EXECUTIVE SUMMARY

Investing in equities requires time, knowledge and constant monitoring of the market.
For those who need an expert to help to manage their investments, Portfolio Management
Service (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 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. Thats where the expert
comes in.
The term Portfolio Management in common practice refers to selection of securities
and their continuous shifting in a way that the holder gets maximum returns at minimum
possible risk. PMS are merchant banking activities recognized by SEBI and these activities
can be rendered by SEBI authorized portfolio managers or discretionary portfolio managers.
A Portfolio Manager by the virtue of his knowledge, background and experience helps
his clients to make investment in profitable avenues. A portfolio manager has to comply
with the provisions of the SEBI (portfolio managers) rules and regulations, 1993.
This project also includes the different services rendered by the portfolio manager. It
includes the functions to be performed by the portfolio manager.
The project also shows the factors that one considers for making an investment
decision and briefs about the information related to asset allocation.

PORTFOLIO MANAGEMENT
Introduction
A portfolio is a collection of assets. The assets may be physical or financial
like Shares, Bonds, Debentures, Preference Shares, etc. The individual investor
or a fund manager would not like to put all his money in the shares of one
company that would amount to great risk. He would therefore, follow the age
old maxim that one should not put all the eggs into one basket. By doing so,
he can achieve objective to maximize portfolio return and at the same time
minimizing the portfolio risk by diversification.
A Portfolio Management refers to the science of analyzing the Strengths ,
Weaknesses, Opportunities & Threats for performing wide range of activities
related to the ones portfolio for maximizing the return at a given risk. It
helps in making selection of Debt V/S Equity, Growth V/S Safety, & various
other tradeoffs.
A Portfolio Management refers to the science of analyzing the strengths,
weaknesses, opportunities, and threats for performing wide range of activities
related to the ones portfolio for maximizing the return at a given risk. It
helps in making selection of Debt V/S Equity, Growth V/S Safety, and various
other tradeoffs.
Major tasks involved with Portfolio Management are as follows:

Taking decisions about investment mix & policy.

Matching investments to objectives.

Asset allocation for individuals & institution.

Balancing risk against performance.

There are basically 2 types of Portfolio Management in case of mutual &

exchange traded funds including Passive & Active.

 Passive Management involves tracking of the market index or index

investing.
Active management involves active management of a funds portfolio by
manager or team of managers who take research based investment
decisions & decisions on individual holdings.

Portfolio management is the management of various financial assets which comprise

the portfolio.

Portfolio management is a decision support system that is designed with a view to

meet the multi-faced needs of investors.
In terms of Mutual Fund Industry, a Portfolio is built by buying additional
Bonds, Mutual Funds, Stocks, or other Investments. If a person owns more than one
security, he has an investment portfolio. The main target of the portfolio owner is to
increase value of portfolio by selecting investments that yield good returns.
As per the modern Portfolio Theory, a diversified portfolio that includes
different types or classes of securities reduces the investment risk. It is because any
one of the security may yield strong returns in any economic climate.
Investors choose to hold groups of securities rather than single security that
offer the greater expected returns. They believe that a combination of securities held
together will give a beneficial result if they are grouped in a manner to secure higher
return after taking into Consideration the risk element. That is why professional
investment advice through portfolio Management service can help the investors to
make an intelligent and informed choice between alternative investments opportunities
without the worry of post trading hassles.

Definition of Portfolio Management

According to Securities and Exchange Board of India Portfolio Management is
defined as: Portfolio means the total holdings of securities belonging to any person.
The art and science of making decisions about investment mix and policy,
matching investments to objectives, asset allocation for individuals and institutions, and
balancing risk against performance.
Investopedia explains Portfolio Management
In the case of mutual and Exchange Traded Funds (ETFs), there are two
forms of Portfolio Management :
Passive Management It simply tracks a market index, commonly referred to as
indexing or index investing.
Active Management It involves a single manager, co-managers, or a team of
managers who attempt to beat the market return by actively managing a funds
portfolio through investment decisions based on research and decisions on individual
holdings. Closed end funds are generally actively managed.

Financial Dictionary
A collection of various company shares, fixed interest securities or moneymarket Instruments. People may talk grandly of 'running a portfolio' when they own a
couple of Shares but the characteristic of a serious investment portfolio is diversity. It
should show a Spread of investments to minimize risk - brokers and investment
advisers warn against 'Putting all your eggs in one basket'.

MEANING OF PORTFOLIO MANAGERS

Portfolio manager means any person who enters into a contract or arrangement with a
client. Pursuant to such arrangement he advises the client or undertakes on behalf of such
client Management or administration of portfolio of securities or invests or manages the
clients funds.
A discretionary portfolio manager means a portfolio manager who exercises or may
under a Contract relating to portfolio management, exercise any degree of discretion in
respect of the Investment or management of portfolio of the portfolio securities or the funds
of the client, as the Case may be.
He shall independently or individually manage the funds of each client in Accordance
with the needs of the client in a manner which does not resemble the mutual fund.
A non discretionary portfolio manager shall manage the funds in accordance with the
directions of the client.
A portfolio manager by virtue of his knowledge, background and experience is
expected to study the various avenues available for profitable investment and advise his
client to enable the latter to maximize the return on his investment and at the same time
safeguard the funds invested.

SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is an art of putting money in fairly safe, quite profitable and
reasonably in liquid form. An investors attempt to find the best combination of risk and
return is the first and usually the foremost goal.
In choosing among different investment opportunities the following aspects risk
management should be considered:
The selection of a level or risk and return that reflects the investors tolerance for
risk and desire for return, i.e. personal preferences.
The management of investment alternatives to expand the set of opportunities
available at the investors acceptable risk level.
The very risk-averse investor might choose to invest in mutual funds. The more risktolerant Investor might choose shares, if they offer higher returns. Portfolio management in
India is still in Its infancy. An investor has to choose a portfolio according to his
preferences.
The first preference normally goes to the necessities and comforts like purchasing a
house or domestic appliances. His second preference goes to some contractual obligations
such as life insurance or provident funds. The third preference goes to make a provision for
savings required for making day to day payments.
The next preference goes to short term investments such as UTI units and post office
Deposits which provide easy liquidity. The last choice goes to investment in company shares
and Debentures. There are number of choices and decisions to be taken on the basis of the
attributes of Risk, return and tax benefits from these shares and debentures.
The final decision is taken on the basis of alternatives, attributes and investor
preferences. For most investors it is not possible to choose between managing ones own
portfolio. They Can hire a professional manager to do it. The professional managers provide

a variety of services Including diversification, active portfolio management, liquid securities

and performance of Duties associated with keeping track of investors money.

NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in
assets and securities. It is a dynamic and flexible concept and involves regular and
systematic analysis, Judgment and action. The objective of this service is to help the
unknown

and

investors

with

the

expertise

of

professionals

in

investment

portfolio

management.
It involves construction of a portfolio based upon the investors objectives,
constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and
adjusted from time to time in tune with the market conditions. The evaluation of
portfolio is to be done in terms of targets set for risk and returns.
The changes in the portfolio are to be effected to meet the changing condition.
Portfolio construction refers to the allocation of surplus funds in hand among a variety of
Financial assets open for investment. Portfolio theory concerns itself with the principles
governing Such allocation. The modern view of investment is oriented more go towards the
assembly of proper combination of individual securities to form investment portfolio.
A combination of securities held together will give a beneficial result if they grouped
in a Manner to secure higher returns after taking into consideration the risk elements.
The modern theory is the view that by diversification risk can be reduced.
Diversification can Be made by the investor either by having a large number of shares of
companies in different Regions, in different industries or those producing different types of
product lines.
Modern theory believes in the perspective of combination of securities under
of risk and Returns.

constraints

OBJECTIVES OF PORTFOLIO MANAGEMENT

Favourable Tax Status

The major objectives of portfolio management are summarized as below:-

Security/Safety of Principal:
Security not only involves keeping the principal sum intact but also keeping intact its
purchasing power intact.

Stability of Income:
So as to facilitate planning more accurately and systematically the reinvestment
consumption of income.

Capital Growth:
This can be attained by reinvesting in growth securities or through purchase of
growth securities.

Marketability:
The case with which a security can be bought or sold. This is essential for providing
flexibility to investment portfolio
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 Liquidity i.e. Nearness To Money:

It is desirable to investor so as to take advantage of attractive opportunities
upcoming in the market.

Diversification:
The basic objective of building a portfolio is to reduce risk of loss
of capital and / or income by investing in various types of securities and over a wide range
of industries.

Favourable Tax Status:

The effective yield an investor gets form his investment depends on tax to which it
is subject. By minimizing the tax burden, yield can be effectively improved.

BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT

There are two basic principles for effective portfolio management which are given
below: Effective investment planning for the investment in securities by considering the
following factorsa) Fiscal, financial and monetary policies of the Govt. of India and the
Reserve Bank of India.
b) Industrial and economic environment and its impact on industry. Prospect in terms of
prospective technological changes, competition in the market, capacity utilization with
industry and demand prospects etc.
Constant Review of Investment:
It requires to review the investment in securities and to continue the selling and
purchasing of investment in more profitable manner. For this purpose they have to carry
the following analysis:

a) To assess the quality of the management of the companies in which investment has
been made or proposed to be made.
b) To assess the financial and trend analysis of companies Balance Sheet and Profit and
Loss Accounts to identify the optimum capital structure and better performance for
the purpose of withholding the investment from poor companies.

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TYPES OF PORTFOLIO MANAGEMENT

There are various types of portfolio management:

Types of Portfolio
Management

Investment Management
IT Portfolio Management
Project Portfolio Management
INVESMENT MANAGEMENT:
Investment management is the professional management of various securities (Shares,
Bonds etc.) And assets (e.g., Real Estate), to meet specified investment goals for the benefit
of the Investors. Investors may be institutions (insurance companies, pension funds,
corporations etc.) Or private investors (both directly via investment contracts and more
commonly via collective Investment schemes e.g. mutual funds or Exchange Traded Funds).
The term Asset Management is often used to refer to the investment management of
Collective investments, (not necessarily) whilst the more generic fund management may refer
to All forms of institutional investment as well as investment management for private
investors.

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Investment managers who specialize in advisory or discretionary management on

behalf of (Normally wealthy) private investors may often refer to their services as wealth
management or Portfolio Management often within the context of so-called "private banking".
Fund manager (or investment adviser in the U.S.) refers to both a firm that provides
Investment Management services and an individual who directs fund management decisions.

IT PORTFOLIO MANAGEMENT :
IT Portfolio Management is the application of systematic management to large
classes of Items managed by enterprise Information Technology (IT) capabilities. Examples of
IT Portfolios would be planned initiatives, projects, and ongoing IT services (such as
application Support). The promise of IT portfolio management is the quantification of
previously

mysterious

IT

efforts,

enabling

measurement

and

objective

evaluation

of

investment scenarios.
The concept is analogous to financial portfolio management, but there are
significant Differences. IT investments are not liquid, like stocks and bonds (although
investment portfolios May also include illiquid assets), and are measured using both financial
and non-financial Yardsticks (for example, a balanced scorecard approach); a purely financial
view is not sufficient. At its most mature, IT Portfolio management is accomplished through
the creation of two Portfolios:
Application Portfolio
Management of this portfolio focuses on comparing spending on established systems
based upon their relative value to the organization. The comparison can be based upon the
level of contribution in terms of IT investments profitability. Additionally, this comparison
can also be based upon the non-tangible factors such as organizations level of experience
with a certain technology, users familiarity with the applications and infrastructure, and
external forces such as emergence of new technologies and obsolesce of old ones.

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 Project Portfolio
This type of portfolio management specially address the issues with spending on
the development of innovative capabilities in terms of potential ROI and reducing investment
overlaps in situations where reorganization or acquisition occurs. The management issues with
the second type of portfolio management can be judged in terms of data cleanliness,
maintenance savings, and suitability of resulting solution and the relative value of new
investments to replace these projects.
PROJECT PORTFOLIO MANAGEMENT:
Project portfolio management organizes a series of projects into a single portfolio
consisting Of reports that capture project objectives, costs, timelines, accomplishments,
resources, risks and Other critical factors.
Executives can then regularly review entire portfolios, spread resources
Appropriately and adjust projects to produce the highest departmental returns.
Project management is the discipline of planning, organizing and managing resources
to Bring about the successful completion of specific project goals and objectives.
A project is a finite endeavour (having specific start and completion dates) undertaken
to Create a unique product or service which brings about beneficial change or added value.
This Finite characteristic of projects stands in contrast to processes, or operations, which are
Permanent or semi-permanent functional work to repetitively produce the same product or
Service.

PORTFOLIO MANAGEMENT PROCESS

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Process of Portfolio
Management.

THERE ARE THREE MAJOR ACTIVITIES INVOLVED IN AN EFFICIENT

PORTFOLIO MANAGEMENT WHICH ARE AS FOLLOWS: Identification of assets or securities, allocation of investment and also identifying the
classes of assets for the purpose of investment.
They have to decide the major weights, proportion of different assets in the portfolio
by taking in to consideration the related risk factors.
Finally they select the security within the asset classes as identify.
The above activities are directed to achieve the sole purpose of maximizing return
and minimizing risk on investment.
It is well known fact that portfolio manager balances the risk and return in a
portfolio investment. With higher risk higher return may be expected and vice versa.

INVESTMENT DECISION

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 Objectives of Investment Portfolio:

This is a crucial point which a Finance Manager must consider. There can be many
objectives of making an investment. The manager of a provident fund portfolio has to look
for security and may be satisfied with none too high a return, where as an aggressive
investment company be willing to take high risk in order to have high capital appreciation.
How the objectives can affect in investment decision can be seen from the fact that
the Unit Trust of India has two major schemes: Its Capital Units are meant for those who
Wish to have a good capital appreciation and a moderate return, where as the Ordinary
Unit are meant to provide a steady return only.
The investment manager under both the scheme will invest the money of the Trust in
different kinds of shares and securities. So it is
obvious that the objectives must be clearly defined before an investment decision is taken.
Selection of Investment:
Having defined the objectives of the investment, the next decision is to decide the
kind of investment to be selected. The decision what to buy has to be seen in the context
of the following:a) There is a wide variety of investments available in market i.e. Equity shares,
preference Share, debentures, convertible bond, Govt. securities and bond, capital units
etc. Out of These what types of securities to be purchased.
b) What should be the proportion of investment in fixed interest dividend securities and
Variable dividend bearing securities? The fixed one ensures a definite return and thus
a Lower risk but the return is usually not as higher as that from the variable
dividend Bearing shares.
c) If the investment is decided in shares or debentures, then the industries showing a
Potential in growth should be taken in first line. Industry-wise-analysis is important
since Various industries are not at the same level from the investment point of view.
15

It is Important to recognize that at a particular point of time, a particular

industry may have a better growth potential than other industries. For example, there
was a time when jute Industry was in great favour because of its growth potential
and high profitability, the Industry is no longer at this point of time as a growth
oriented industry.
d) Once industries with high growth potential have been identified, the next step is to
select The particular companies, in whose shares or securities investments are to be
made.

FUNDAMENTAL ANALYSIS

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 FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED

COMPANIES:
One of the first decisions that an investment manager faces is to identify the
industries which have a high growth potential.
Two approaches are suggested in this regard. They are:
Statistical Analysis of Past Performance:
A statistical analysis of the immediate past performance of the share price indices of
various Industries and changes there in related to the general price index of shares of all
industries should be made. The Reserve Bank of India index numbers of security prices
published every month in its bulletin may be taken to represent the behaviour of share
prices of various industries in the last few years. The related changes in the price index of
each industry as compared with the changes in the average price index of the shares of all
industries would show those industries which are having a higher growth potential in the
past few years. It may be noted that an Industry may not be remaining a growth Industry
for all the time. So he shall now have to make an assessment of the various Industries
keeping in view the present potentiality also to finalize the list of Industries in which he
will try to spread his investment.
Assessing the Intrinsic Value of an Industry/Company:
After an investment manager has identified statistically the industries in the share of
which the investors show interest, he would assess the various factors which influence the
value of a particular share. These factors generally relate to the strengths and weaknesses of
the company under consideration, Characteristics of the industry within which the company
fails and the national and international economic scene. It is the job of the investment
manager to examine and weigh the various factors and judge the quality of the share or the
security under consideration. This approach is known as the intrinsic value approach. The
major objective of the analysis is to determine the relative quality and the quantity of the
security and to decide whether or not is security is good at current markets prices. In this,
both qualitative and quantitative factors are to be considered.
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 INDUSTRY ANALYSIS
First of all, an assessment will have to be made regarding all the conditions and
factors relating to demand of the particular product, cost structure of the industry and other
economic and Government constraints on the same. As we have discussed earlier, an
appraisal of the particular industrys prospect is essential and the basic profitability of any
company is dependent upon the economic prospect of the industry to which it belongs. The
following factors may particularly be kept in mind while assessing to factors relating to an
industry.
Demand and Supply Pattern for the Industries Products and Its Growth
Potential:
The main important aspect is to see the likely demand of the products of the
industry and The gap between demand and supply. This would reflect the future growth
prospects of the Industry. In order to know the future volume and the value of the output
in the next ten Years or so, the investment manager will have to rely on the various
demand forecasts made by various agencies like the planning commission, Chambers of
Commerce and institutions like NCAER, etc.
The management expert identifies fives stages in the life of an industry. These are
Introduction, Development, Rapid Growth, Maturity and Decline. If an industry has already
reached the maturity or decline stage, its future demand potential is not likely to be high.
Profitability:
It is a vital consideration for the investors as profit is the measure of performance
and a source of earning for him. So the cost structure of the industry as related to its sale
price is an important consideration. In India there are many industries which have a growth
potential on account of good demand position. The other point to be considered is the ratio
analysis, especially return on investment, gross profit and net profit ratio of the existing
companies in the industry. This would give him an idea about the profitability of the
industry as a whole.
Particular Characteristics of the Industry:

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Each industry has its own characteristics, which must be studied in depth in order
to understand their impact on the working of the industry. Because the industry having a
fast changing technology become obsolete at a faster rate. Similarly, many industries are
characterized by high rate of profits and losses in alternate years. Such fluctuations in
earnings must be carefully examined.
Labour Management Relations in the Industry:
The state of labour-management relationship in the particular industry also has a great
deal of influence on the future profitability of the industry. The investment manager should,
therefore, see whether the industry under analysis has been maintaining a cordial relationship
between labour and management. Once the industrys characteristics have been analyzed and
certain industries with growth potential identified, the next stage would be to undertake and
analyze all the factors which show the desirability of various companies within an industry
group from investment point of view.

COMPANY ANALYSIS
To select a company for investment purpose a number of qualitative factors have to
be seen. Before purchasing the shares of the company, relevant information must be
collected and properly analyzed. An illustrative list of factors which help the analyst in
taking the investment decision is given below. However, it must be emphasized that the past
performance and information is relevant only to the extent it indicates the future trends.
Hence, the investment manager has to visualize the performance of the company in future
by analyzing its past performance.
Size and Ranking
A rough idea regarding the size and ranking of the company within the economy, in
general, and the industry, in particular, would help the investment manager in assessing the
risk associated with the company. In this regard the net capital employed, the net profits,
the return on investment and the sales volume of the company under consideration may be
compared with similar data of other company in the same industry group. It may also be
useful to assess the position of the company in terms of technical knowhow, research and
development activity and price leadership.
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 Growth Record
The growth in sales, net income, net capital employed and earnings per share of the
company in the past few years must be examined. The following three growth indicators
may be particularly looked in to: (a) Price earnings ratio, (b) Percentage growth rate of
earnings per annum and (c) Percentage growth rate of net block of the company. The price
earnings ratio is an important indicator for the investment manager since it shows the
number the times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar features. However,
this is not so in practice due to many factors. Hence, by a comparison of this ratio
pertaining to different companies the investment manager can have an idea About the image
of the company and can determine whether the share is under-priced or over-priced.
An evaluation of future growth prospects of the company should be carefully made.
This requires the analysis of the existing capacities and their utilization, proposed expansion
and diversification plans and the nature of the companys technology. The existing capacity
utilization levels can be known from the quantitative information given in the published
profit and loss accounts of the company.
The plans of the company, in terms of expansion or diversification, can be known
from the directors reports the chairmans statements and from the future capital commitments
as shown by way of notes in the balance sheets.
The nature of technology of a company should be seen with reference to
technological developments in the concerned fields, the possibility of its product being
superseded of the possibility of emergence of more effective method of manufacturing.
Growth is the single most important factor in company analysis for the purpose of
investment management. A company may have a good record of profits and performance in
the past; but if it does not have growth potential, its shares cannot be rated high from the
investment point of view.
FINANCIAL ANALYSIS
An analysis of financial for the past few years would help the investment manager in

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Understanding the financial solvency and liquidity, the efficiency with which the funds are
used, the profitability, the operating efficiency and operating leverages of the company. For
this purpose certain fundamental ratios have to be calculated. From the investment point of
view, the most important figures are earnings per share, price earnings ratios, yield, book
value and the intrinsic value of the share. The five elements may be calculated for the past
ten years or so and compared with similar ratios computed from the financial accounts of
other companies in the industry and with the average ratios of the industry as a whole.
The yield and the asset backing of a share are important considerations in a decision
regarding whether the particular market price of the share is proper or not. Various other
ratios to measure profitability, operating efficiency and turnover efficiency of the company
may also be calculated.
The return on owners investment, capital turnover ratio and the cost structure ratios
may also be worked out. To examine the financial solvency or liquidity of the company, the
investment manager may work out current ratio, liquidity ratio, debt equity ratio, etc. These
ratios will provide an overall view of the company to the investment analyst. He can
analyze its strengths and weakness and see whether it is worth the risk or not.
Quality of Management
This is an intangible factor. Yet it has a very important bearing on the value of the
shares. Every investment manager knows that the shares of certain business houses command
a higher premium than those of similar companies managed by other business houses. This
is because of the quality of management, the confidence that the investors have in a
particular business house, its policy vis--vis its relationship with the investors, dividend and
financial performance record of other companies in the same group, etc. This is perhaps the
reason that an investment manager always gives a close look to the management of the
company whose shares he is to invest.
Quality of management has to be seen with reference to the experience, skill and
integrity of the persons at the helm of the affairs of the company. The policy of the
management regarding relationship with the share holders is an important factor since certain

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business houses believe in generous dividend and bonus distributions while others are rather
conservative.
Location and labour management relations
The locations of the companys manufacturing facilities determine its economic
viability which depends on the availability of crucial inputs like power, skilled labour and
raw materials etc. Nearness to market is also a factor to be considered. In the past few
years, the investment manager has begun looking into the state of labour management
relations in the company under consideration and the area where it is located.
Pattern of Existing Stock Holding
An analysis of the pattern of the existing stock holdings of the company would
also be relevant. This would show the stake of various parties associated with the
company. An interesting case in this regard is that of the Punjab National Bank in
which the L.I.C. and other financial institutions had substantial holdings. When the
bank was nationalized, the residual company proposed a scheme whereby those
shareholders, who wish to opt out, could receive a certain amount as compensation in
cash. It was only at the instant and bargaining strength of institutional investors that
the compensation offered to the shareholders, who wish to opt out of the company,
was raised considerably.
Marketability of the Shares
Another important consideration for an investment manager is the marketability
of the shares of the company. Mere listing of the share on the stock exchange does not
automatically mean that the share can be sold or purchased at will.
There are many shares which remain inactive for long periods with no transactions
being affected. To purchase or sell such scrips is a difficult task. In this regard, dispersal of
share holding with special reference to the extent of public holding should be seen.
Fundamental analysis thus is basically an examination of the economics and financial
aspects of a company with the aim of estimating future earnings and dividend prospect. It
included an analysis of the macro economic and political factors which will have an impact
on the performance of the firm. After having analyzed all the relevant information about the

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company and its relative strength vis--vis other firm in the industry, the investor is
expected to decide whether he should buy or sell the securities.
TIMING OF PURCHASES
The timing of dealings in the securities, specially shares is of crucial importance,
because after correctly identifying the companies one may lose money if the timing is bad
due to wide fluctuation in the price of shares of that companies.
The decision regarding timing of purchases is particularly difficult because of certain
psychological factors. It is obvious that if a person wishes to make any gains, he should
buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when
they are at a higher price. But in practical it is a difficult task.
When the prices are rising in the market i.e. there is bull phase, everybody joins in
buying without any delay because every day the prices touch a new high. Later when the
bear face starts, prices tumble down every day and everybody starts counting the losses. The
ordinary investor regretted such situation by thinking why he did not sell his shares in
previous day and ultimately Sell at a lower price. This kind of investment decision is
entirely devoid of any sense of timing.
In short we can conclude by saying that Investment management is a complex
activity which may be broken down into the following steps:
Specification Of Investment Objectives And Constraints
The typical objectives sought by investors are current income, capital appreciation, and
Safety of principle. The relative importance of these objectives should be specified further the
Constraints arising from liquidity, time horizon, tax and special circumstances must be
Identified.
Choice Of The Asset Mix
The most important decision in portfolio management is the asset mix decision very
Broadly; this is concerned with the proportions of stocks (equity shares and units/shares of
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equity-oriented mutual funds) and bonds in the portfolio.

The appropriate stock-bond mix depends mainly on the risk tolerance and investment
Horizon of the investor.

ELEMENTS OF PORTFOLIO MANAGEMENT

Portfolio management is on-going process involving the following basic tasks:
Identification of the investors objectives, constraints and preferences.
Strategies are to be developed and implemented in tune with investment policy
Formulated.
Review and monitoring of the performance of the portfolio.
Finally the evaluation of the portfolio.

TECHIQUES OF PORTFOLIO MANAGEMENT

As of now the under noted technique of portfolio management are in vogue in our
country.
The various modes of Technique of Portfolio Management are as follows:

Equity Portfolio
It is influenced by internal and external factors. The internal factors affect the inner
working of the companys growth plans are analyzed with referenced to Balance sheet, profit
& loss a/c (account) of the company. Among the external factor are changes in the
government policies, Trade cycles, Political stability etc.

Equity Stock Analysis

24

Under this method the probable future value of a share of a company is determined.
It can be done by ratios of earning per share of the company and price earnings ratio.
EARNING PER SHARE = _ PROFIT AFTER TAX__
NO. OF EQUITY SHARES
PRICE EARNING RATIO = _MARKET PRICE (PER SHARE)_
EARNING PER SHARE
Points to be considered while analyzing the securities:

Nature of the industry and its product:

Long term trends of industries, competition within, and outside the industry,
Technical changes, labour relations, sensitivity, to Trade cycle.

Industrial analysis :
Of prospective earnings, cash flows, working capital, dividends, etc.

Ratio analysis:
Ratios such as debt equity ratio, current ratio, net worth, profit earnings ratio, returns
on investment, are worked out to decide the portfolio. The wise principle of portfolio
management suggests that Buy when the market is low or BEARISH, and sell when the
market is rising or BULLISH.
Stock market operation can be analyzed by:
Fundamental approach- Based on intrinsic value of shares.
Technical approach- Based on Dow Jones Theory, Random Walk Theory, etc.
Prices are based upon demand and supply of the market
Objectives are maximization of wealth and minimization of risk.

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 Diversification reduces risk and volatility.

Variable returns, high illiquidity; etc.

RISK RETURN RELATIONSHIP OF PORTFOLIO MANAGEMENT

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 RISK ON PORTFOLIO

The expected returns from individual securities carry some degree of risk. Risk on
the
Portfolio is different from the risk on individual securities. The risk is reflected in the
variability Of the returns from zero to infinity. Risk of the individual assets or a portfolio is
measured by the Variance of its return.
The expected return depends on the probability of the returns and their weighted
contribution to the risk of the portfolio. These are two measures of risk in this context one
is the absolute deviation and other standard deviation.
Most investors invest in a portfolio of assets, because as to spread risk by not
putting all eggs in one basket. Hence, what really matters to them is not the risk and return
of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is mainly
reduced by Diversification.

Following are the some of the types of Risk

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Financial Risk.

Interest Rate Risk

This arises due to the variability in the interest rates from time to time. A change in
the interest rate establishes an inverse relationship in the price of the security i.e. price of
the security tends to move inversely with change in rate of interest, long term securities
show greater variability in the price with respect to interest rate changes than short term
securities.
Interest rate risk vulnerability for different securities is as under:

TYPES

RISK EXTENT

Cash Equivalent

Less vulnerable to interest rate risk.

Long Term Bonds

More vulnerable to interest rate risk.

Purchasing Power Risk

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It is also known as Inflation Risk also emanates from the very fact that inflation
affects the purchasing power adversely. Nominal return contains both the real return
component and an inflation premium in a transaction involving risk of the above type to
compensate for inflation over an investment holding period. Inflation rates vary over time
and investors are caught unaware when rate of inflation changes unexpectedly causing
erosion in the value of realized rate of return and expected return.
Purchasing power risk is more in inflationary conditions especially in respect of bonds
and fixed income securities. It is not desirable to invest in such securities during inflationary
periods. Purchasing power risk is however, less in flexible income securities like equity
shares or common stock where rise in dividend income off-sets increase in the rate of
inflation and provides advantage of capital gains.

Business Risk
Business risk emanates from sale and purchase of securities affected by business
cycles, technological changes etc. Business cycles affect all types of securities i.e. there is
cheerful movement in boom due to bullish trend in stock prices whereas bearish trend in
depression brings down fall in the prices of all types of securities during depression due to
decline in their market price.

Financial Risk
It arises due to changes in the capital structure of the company. It is also known as
leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis--vis equity in
the capital structure indicates that the company is highly geared. Although a leveraged
companys earnings per share are more but dependence on borrowings exposes it to risk of
winding up for its inability to honour its commitments towards lender or creditors. The risk
is known as leveraged or financial risk of which Investors should be aware and portfolio
managers should be very careful.

Systematic Risk or Market Related Risk

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Systematic risks affected from the entire market are (the problems, raw material
availability, tax policy or government policy, inflation risk, interest risk and financial risk). It
is managed by the use of Beta of different company shares.

Unsystematic Risks
The unsystematic risks are mismanagement, increasing inventory, wrong financial
policy, defective marketing etc. this is diversifiable or avoidable because it is possible to
eliminate or diversify away this component of risk to a considerable extent by investing in a
large portfolio of securities. The unsystematic risk stems from inefficiency magnitude of
those factors different form one company to another.

RISK RETURN ANALYSIS

All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc. The risk over time can be represented by
the variance of the returns while the return over time is capital appreciation plus payout,
divided by the purchase price of the share.
`Risk-return is subject to variation and the objectives of the portfolio manager are to
reduce That variability and thus reduce the risk by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better; it is according to the
Modern Approach diversification should not be quantity that should be related to the quality
of scripts this leads to quality of portfolio. Experience has shown that beyond the certain
securities by adding more securities expensive.

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 RETURNS ON PORTFOLIO

Each security in a portfolio contributes return in the proportion of its investments in

Security. Thus the portfolio expected return is the weighted average of the expected return,
from Each of the securities, with weights representing the proportions share of the security
in the total Investment. Why does an investor have so many securities in his portfolio? If
the security ABC Gives the maximum return why not he invests in that security all his
funds and thus maximize Return? The answer to this question lie in the investors perception
of risk attached to Investments, his objectives of income, safety, appreciation, liquidity and
hedge against loss of Value of money etc. this pattern of investment in different asset
categories, types of investment, etc., would all be described under the caption of
diversification, which aims at the reduction or Even elimination of non-systematic risks and
achieve the specific objectives of investors.

PORTFOLIO THEORIES
CAPITAL ASSETS PRICING MODEL (CAPM)

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CAPM provides a conceptual framework for evaluating any investment decision. It is

used to estimate the expected return of any portfolio with the following formula:
E (Rp) = Rf +Bp (E( Rm) Rf )
Where,
E (Rp)

= Expected return of the portfolio

Rf

= Risk free rate of return

Bp

= Beta portfolio i.e. market sensitivity index

E(Rm)

= Expected return on market portfolio

[E(Rm)-Rf]

= Market risk premium

Uses of CAPM
Estimate the required rate of return to investors on companys common stock.
Evaluate risky investment projects involving real Assets.
Explain why the use of borrowed fund increases the risk and increases the rate of
return.
Reduce the risk of the firm by diversifying its project portfolio.

MOVING AVERAGE
It refers to the mean of the closing price which changes constantly and moves
ahead in time, there by encompasses the most recent days and deletes the old one.

MODERN PORTFOLIO THEORY

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Modern Portfolio Theory quantifies the relationship between risk and return and
assumes that an investor must be compensated for assuming risk. It believes in the
maximization of return through a combination of securities. The theory states that by
combining securities of low risks with securities of high risks success can be achieved in
making a choice of investments. There can be various combinations of securities. The
modern theory points out that the risk of portfolio can be reduced by diversification.
MARKOWITZ THEORY
Markowitz has suggested a systematic search for optimal portfolio. According to him,
the portfolio manager has to make probabilistic estimates of the future performances of the
securities and analyse these estimates to determine an efficient set of portfolios. Then the
optimum set of portfolio can be selected in order to suit the needs of the investors.
Assumptions of Markowitz Theory
Investors make decisions on the basis of expected utility maximization.
In an efficient market, all investors react with full facts about all securities in the
market.
Investors utility is the function of risk and return on securities.
The security returns are co-related to each other by combining the different securities.
The combination of securities is made in such a way that the investor gets maximum
return with minimum of risk.
An efficient portfolio exists, when there is lowest level of risk for a specified level
of expected return and highest expected return for a specified amount of portfolio
risk.
The risk of portfolio can be reduced by adding investments in the portfolio.
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 SHARPES THEORY
William Sharpe has suggested a simplified method of diversification of portfolios. He
has made the estimates of the expected return and variance of indexes which are related to
economic activity. Sharpes Theory assumes that securities returns are related to each other
only through common relationships with basic underlying factor i.e. market return index.

RULES TO BE FOLLOWED BEFORE INVESTMENT IN PORTFOLIOS

Compile the financials of the companies in the immediate past 3 years such as
Turnover, gross profit, net profit before tax, compare the profit earning of company

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with that of the industry average nature of product manufacture service render and it
future demand ,know about the promoters and their back ground, dividend track
record, bonus shares in the past 3 to 5 years ,reflects companys commitment to
share holders the relevant information can be accessed from the RDC (Registrant of
Companies) published financial results financed quarters, journals and ledgers.
Watch out the highs and lows of the scripts for the past 2 to 3 years and their
timing cyclical scripts have a tendency to repeat their performance, this hypothesis
can be true of all other financial.
The higher the trading volume higher is liquidity and still higher the chance of
speculation, it is futile to invest in such shares whos daily movements cannot be
kept track, if you want to reap rich returns keep investment over along horizon and
it will offset the wild intraday trading fluctuations, the minor movement of scripts
may be ignored, we must remember that share market moves in phases and the span
of each phase is 6 months to 5 years.

Case Study: Motilal Oswal Financial Services

COMPANY PROFILE

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Motilal Oswal Financial Services is a well diversified financial services group having
businesses in securities, commodities, investment banking and venture capital.
With 1300 business locations and more than 3,85,000 customers in over 425 cities, Motilal
Oswal is well suited to handle all your wealth creation and wealth management needs.
The company has in the last year placed 9.48% with two leading private equity investors New Vernon Private Equity Limited and Bessemer Venture Partners at post money company
valuation of Rs. 1345 corer. (Rs. 13.45 billion).
Motilal Oswal Financial Services Ltd., consists of four companies.
Motilal Oswal Investment Advisors Pvt. Ltd. is our Investment Banking arm with collective
experience of over 100 years in investment banking/corporate banking and advisory services
Motilal Oswal Commodities Broker (P) Ltd. has been providing commodity trading facilities
and related products and services since 2004.
Motilal Oswal Venture Capital Advisors Private Limited has launched the India Business
Excellence Fund (IBEF), a US$100 mn India focused Private Equity Fund.
Motilal Oswal Securities Ltd. (Most) is a leading research and advisory based stock broking
house of India, with a dominant position in both institutional equities and wealth
management. Our services include equities, derivatives, e-broking, portfolio management,
mutual funds, commodities, IPOs and depository services.
In March 2006, AQ Research, a firm that analyses the accuracy of a brokers research call,
declared Motilal Oswal Securities the best research house for Indian stocks.
Research is the solid foundation on which Motilal Oswal Securities advice is based. Almost
10% of revenue is invested on equity research and we hire and train the best resources to
become advisors. At present we have 24 equity analysts researching over 26 sectors. From a
fundamental, technical and derivatives research perspective; Motilal Oswal's research reports
have received wide coverage in the media (over a 1000 mentions last year).
Motilal Oswal Securities has witnessed rapid organic growth due to favorable market
conditions as well as efforts put in by the company itself. FY05 and FY06 saw the company
grow inorganically through acquisition of three significant regional broking firms from

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Karnataka, Kerala and UP. Over a period of time many more regional broking firms may be
acquired to gain solid footing in various regions of India.
The company has also established a base in the UAE to address the needs of the overseas
audience.
Motilal Oswal Securities Limited (MOSt) has established itself as the Most Independent
Research - Local Brokerage (Asia Money Brokers Poll 2006). Its Institutional Equities
Division combines the efforts of our Research and Sales & Trading departments to best serve
clients' needs. It believes it is its unflinching commitment to providing superior client service
that makes us stand out.
They have a dedicated research team, which is engaged in analyzing the Indian economy and
corporate sectors to identify equity investment ideas. They staunchly practice the valueinvesting philosophy and advise investors to take a long-term view of equity investments.
Consistent delivery of high quality advice on individual stocks, sector trends and investment
strategy has established us as a reliable research unit amongst leading Indian as well as
international investors.
Our sales & trading team, comprising top equity professionals, translates the research
findings into actionable advice for clients, based on their specific needs. Each of our sales
personnel has significant experience in equity research. Sophisticated computerized tools are
used to understand client investment profile and objectives, which ensures proactive and
timely service.
Company Core Purpose:
To be a well respected and preferred global financial services organization enabling wealth
creation for all our customers.
Values:
Integrity: A company honoring commitment with highest ethical and business practices.
Team Work: Attaining goals collectively and collaboratively.
Meritocracy: Performance gets differentiated, recognized and rewarded in an apolitical
environment.
Passion & Attitude: High energy and self motivated with a Do It attitude and
entrepreneurial spirit.

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Excellence in Execution: Time bound results within the framework of the companys value
system.
MANAGEMENT TEAM:

Mr.Motilal Oswal

chairman and managing director

Mr. Raamdeo Agrawal

Non-Executive Director

Mr. Navin Agarwal

Non-Executive Director

Mr. Ashutosh Maheshwari

CEO - MOIA

Mr. Vishal Tulsyan

CEO - MOVC

CONCLUSION
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From the above discussion it is clear that portfolio functioning is based on market
risk, so one can get the help from the professional Portfolio Manager or the Merchant
banker if required before investment because applicability of practical knowledge through
technical analysis can help an investor to reduce risk.
In other words Security prices are determined by money manager and home
managers, students and strikers, doctors and dog catchers, lawyers and landscapers, the
wealthy and the wanting. This breadth of market participants guarantees an element of
unpredictability and excitement. If we were all totally logical and could separate our
emotions from our investment decisions then, the determination of price based on future
earnings would work magnificently. And since we would all have the same completely
logical expectations, price would only change when quarterly reports or relevant news was
released.
I can conclude from this project that portfolio management has become an important
service for the investors to identify the companies with growth potential. Portfolio managers
can provide the professional advice to the investors to make an intelligent and informed
investment.
Portfolio management role is still not identified in the recent time but due it
expansion of investors market and growing complexities of the investors the services of the
portfolio managers will be in great demand in the near future. Today the individual investors
do not show interest in taking professional help but surely with the growing importance and
awareness regarding portfolios managers people will definitely prefer to take professional
help.

BIBLIOGRAPHY
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Books
Security Analysis & Portfolio Management - Fishers & Jordon,
Security Analysis & Portfolio Management V.A.Avadhani
Websites:
www.amfiindia.com
www.sebi.com
www.motilaloswal.com
www.scribd.com

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