look
at the various investment options, and products available in the market, while a weekly
report, called; Karvy Bazaar Baatein; keeps the investor more informed on the immediate
trends in the stock market. In addition, their specific industry reports give comprehensive
information on various industries. Besides this, they also offer special portfolio analysis
packages that provide daily technical advice on scrip for successful portfolio management
and provide customized advisory services to help the investors to make the right financial
moves that are specifically suited to their portfolio.
To empower the investor further they have made serious efforts to ensure that their
research calls are disseminated systematically to all their stock broking clients through
various delivery channels like email, chat, SMS, phone calls etc.
In the future, their focus will be on the emerging businesses and to meet this
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objective, they have enhanced their manpower and revitalized their knowledge base with
enhances focus on Futures and Options as well as the commodities business.
Respect for the individual:
Each and every individual is an essential building block of our organization.
We are the kilns that hone individuals to perfection. Be they our employees, shareholders
or investors. We do so by upholding their dignity & pride, inculcating trust and achieving
a sensitive balance of their professional and personal lives.
Teamwork:
None of us is more important than all of us.
Each team member is the face of Karvy. Together we offer diverse services with speed,
accuracy and quality to deliver only one product: excellence. Transparency, co-operation,
invaluable an individual contribution for a collective goal, and respecting individual
uniqueness within a corporate whole, is how we deliver again and again.
Responsible Citizenship:
A social balance sheet is as rewarding as a business one.
As a responsible corporate citizen, our duty is to foster a better environment in the societywhere we live and work. Abiding by its norms, and behaving responsibly towards the
environment, is some of our growing initiatives towards realizing it.
Integrity:
Everything else is secondary.
Professional and personal ethics are our bedrock. We take pride in an environment that
encourages honesty and the opportunity to learn from failures than camouflage them. We
insist on consistency between works and actions.
3.3 BOARD OF DIRECTORS:
1. Mr. C Parthasarathy
Chairman and Managing Director
2. Mr. M Yugandhar
Managing Director
3. Mr. M S Ramakrishna
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Director
4. Mr. Prasad V Potluri
Director
3.4 KARVY GROUPS OF COMPANIES ARE:
1) Karvy Consultants Ltd
2) Karvy Stock Broking Ltd
3) Karvy Investors Service Ltd
4) Karvy Computershare Pvt Ltd
5) Karvy Global Service Ltd
6) Karvy Commodities Broking Ltd
7) Karvy Insurance Broking Private Ltd
8) Karvy alliances
1. KARVY CONSULTANTS LIMITED:
As the flagship company of the Karvy Group, Karvy Consultants Limited has
always at remained the helm of organizational affairs, pioneering business policies, work
ethic and channels of progress.
Having emerged as a leader in the registry business, the first of the businesses that
Karvy ventured into, company have now transferred this business into a joint venture with
Computer share Limited of Australia, the worlds largest registrar. With the advent of
depositories in the Indian capital market and the relationships that Company have created
in the registry business, Karvy believe that they were best positioned to venture into this
activity as a Depository Participant. Karvy were one of the early entrants registered as
Depository Participant with NSDL (National Securities Depository Limited), the first
Depository in the country and then with CDSL (Central Depository Services Limited).
Today, Karvy service over 6 lakhs customer accounts in this business spread across over
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250 cities/towns in India and are ranked amongst the largest Depository Participants in
the country. With a growing secondary market presence, they have transferred this
business to Karvy Stock Broking Limited (KSBL), their associate and a member of NSE,BSE and HSE.
2. KARVY STOCK BROKING LIMITED:
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice,
flows freely towards attaining diverse goals of the customer through varied services.
Creating a plethora of opportunities for the customer by opening up investment vistas
backed by research-based advisory services. Here, growth knows no limits and success
recognizes no boundaries. Helping the customer create waves in his portfolio and
empowering the investor completely is the ultimate goal.
Karvy is a Member of National Stock Exchange (NSE), The Bombay Stock
Exchange (BSE), and The Hyderabad Stock Exchange (HSE).
3. KARVY INVESTORS SERVICES LIMITED:
Merchant Banking- Recognized as a leading merchant banker in the country,
Karvy are registered with SEBI as a Category I merchant banker. This reputation wasbuilt by capitalizing on opportunities in corporate consolidations, mergers and
acquisitions and corporate restructuring, which have earned us the reputation of a
merchant banker. Raising resources for corporate or Government Undertaking
successfully over the past two decades have given us the confidence to renew company
focus in this sector.
Karvy quality professional team and their work-oriented dedication have
propelled company to offer value-added corporate financial services and act as a
professional navigator for long term growth of companies clients, which includes leading
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corporate, State Governments, foreign institutional investors, public and private sector
companies and banks, in Indian and global markets.
4. KARVY COMPUTERSHARE PVT. LIMITED:
Karvy have traversed wide spaces to tie up with the worlds largest transfer
agent, the leading Australian company, Computer share Limited. The company that
services more than 75 million shareholders across 7000 corporate clients and makes its
presence felt in over 12 countries across 5 continents has entered into a 50-50 joint
venture with KARVY.
Mutual Fund Services:
Karvy have attained a position of immense strength as a provider of across-the-board transfer agency services to AMCs, Distributors and Investors.
Nearly 40% of the top-notch AMCs including prestigious clients like Deutsche
AMC and UTI swear by the quality and range of services that company offer. Besides
providing the entire back office processing, Karvy provide the link between various
Mutual Funds and the investor, including services to the distributor, the prime channel in
this operation.
Issue Registry:
In company voyage towards becoming the largest transaction-processing house
in the Indian Corporate segment, KARVY have mobilized funds for numerous corporate,
and emerged as the largest transaction-processing house for the Indian Corporate sector.
With an experience of handling over 700 issues, Karvy today, has the ability to execute
voluminous transactions and hard-core expertise in technology applications have gained
company the No.1 slot in the business. Karvy is the first Registry Company to receive
ISO 9002 certification in India that stands testimony to its stature.
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Corporate Shareholder Services:
Karvy has been a customer centric company since its inception. Karvy offers a
single platform servicing multiple financial instruments in its bid to offer complete
financial solutions to the varying needs of both corporate and retail investors where an
extensive range of services are provided with great volume-management capability.
5. KARVY GLOBAL SERVICES LIMITED:
The specialist Business Process Outsourcing unit of the Karvy Group. The legacy
of expertise and experience in financial services of the Karvy Group serves us well as
company enter the global arena with the confidence of being able to deliver and deliver
well. Here company offers several delivery models on the understanding that business
needs are unique and therefore only a customized service could possibly fit the bill.
KARVY is in re-engineering and managing processes or delivering new
efficiencies, companys service meets up to the most stringent of international
standards.Providing productivity improvements, operational cost control, cost savings,improved accountability and a whole gamut of other advantages. KARVY Operate in the
core market segments that have emerging requirements for specialized services. Their
wide vertical market coverage includes Banking, Financial and Insurance Services
(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and
Healthcare.
6. KARVY COMMODITIES BROKING LIMITED:
At Karvy Commodities, they are focused on taking commodities trading to new
dimensions of reliability and profitability. They have made commodities trading, an
essentially age-old practice, into a sophisticated and scientific investment option.
Company enables trade in all goods and products of agricultural and mineral
origin that include lucrative commodities like gold and silver and popular items like oil,
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pulses and cotton through a well-systematized trading platform. The technological and
infrastructural strengths and especially the street-smart skills make them an ideal broker.
Their service matrix is holistic with a gamut of advantages, the first and foremost beingtheir legacy of human resources, technology and infrastructure that comes from being part
of the Karvy Group.
7. KARVY INSURANCE BROKING PRIVATE LIMITED:
At Karvy Insurance Broking Pvt. Ltd., they provide both life and non-life
insurance products to retail individuals, high net-worth clients and corporate. With the
opening up of the insurance sector and with a large number of private players in the
business, they are in a position to provide tailor made policies for different segments of
customers. In their journey to emerge as a personal finance advisor, they will be better
positioned to leverage their relationships with the product providers and place the
requirements of their customers appropriately with the product providers. With Indian
markets seeing a sea change, both in terms of investment pattern and attitude of investors,
insurance is no more seen as only a tax saving product but also as an investment product.
By setting up a separate entity, we would be positioned to provide the best of the products
available in this business to the customers.
KARVY have wide national network, spanning the length and breadth of India,
further supports these advantages. Further, personalized service is provided here by a
dedicated team committed in giving hassle-free service to the clients.
8. KARVY ALLIANCES:
Karvy Computer share Private Limited is a 50:50 joint venture of Karvy
Consultants Limited and Computer share Limited, Australia. Computer share Limited is
world's largest -- and only global -- share registry, and a leading financial market services
provider to the global securities industry.
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The joint venture with Computer share, reckoned as the largest registrar in the
world, servicing over 60 million shareholder accounts for over 7,000 corporations across
eleven countries spread across five continents. Computer share manages more than 70million shareholder accounts for over 13,000 corporations around the world.
Karvy Computer share Private Limited, today, is India's largest Registrar and
Share Transfer Agent servicing over 300 corporate and mutual funds and 16 million
investors.
Distribution of Financial Products:
The paradigm shift from pure selling to knowledge based selling drives the
business today. With their wide portfolio offerings, they occupy all segments in the retail
financial services industry.
A 1600 team of highly qualified and dedicated professionals drawn from the best of
academic and professional backgrounds are committed to maintaining high levels of
client service delivery. This has propelled them to a position among the top distributors
for equity and debt issues with an estimated market share of 15% in terms of applicationsmobilized, besides being established as the leading procurer in all public issues.
To further tap the immense growth potential in the capital markets they enhanced
the scope of their retail brand, Karvy the Finapolis, thereby providing planning and
advisory services to the mass affluent. Here they understand the customer needs and
lifestyle in the context of present earnings and provide adequate advisory services that
will necessarily help in creating wealth. Judicious planning that is customized to meet the
future needs of the customer deliver a service that is exemplary. The market-savvy andthe ignorant investors, both find this service very satisfactory. The edge that they have
over competition is their portfolio of offerings and their professional expertise. The
investment planning for each customer is done with an unbiased attitude so that the
service is truly customized on market trends, investment options, opinions etc.
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Graph 3.1 Showing Milestones of Karvy
Figure no. 3.1 Showing Steps to Stock Selection Process in Karvy
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3.5 Portfolio Schemes of karvy:
1. K-Sensible
Objective
The objective of the K-Sensible Plan is to provide long-term returns by following a
disciplined and focused approach to investments. This is guided by two doctrines
capital preservation and generates steady long-term returns.
Strategy
Long-term investing
Focus on companies which qualify in the three key attributes Management,
Business and Valuation
Adequate diversification to mitigate risks
Maintain reasonable liquidity
Ideal for
Investors seeking steady long-term returns
Investment horizon between two to three years
Low portfolio turnover
2.K-Aggressive
Objective
The objective of the K-Aggressive Plan is to provide a balance between growth,
safety and returns. This is achieved by investing in well-researched companies and
employing a strategy of systematic profit booking. In our stock selection process
we continue to focus on companies which qualify in the three key attributes
Management, Business and Valuation.
Strategy
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Medium to long-term investing
Top-down and bottom-up approach
Judicious mix of growth and value stocks
Systematic profit booking
Adequate diversification to mitigate risks
Maintain reasonable liquidity
Ideal for
Investors seeking gains from systematic profit booking
Investment horizon between one to two years
Medium portfolio turnover
3.K-Energetic
Objective
The objective of the K-Energetic Plan is to provide returns by following an
aggressive
style of investing which entails higher risks.
Strategy
Higher proportion of mid cap stocks
Short to medium-term investing
Stock specific approach to capture triggers which could yield higher returns
Adequate diversification to mitigate risks
Maintain reasonable liquidity
Ideal for
Investors with high risk profile and seeking short to medium term returns
Investment horizon between 12 to 15 months
High portfolio turnover
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Figure No. 3.2 INVESTMENT PHILOSOPHY OF KARVY
2. Stock Selection
Management
Quality
Earning Growth
Valuations
News Flows
Timing
3. Portfolio Construction
Focus on: Objectives,
Approach
Security Selection
Concentration / Weights
Portfolio Beta
1. Sector Selection
Government Policies
Stage of Business Cycle
Future Profitability
Global/Domestic
Linkages
Identified favored sector
5. Risk Management
Portfolio Risk
Operational Risk
Residual Risk
4. Portfolio Rebalancing
Tactical shifts: Large Vs
Mid cap
Tactical shifts: Stock VsCash
Buy-side Triggers
Sell-side Triggers
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3.6 ACHIVEMENTS:
1. Largest independent distributor for financial products
2. Ranking amongst the top 3 stock broking firms
3. Amongst the top 3 Depository participants
4. Largest network of branches and business associates
5. Ranking amongst top 10 investment Bankers.
6. First ISO-9002 certified registrars
7. Ranking amongst top 3 Mutual Funds distributors
8. Ranking 1st in retail procurement in equity IPOs.
9. Adjudged as one of the top 50 IT uses in India by MIS Asia
10. Fully Fledged IT driven operations ranking 8th in merchant Banking services
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CHAPTER NO .4
PORTFOLIO MANAGEMENT SERVICES
-A LITERATURE REVIEW
4.1 INVESTMENT ALTERNATIVES & THEIR ATTRIBUTES:
There are number of investment alternatives available & give their attributes in
detail
Like their safetyness, return on investment, tenure & most important tax benefits etc.
1) PPF (Public Provident Fund):
Safe
9% p.a. compounded annually
15 years
Tax rebate on a maximum investment of Rs.60,000/-, u/s 88. Interest is totally exempt
from tax and there is no TDS on interest.
2) NSC (National Saving Certificate):
Safe
9% p.a. compounded half-yearly
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6 years
Tax rebate on a maximum investment of Rs.60, 000/-, u/s 88. No TDS on interest. Interest
amount reinvested is eligible for Section 88 benefits
3) Infrastructure bonds:
Safety indicated by credit rating.
Varies from 9.00% to 9.5% p.a.
3 years
A tax rebate u/s 88 on a maximum investment of Rs.80,000/-.
4) Life insurance polices:
Safe
Around 10%
20 25 years
Premiums paid on life insurance policies, up to a maximum of Rs.60,000/- qualifies for
tax rebate u/s 88.
5) ELSS schemes (Equity Linked Saving Scheme):
Carry risk as they invest in stock market.
Depends on the performance of the stock market
3 years
Tax rebate u/s 88 on a maximum investment of Rs.10,000/-
6) Pension plans of mutual funds:
Carry risk as they invest in a combination of debt and equity
3 years to age of 58 years.
Tax rebate u/s 88 on a maximum investment of Rs.60, 000/-.
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7) Post office saving bank account:
Safety
Rate of interest per annum 3.5%
Income tax concession- Exempt under Sec. 10 (15)(ii)
8) Bank Fixed deposits:
Safety
Rate of interest per annum 4%
Income tax concession- Exempt under Sec. 10 & 88 up to Rs. 60, 000 P.A.
9) Units of UTI/Scheme of mutual fund:
Safety
VariableIncome tax concession- Included in 80L exemption
10) Equity shares of companies:
Safety
Variable
Income tax concession
1) Dividend in the hands of investors is tax free.
2) Provision for a tax rebate at 20% on any investment in eligible equity
linked schemes of Rs.10, 000 maximum- a rebate of Rs. 2, 000
Note: Section 88 offers a tax rebate on a maximum investment of Rs.80, 000/-, for
individuals earning taxable income of less than Rs.5 lakhs. The tax rebate is 20% of the
sum invested for individuals with taxable income of less than Rs.1.5 lakhs, while it is
limited to 10% for persons with taxable income between Rs.1.5 lakhs and Rs.5 lakhs.
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4.2 COMPERASION OF SELECTED INVESTMENT
ALTERNATIVES & THEIR ATTRIBUTES:
Table No. 4.1
Portfolio Grid & proposed allocation of assets
Avenues Allocation Risk
involved
Historical
earnings
Liquidity Tax
implicationScope for
lending
facilityEquities High 18-22% High LTCG: 10% -
Proposed allocation in Equities: 25%
LTCG: Long Term Capital Gain
Income
Mutual
Fund
Medium 11-14% High LTCG: 10%
Dividends:
Tax free
-
LongTerm Gilt
Funds
Low 11-14% High LTCG: 10%Dividends:
Tax free
-
Index
Funds
Medium - High LTCG: 10%
Dividends:
Tax free
-
Proposed allocation in Mutual Funds: 30%
LTCG: Long Term Capital Gain
ICICISafety
Bonds
Medium 9.5% Low Subject toTDS as per
then
prevailing
tax laws.
Nil
RBI
Relief
Bond
Low 9% Low Interest is
fully exempt
from Income
tax and The
Bonds are
exempt from
Wealth Tax.
Loans from
banks can be
availed of
against the
security of
the bonds
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Cont
Avenues Allocation Risk
involved
Historical
earnings
Liquidity Tax
implicationScope for
lending
facility
REC
Bond
Low 8.5% Low Section54EC
of the
Income Tax
Act dealswith capital
gains not to
be charged
on
investment
in this bond.
Nil
NHAI
Bonds
Low 9% Low Section
54EC of the
Income Tax
Act deals
with capitalgains not to
be charged
on
investment
in this bond.
Nil
Proposed allocation in Bonds: 25%
Sundaram
Home FD
Medium 10% Low Subject to
TDS as per
then
prevailing
tax laws.
-
Gujarat
SF FD
Medium 10% Low Subject to
TDS as per
then
prevailing
tax laws.
-
Proposed allocation in FDs: 20%
Portfolio strategy:
First Priority - Safety, Second Priority - Earnings, Third Priority - Liquidity,
Time Horizon - Long term
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4.3 FINANCIAL MARKETS:
A financial market can be defined as the market in which financial assets are
created or transferred. Financial assets represents represent a claim to the payments of a
sum of money sometime in the future and/or periodic payment in the form of interest or
dividend. Financial Market performs an important function of mobilization of savings and
channeling them into the most productive uses. The participants in the financial markets
are financial institutions, agents, brokers, dealers, borrowers, lenders, savers and others
who are inter-linked by the laws, contracts and communication networks.
Financial markets consist ofPrimary and SecondaryMarkets. The Primarymarkets deal in new financial claims and securities and hence are known as new issue
markets. The secondary market deals in securities already issued, existing or outstanding.
Financial markets are also classified as Money and Capital Markets. Money markets
deals with transactions in short-term instruments (with period of maturity one year or less,
e.g. treasury bills), while capital market deals with transactions in long-term instruments
(with period of maturity above one year, e.g. corporate debentures and government
bonds).
On the basis of the type of the financial claim, financial markets are classified as
Debt and Equity markets. By the timing of delivery, financial markets are classified as
Cash or Spot markets and Forward or Future markets.
The classification of financial markets can be summarized as follows:
Money Market
Debt Market
Forex Market
Capital Market
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Figure No. 4.1 classifications of financial markets
1. MONEY MARKETS:
Money markets can be defined as a market for short-term money and financial
assets that are near substitutes for money (any financial assets that can be quickly
converted into money with minimum transaction cost). One more important function of
this market is to channel savings into short-term productive investments like working
capital. Money market aids banking, operates as a medium of integration between sub
markets, promotes maintaining of minimum reserve in the form of cash and liquidity and
controls the interest rates.
Money market is a collection of market for the instruments like Call money,
Treasury bills, Commercial papers, Certificate of deposits, Money Market Mutual Funds,
etc. A certain degree of flexibility in the regulatory framework exists and there are
constant endeavors for introducing a new instruments or innovating dealing techniques. It
is a wholesale market and the volume of funds or financial assets traded are very large i.e.
in corers of rupees.
2. DEBT MARKET:
Traditionally debt instruments are known for generating a predetermined income
for a given period of time, other than in cases of default. Hence they are also known as
fixed income instruments. The debt markets in advanced are significantly larger and
deeper than equity markets. But in India, the trend is just the opposite. The development
of debt market in India has not been as remarkable as in the equity market. However the
debt markets in India have undergone a considerable change in the last few years.Characterized by regulated interest rates, limited players and lack of trading earlier, the
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4. CAPITAL MARKET:
Capital markets provide the resources needed by medium and large-scale industries
for investment purposes unlike money markets that provide the resources for workingcapital needs. While money markets deal in short-term claims (with a period of maturity 1
year or less) capital market deals in long-term claims (with a period of maturity more than
1 year). Stock market and Government bond markets are example of capital markets.
Capital market consists of primary and secondary markets. The primary markets
create long-term instruments through which corporate entities borrow and the secondary
market provides liquidity and marketability to these instruments. Companies can raise
capital in the primary market through the issue of shares and debentures for which prior
approval of The SEBI is required. The secondary market that operates through the
medium of stock exchanges is that segment of the capital market where securities already
issued are traded.
4.4 BASKET OF FINANCIAL PRODUCTS:
1. BOND :
Individuals have surplus funds in the form of savings, which they want to invest.
Companies need funds to undertake good projects with high returns. Companies provide
individuals with instruments to invest their savings in. One such instrument is a corporate
bond. Similarly, governments also need funds for various developmental projects.
Further, the government also needs to raise money to finance the fiscal deficit. They too
tap the savings by issuing various kinds of bonds.
Bonds have a fixed face value, which is the amount to be returned to the investor
upon maturity of the bond. During this period, the investors receive a regular payment of
interest, semi-annually or annually, which is calculated as a certain percentage of the face
value and know as a 'coupon payment.'
Issuing a bond: The government, publicsector units and corporate are the dominant
issuers in the bond market. The central government raises funds through the issue of
dated securities (securities with maturity period ranging from two years to 30 years, long-
term) and treasury bills (securities with maturity periods of 91 or 364 days, short-term).
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The central government securities are issued for a minimum amount of Rs 10, 000
(face value). Thereafter they are issued in multiples of Rs 10,000. They are issued
through an auction carried out by the Reserve Bank of India.State governments go about raising money through state development loans.
Local bodies of various states like municipalities also tap the bond market from time to
time. Bonds are also issued by public sector banks and PSUs. Corporate on the other
hands raise funds by issuing commercial paper (short-term) and bonds (long-term).
a. Types of bonds:
Government bond
National saving certificate
Public provident fund
Monthly investment scheme
RBI Bonds Taxable 8%
Recurring deposit
Kisan vikas patra
Time deposit
Post office
Corporate Bonds
b. Characteristics of a bond:
1. Fixed maturity period.
2. Fixed interest rate.
3. Regular payment of interest.
4. Less risky.
5. Some bonds give tax redemption.
2. INSURANCE:
A human life is also an income-generating asset. This asset also can be lost
through unexpectedly early death or made non-functional through sickness & disabilities
caused by accidents. Accidents may or may not happen. Death will happen, but the timingis uncertain. If it happens around the time of one's retirement, when it could be expected
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that the income will cease, the person concerned could have made some other
arrangements to meet the continuing needs. But if it happens much earlier when the
alternate arrangements are not in place, insurance is necessary to help the dependents.In case of a human being, he may have made arrangements for his needs after his
retirement. These would have been made on the basis of some expectations like he may
live for another 15 years, or that his children will look after him. If any of these
expectations do not come true, the original arrangement would become inadequate and
there could be difficulties. Living too long can be as much a problem as dying too young.
These are risks, which need to be safeguarded against. Insurance takes care of it.
Insurance, in law and economics, is a form ofrisk management primarily used to
hedge against the risk of potential financial loss. Insurance is defined as the equitable
transfer of the risk of a potential loss, from one entity to another, in exchange for a
premium and duty of care is necessary to help the dependents.
Types of insurance:
Any risk that can be quantified probably has a type of insurance to protect it. Among
the different types of insurance are:
1 Automobile insurance, also known as auto insurance, car insurance and in the UK as
motor insurance, is probably the most common form of insurance and may cover both
legal liability claims against the driver and loss of ordamage to the vehicle itself.
2 Casualty insurance insures against accidents, not necessarily tied to any specific
property.
3 Credit insurance pays some or all of a loan back when certain things happen to the
borrower such as unemployment, disability, ordeath.
4 Financial loss insurance protects individuals and companies against various
financial risks. For example, a business might purchase cover to protect it from loss of
sales if a fire in a factory prevented it from carrying out its business for a time. Insurance
might also cover failure of a creditor to pay money it owes to the insured. Fidelity bonds
and surety bonds are included in this category.
5 Health insurance covers medical bills incurred because ofsickness or accidents.
6 Liability insurance covers legal claims against the insured. For example, a doctor may
purchase insurance to cover any legal claims against him if he were to be convicted of a
mistake in treating a patient.
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7 Life insurance provides a benefit to a decedent's family or other designated beneficiary,
to replace loss of the insured's income and provide forburial and other final expenses.
8 Annuities provide a stream of payments and are generally classified as insurance becausethey are issued by insurance companies and regulated as insurance. Annuities and
pensions that pay a benefit for life are sometimes regarded as insurance against the
possibility that a retiree will outlive his or her financial resources. In that sense, they are
the complement of life insurance.
9 Political risk insurance can be taken out by businesses with operations in countries in
which there is a risk that revolution or otherpolitical conditions will result in a loss.
10 Property insurance provides protection against risks to property, such as fire, theft or
weather damage. This includes specialized forms of insurance such as fire insurance,
flood insurance, earthquake insurance, home insurance orboiler insurance.
11 Title insurance provides a guarantee that title to real property is vested in the purchaser
and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in
conjunction with a search of the public records done at the time of a real estate
transaction.
12 Workers' compensation insurance replaces all or part of a worker's wages lost and
accompanying medical expense incurred due to a job-related injury.
3. TAX PLANNING:
An Individual needs to take the taxation into consideration at all times, from the
stage of earning the income, incurring expenditure to the time of investing in various
types of securities, deposits etc. Return on investment in the form of income, when
received, attracts income tax under the Income Tax Act. Incidence of income tax depends
on the nature of your investment, income and the quantum of other income like salary,
rent from property, interest etc.
Other common sources of incomes are: interest on bank deposits, debentures,
bonds, deposits with companies, provident fund (and PPF), NSC, dividend income from
shares or from mutual funds, royalties, one time windfall gains, income from profession,
business or pension. Income Tax act treats each one of these incomes separately and
allows many deductions, exemptions etc. depending, mainly, upon the source of income.
It is, therefore, necessary to learn and understand the Sections of Income Tax Act
applicable to your source(s) of income BEFORE you invest and BEFORE you decide to
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incur any major expenditure. One must take a keen interest in the annual budget exercise
of Government of India (GOI) as the tools available for tax planning in India are a
dynamic lot which undergo a change with every budget.The annual budget represents the desire of GOI to direct the savings into specific
channels and areas. Various incentives, tax sops given away in every budget are the tools
used to encourage individuals and corporate to direct their savings into these areas. You
can use these sops to enhance the disposable income in your hands, thus serving the twin
purposes of saving for your self and also help the society in growing in the desired
direction.
One point that needs to be kept in mind is that managing your personal finance has
nothing to do with tax avoidance. Taxes have to be paid and they must be paid as our
dues to the society that makes life in an organized manner possible. However, a little tax
planning can enable you to avail of all the avenues that our tax system provides you to
save and grow.
a. Tax deduction is available under following section:
Used to allow deduction of interest earned on ,say, a National Saving Certificate,
or Bank deposit up to a limit of Rs.12,000. But now all these are gone. In their place has
come Section 80C u/s 80 CCC, & u/s 80CCD, as the Finance Bill puts it. Thus, the
new Section 80C of the Income Tax Act proposed in Union Budget gives you a bigger tax
bread than what the current regime offers.
Deduction in respect of Life Insurance Premium, Contribution to Provident Fund, etc
Rs.10,000 in pension funds.
Section 80CCC:-Is for deduction in respect of contribution to certain Pension Funds
Section 80L is for deductions in respect to Interest on certain Securities, Dividends, etc
Table No. 4.2 Showing Computation of Income tax:
Up to 1.5lakh Nil
1.5 to 2.5 Lakh 10%
2.5 to 3.5 Lakh 20%
3.5 & above 30%
A surcharge of 10% is applicable in case the total income exceeds Rs.10 Lakh.
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4. MUTUAL FUND:
A Mutual Fund is a trust that pools the savings of a number of investors who sharea common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciations realized by the scheme 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 portfolio at a relatively low cost. Anybody
with an investible surplus of as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and strategy.
Investments in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. Mutual fund
issues units to the investors in accordance with quantum of money invested by them.
Investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their
investments. The mutual funds normally come out with a number of schemes with
different investment objectives, which are launched from time to time. A mutual fund is
required to be registered with Securities and Exchange Board of India (SEBI), which
regulates securities markets before it can collect funds from the public.
The flow chart below describes broadly the working of a mutual fund:
A. Organization of Mutual fund:
There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:
The mutual fund industry in India began with the setting up of the Unit Trust In
India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown
to be a dominant player in the industry with assets of over Rs. 76,547 Crores as of
March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of
India Act, 1963. In 1987 public sector banks and insurance companies were permitted to
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set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual
funds. Also the two Insurance companies LIC and GIC established mutual funds.
Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation)1993, which for the first time established a comprehensive regulatory framework for the
mutual fund industry. Since then several mutual funds have been set up by the private and
joint sectors.
B. Types of Mutual Funds:
Mutual fund schemes may be classified on the basis of its structure and its
investment objective.
a) By Structure:
1. Open-ended Funds:
An open-end fund is one that is available for subscription all through the year. These
do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Closed-ended Funds:
A closed-end fund has a stipulated maturity period which generally ranging from
3 to 15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can buy
or sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor.
3. Interval Funds:
Interval funds combine the features of open-ended and close-ended schemes. They
are open for sale or redemption during pre-determined intervals at NAV related prices.
b) By Investment Objective:
1. Growth Funds:
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The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a majority of their corpus in equities. It has
been proven that returns from stocks, have outperformed most other kind of investmentsheld over the long term. Growth schemes are ideal for investors having a long-term
outlook seeking growth over a period of time.
2. Income Funds:
The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures and Government securities. Income Funds are ideal for capital stability and
regular income.
3. Balanced Funds:
The aim of balanced funds is to provide both growth and regular income. Such
schemes periodically distribute a part of their earning and invest both in equities and fixed
income securities in the proportion indicated in their offer documents. In a rising
stock market, the NAV of these schemes may not normally keep pace, fall equally when
the market falls. These are ideal for investors looking for a combination of income and
moderate growth.
4. Money Market Funds:
The aim of money market funds is to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and inter-
bank call money. Returns on these schemes may fluctuate depending upon the interest
rates prevailing in the market. These are ideal for Corporate and individual investors as a
means to park their surplus funds for short periods.
5. Load Funds:
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A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and exit
loads range from 1% to 2%. It could be worth paying the load, if the fund has a goodperformance history.
6. Gilt Fund:
These funds invest exclusively in government securities. Government securities
have no default risk. NAVs of these schemes also fluctuate due to change in interest rates
and other economic factor as is the case with income or debt oriented schemes.
7. Index Funds:
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same
weight age comprising of an index. NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though not exactly by the same percentage
due to some factors known as "tracking error" in technical terms.
c) Other Schemes:
1. Tax Saving Schemes:
These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the Government offers tax incentives for investment in
specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and
Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act
also provides opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds, provided the capital asset has been sold prior to April 1, 2000
and the amount is invested before September 30, 2000.
d) Special Schemes:
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1. Industry Specific Schemes:
Industry Specific Schemes invest only in the industries specified in the offerdocument. The investment of these funds is limited to specific industries like InfoTech,
FMCG, and Pharmaceuticals etc.
2. Index Schemes:
Index Funds attempt to replicate the performance of a particular index such As the BSE
Sensex or the NSE 50.
3. Sectorial Schemes:
Sectorial Funds are those, which invest exclusively in a specified industry or a
group of industries or various segments such as 'A' Group shares or initial public offering.
C. Benefits of Mutual Fund investment:
Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Affordability
Choice of Schemes
Tax benefits
Well regulated
D. Restrictions on Investments :
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1 A mutual fund scheme shall not invest more than 15% of its NAV (Net Asset Value) in
debt instruments issued by a single issuer, which are rated not below investment grade bya credit rating agency authorized to carry out such activity under the Act. Such
investment limit may be extended to 20% of the NAV of the scheme with the prior
approval of the Board of Trustees and the Board of asset Management Company.
2 A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt
instruments issued by a single issuer and the total investment in such instruments shall not
exceed 25% of the NAV of the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of asset Management Company.
3 No mutual fund under all its schemes should own more than ten per cent of any
company's paid up capital carrying voting rights.
4 Such transfers are done at the prevailing market price for quoted instruments on spot
basis.
The securities so transferred shall be in conformity with the investment objective of the
scheme to which such transfer has been made.
5 A scheme may invest in another scheme under the same asset management company or
any other mutual fund without charging any fees, provided that aggregate interscheme
investment made by all schemes under the same management or in schemes under the
management of any other asset management company shall not exceed 5% of the net
asset value of the mutual fund.
6 The initial issue expenses in respect of any scheme may not exceed six per cent of the
funds raised under that scheme.
7 Every mutual fund shall buy and sell securities on the basis of deliveries and shall in all
cases of purchases, take delivery of relative securities and in all cases of sale, deliver the
securities and shall in no case put itself in a position whereby it
has to make short sale or carry forward transaction or engage in badla finance.
8 Every mutual fund shall, get the securities purchased or transferred in the name of
the mutual fund on account of the concerned scheme, wherever investments are intended
to be of long-term nature.
9 Pending deployment of funds of a scheme in securities in terms of investment
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objectives of the scheme a mutual fund can invest the funds of the scheme in short term
deposits of scheduled commercial banks.
No mutual fund scheme shall make any investment in;a) Any unlisted security of an associate or group company of the sponsor; or
b) Any security issued by way of private placement by an associate or group company of the
sponsor.
c) The listed securities of group companies of the sponsor which is in excess of 30% of the
net assets [of all the schemes of a mutual fund]
d) No mutual fund scheme shall invest more than 10 per cent of its NAV in the equity shares
or equity related instruments of any company. Provided that, the limit of 10 per cent shall
not be applicable for investments in index fund or sector or industry specific scheme.
e) A mutual fund scheme shall not invest more than 5% of its NAV in the equity shares or
equity related investments in case of open-ended scheme and 10% of its NAV in case of
close-ended scheme.
5. STOCK:
Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE),
and The Hyderabad Stock Exchange (HSE).
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows
freely towards attaining diverse goals of the customer through varied services. Creating
a plethora of opportunities for the customer by opening up investment vistas backed by
research-based advisory services. Here, growth knows no limits and success recognizes
no boundaries. Helping the customer create waves in his portfolio and empowering the
investor completely is the ultimate goal.
a. Stock Broking Services:
It is an undisputed fact that the stock market is unpredictable and yet enjoys a high
success rate as a wealth management and wealth accumulation option. The difference
between unpredictability and a safety anchor in the market is provided by in-depth
knowledge of market functioning and changing trends, planning with foresight and
choosing one & choose options with care. This is what we provide in our Stock Broking
services.
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b. Depository Participants:
The onset of the technology revolution in financial services Industry saw the
emergence of Karvy as an electronic custodian registered with National SecuritiesDepository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998.
Karvy set standards enabling further comfort to the investor by promoting paperless
trading across the country and emerged as the top 3 Depository Participants in the
country in terms of customer serviced.
c. Basic Information:
Besides familiarity with the stock market, the transaction process, and having an
account at a broker or sub-broker, knowledge of basic investment information is also
important to making investment decisions
In this section, you can read about the basics of investment that often appear in stock
market reports and discussions.
d. Market information:
Important data and information about the overall market situation that you often
come across include:
i. Stock market index:
There are a number of stock market indices but the most widely used is the SET
Index, which calculates the average price of all listed shares weighted by the number of
registered shares. Thus, price movements of large capitalization stocks have a greater
influence on the movement of the SET Index than price changes of small capitalization
stocks.
Besides the SET Index , other stock price indices have been constructed to track
market trends, for example the SET50 Index, Book Club Index, TISCO Price Index, and
Sector Indices to track the price movements of individual sectors.
ii. Market turnover:
It's often quoted together with the SET Index to indicate how active the trading
activities are. In a bullish market, turnover is high as investors trade actively.
Conversely, the market is sluggish when investors do not trade actively. Thus, turnover is
a crucial factor in an investment consideration.
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Advances, declines, and no change in stock prices. When most stock prices have
closed higher, it indicates that the market has had a good day. Conversely, when most
stock prices have closed lower, the market has a bad day. If stock prices are mostlyunchanged, the market is moving in a narrow range. Investors can try their own market
analysis by looking at the trends in price movement. This however reflects a short- term
picture and other factors must be taken into consideration.
e. Stock information:
In addition to the market information above, it's essential to understand how to pick
good stocks. Here are some basic investment principles.
i. Price:
Stock price is an important factor to investors, as buying and selling influence stock
price movements. At the end of the day, investors like to know how their stocks fared.
Did they close higher? Lower? And by how much? The change in price of a stock also
reflects the amount of money for investor decision-making whether to buy, sell, or hold.
In stock valuation, price has to be considered in conjunction with other performance
variables such as earnings per share and dividends.
ii. Price-Earnings Ratio (P/E Ratio):
The ratio is derived by comparing the Close Price (P) with Earnings per share (E). It
is a measure of the stock's fundamental value. P/E Ratio is calculated by dividing the
Close Price (P) with Earnings per share (E).
P/E = Close price or market price (P)
12-month earnings per share (E)
P/E ratio tells you how many years it will take the company's earnings to add up to
its stock price at the time of calculation.
For example, if the close price of stock ABC (P) is 100 Rs and its earnings per share (E)
is 20 Rs, then its P/E Ratio equals 100/20 = 5. That is, at the time of calculation, it will
take only 5 years of company ABC's earnings to equal its stock price.
A stock with low P/E ratio is preferable to one with a high P/E. Conversely,
suppose stock DEF closes at 200 Rs and its earnings per share (E) is 20 Rs, its P/E Ratio
equals 200/20 = 10. At the time of calculation, it will take 10 years of company DEF's
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earnings to equal its stock price. Comparing stock ABC with stock DEF, we can draw an
initial conclusion that stock ABC is more attractive than stock DEF.
In brief, a low P/E stock has more earnings potential or is cheaper than a high P/Estock, considering its earnings ability.
iii. Dividend Yield:
Rate of dividend return, shown in percentage form. A stock with a high
Dividend Yield is more attractive because you get aHigher rate of return in the form of
dividends.
The formula for calculating Dividend Yield is
Dividend Yield = Dividend x 100
Stock Price
For example, if stock ABC has a market price of 20 Rs and pays a 2 baht dividend, its
dividend yield is
1 x 100 = 10%
20
iv. Trading Volume:
Trading volume or liquidity of a stock is important. It's easier to trade in/out of a stock
with high liquidity or large trading volume. It's difficult to buy a stock which has a low
liquidity or low trading volume because there are few sellers. And selling is difficult if
there are few or no buyers when you want to sell because you urgently need the cash.
f. Financial Analysis :
Analysis of a company's growth potential, stability, financial and
management strengths, and profit potential for its investors. Financial analysis is a rather
complex exercise and can be left until you've mastered more basic investment knowledge.
4.5 ABOUT PORTFOLIO MANAGEMENT:
Portfolio is nothing but the total holding of securities belonging to any
person.
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Portfolio management is the process of managing money, including
investments, budgeting, banking and taxes. The portfolio management process involves
formulating, modifying and implementing a real estate investment strategy in light of aninvestor's broader overall investment objectives. It also can be defined as the management
of several properties owned by a single entity
The basis for constructing a portfolio should reflect the enterprise"s particular
needs. For example, you might choose to build a portfolio around initiatives for a specific
product, business segment, or separate business unit within a multinational organization.
A long-term investment strategy requires more than a passive investand
forget" approach. Once youve created an investment strategy and built your portfolio,
youve taken the first steps toward reaching your financial goals. As time passes, you
will need to review your portfolio regularly to make sure you stay on track.
Portfolio planning is a structured and intelligent way of spreading your risk
through different investment options and to enjoy the diversification benefits marked with
a higher rate of interests. There is no fixed rule on how to plan your portfolio but there are
several platforms available on which you can explore the art of perfect portfolio building.
It is equally important to check the portfolio performance in every quarter.
Presently, the stock market sentiment is slowly going upward with a new hope of revival
by late this year. This is a good time for investors to reshuffle their portfolios.
For example, the market is expected to sustain the growth in the FMCG sector
with the news of 20 percent average growth by FMCG majors last quarter. Major heavy
weights like HLL and Cadburys are trading at 15 percent to 20 percent below their 52-
week high. One of the major reasons for failure in portfolio management is the lack of
realistic objectives. What can rationally be expected is often quite different from the
hyped anticipation created in the minds of investor. To be successful in the portfolio
planning, you need to be aware of historical precedents.
One of the reasons for your investment portfolio not giving the expected returns could be
- you have not properly planned to cover your tax liability. In this section, we present a
comparison of investments, which can reduce your tax burden.
Most of us think of investing in tax only in the month of March and as the D-day
approaches, there is a rush to invest in any tax-saving avenue be it infrastructure bonds,
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ELSS schemes or PPF without any proper thought before investing. Ideally, investing for
tax saving purposes, should be an integral part of your portfolio plan, helping you reach
your investment goals in a tax efficient way.
The number of tax saving options on offer not only serve the purpose of saving tax
but also offer other benefits such as risk coverage, capital appreciation, retirement savings
etc. In this section, we have attempted to give a comparison of the various tax-saving
investments, which should help you make an informed and intelligent decision regarding
your tax investments. The comparison is done in a group of two on the parameters of
safety, returns, tenure and tax benefits. The argument behind grouping of those avenues is
not very complicated; we just want to address the dilemma of much talked groups. Forinstance, one can ask whether investment in NSC is better when compared to
Infrastructure bond. The grouping has not been addressed. In this section, we suggest
those readers to compare in their own for these kind of grouping after taking a look at the
arguments of the available grouping.
4.6 MARKOWITZ PORTFOLIO THEORY:
In the earlier days the investment communities talked about risk and returns butthere was no specific model to further term. The basic portfolio model was developed by
Harry Markowitz, who derived the expected rate of return for a portfolio of assets and an
expected risk measure. Before Markowitz, investors dealt loosely wit the concepts of
return and risk. He was first to develop the concept of portfolio diversification in a formal
way He quantified the concept of diversification. He showed quantitatively why and
how portfolio diversification works to reduce the risk of portfolio to an investors. He was
first to develop specific measure of portfolio risk and to derive the expected rate of return
and risk for a portfolio based on co variance relationship. Markowitz model is based on
several assumptions regarding investment behavior as:-
1. Investors consider each investment alternative as being represented by a
probability distribution of expected return over some holding period.
2. Investors maximize one period expected utility, and their utilities curves
demonstrate diminishing marginal utility of wealth.
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3. Investors estimate the risk of the portfolio on the basis of the variability of
expected returns.
4. Investors base decisions solely on expected return on risk, so their utility curves
are functions of expected return and expected variance of returns only.
5. For a given risk level, investor prefer, higher returns to lower returns. Similarly
for a given level of expected return, investors prefer less risk to more risk.
Under these assumptions , a single asset or a portfolio assets is considered to be
efficient if no other assets or portfolio assets offers higher expected return with the
same( or Lower ) risk, or lower risk with same ( or higher ) expected returns.
VARIANCE OF RETURNS FOR AN INDIVIDUAL INVESTMENT:-
We will be using the variance or standard deviation of returns as the measure of
risk. The variance or standard deviation is a measure of the variation of possible rate of
returns, Ri, from the expected rate of return [E (Ri)] as follows:
Graph No. 4.1 Risk & return on investment
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Variance ( 2) = [ Ri - E(Ri) ]2 Pi
i=1
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Types of portfolio
1. Aggressive Portfolio:-
Objective: Growth. This strategy might be appropriate for investor who seek High
growth and who can tolerate wide fluctuations in market values, over the short term.
Graph No. 4.2 Showing Aggressive Portfolio
2. Growth Portfolio:-
Objective: Growth. This strategy might be appropriate for investors who have a
preference for growth and who can withstand significant fluctuations in market value.
Graph No. 4.3 Showing Growth Portfolio
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3. Balanced Portfolio:
Objective: Capital appreciation and income. This strategy might be appropriate
for investors who want the potential for capital appreciation and some growth, and who
can withstand moderate fluctuations in market values
Graph No. 4.4 Showing Balanced Portfolio
4. Conservative Portfolio:
Objective: Income and capital appreciation. This strategy may be appropriate for
investors who want to preserve their capital and minimize fluctuations in market value.
Graph No. 4.5 Showing Conservative Portfolio
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The Balancing Act:
One reason to review your portfolio is that market conditions or some aspect of
your financial situation say, your time horizon or your tolerance for risk may have
changed since you created your investment strategy. If the change has been significant,
you will need to consider adjusting your portfolios asset mix. Another reason you might
have to considering giving your portfolio a new look is in response to a significant life
event.
Let us consider this example, Suppose your investment strategy was originally
designed to achieve long-term growth, and your portfolio consists primarily of stocks. At
the end of the first year, a year of tremendous growth in the stock market-you review your
portfolio and you see that, although your bond and short-term investments have enjoyed
only modest growth, your stock investments have significantly increased in value. In fact,
your stock investments have grown so much that the