A project report on overview of portfolio management in india

1. 1. Projectsformba.blogspot.com UNIVERSITY OF MUMBAI PROJECT ON OVERVIEW

OF PORTFOLIO MANAGEMENT IN INDIA. Submitted In Partial Fulfillment of the
requirements For the Award of the Degree of Bachelor of Management By PROJECT
GUIDE BACHELOR OF MANAGEMENT STUDIES SEMESTER V (2010-2011)
K.V.PENDHARKAR COLLEGE OF ARTS, SCIENCE&COMMERCE 1
2. 2. Projectsformba.blogspot.com DeclarationI student of BMS
Semester V (2010-2011) herebyDeclare that I have completed this project on
OVERVIEW OFPORTFOLIO MANAGEMENT IN INDIAThe information submitted is true
& original to the best of myknowledge.The conclusions and recommendations written in
this project arebased onThe data collected by me while preparing this report. Signature 2
3. 3. Projectsformba.blogspot.com ACKNOWLEDGEMENTIt gives me great pleasure to
submit this project to the University ofMumbai as a part of curriculum of my BMS course.
I take this opportunitywith great pleasure to present before you this project on
OVERVIEW OFPORTFOLIO MANAGEMENT IN INDIA" which is a result of cooperation,hard work and good wishes of many people. The most pleasant part of
anyproject is to express the gratitude towards all those who have contributedto the
success of the project.I would like to thank .. who has been my mentor
for thisproject. It was only through her excellence assistance and goodsuggestions that I
have been able to complete this project.Library Staff:For giving valuable information
about the various books related to thisproject.With all the heartiest thanks; I hope my final
project report will be a greatsuccess and a good source of learning and information. 3
4. 4. Projectsformba.blogspot.com INDEXCHAPTER TABLE OF CONTENTS PAGE
NO.CHATER-1 Introduction to Portfolio Management 8 Introduction to kotak securities ltd.
10CHAPTER-2 Meaning of portfolio management 14CHAPTER-3
MethodologyCHAPTER-4 18 Basic concepts & components for portfolio
managementCHAPTER-5 23 Types of portfolio managementCHAPTER-6 37 Persons
involved in portfolio managementCHAPTER-7 42 Risk Return analysisCHAPTER-8 49
Assest allocationCHAPTER-9 53 Primary surveyCHAPTER-10 58 FindingsCHAPTER-11
62 ConclusionCHAPTER-12 63 Bibliography/WebliographyCHAPTER-13 64 4
5. 5. Projectsformba.blogspot.com NEED FOR SELECTING THE PROJECT To get the
overall knowledge of securities and investment. To know how the investment made in
different securities minimizes the risk and maximizes the returns. To get the knowledge
of different factors that affects the investment decision of investors. To know how
different companies are managing their portfolio i.e. when and in which sectors they are
investing. To know what is the need of appointing a Portfolio Manager and how does
he meets the needs of the various investors. To get the knowledge about the role
(played) and functions of portfolio manager. To get the knowledge of investment
decision and asset allocation. 5
6. 6. Projectsformba.blogspot.com 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, portfoliomanagement service (PMS) comes as an
answer. The business of portfolio management has never been an easy one. Juggling
thelimited choices at hand with the twin requirements of adequate safety and

sizeablereturns is a task fraught with complexities. Given the unpredictable nature of the
market it requires solid experience and strongresearch to make the right decision. In the
end it boils down to make the right move inthe right direction at the right time. Thats
where the expert comes in. The term portfolio management in common practice refers to
selection of securitiesand their continuous shifting in a way that the holder gets maximum
returns at minimumpossible risk. Portfolio management services are merchant banking
activities recognizedby SEBI and these activities can be rendered by SEBI authorized
portfolio managers ordiscretionary portfolio managers. A portfolio manager by the virtue
of his knowledge, background and experience helpshis clients to make investment in
profitable avenues. A portfolio manager has to complywith the provisions of the SEBI
(portfolio managers) rules and regulations, 1993. This project also includes the different
services rendered by the portfolio manager. Itincludes the functions to be performed by
the portfolio manager. What is the difference between the value of time and money? In
other words, learn toseparate time from money. 6
7. 7. Projectsformba.blogspot.com When it comes to the importance of time, how many of
us believe that time is money.We all know that the work done by us is calculated by units
of time. Have you everconsidered the difference between an employee who is working on
an hourly rate andthe other who is working on salary basis? The only difference between
them is of the unitof time. No matter whether you get your pay by the hour, bi-weekly, or
annually; onething common in all is that the amount is paid to you according to amount of
time youspent on working. In other words, time is precious and holds much more
importance than money. Thatis the reason the time is considered as an important factor
in wealth creation. The project also shows the factors that one considers for making an
investmentdecision and briefs about the information related to asset allocation. 7
8. 8. Projectsformba.blogspot.com CHAPTER: 1 PORTFOLIO
MANAGEMENTINTRODUCTION Stock exchange operations are peculiar in nature and
most of the Investors feelinsecure in managing their investment on the stock market
because it is difficult for anindividual to identify companies which have growth prospects
for investment. Furtherdue to volatile nature of the markets, it requires constant
reshuffling of portfolios tocapitalize on the growth opportunities. Even after identifying the
growth orientedcompanies and their securities, the trading practices are also
complicated, making it adifficult task for investors to trade in all the exchange and follow
up on post tradingformalities. Investors choose to hold groups of securities rather than
single security that offer thegreater expected returns. They believe that a combination of
securities held together willgive a beneficial result if they are grouped in a manner to
secure higher return aftertaking into consideration the risk element. That is why
professional investment advicethrough portfolio management service can help the
investors to make an intelligent and 8
9. 9. Projectsformba.blogspot.cominformed choice between alternative investments
opportunities without the worry of posttrading hassles. From The Rational Edge: The first
in a new series of articles on portfoliomanagement, this introduction expresses IBMs
viewpoint about the foundations andessentials of portfolio management, and discusses
ideas and assets that support andenable effective portfolio management practices.A
good way to begin understanding what portfolio management is (and is not) may be
todefine the term portfolio. In a business context, we can look to the mutual fund
industryto explain the terms origins. Morgan Stanleys Dictionary of Financial Terms offers

thefollowing explanation: If you own more than one security, you have an investment
portfolio. You build theportfolio by buying additional stocks, bonds, mutual funds, or other
investments. Yourgoal is to increase the portfolios value by selecting investments that you
believe will goup in priceAccording to modern portfolio theory, you can reduce your
investment risk by creating adiversified portfolio that includes enough different types, or
classes, of securities so thatat least some of them may produce strong returns in any
economic climate.Note that this explanation contains a number of important ideas: A
portfolio contains many investment vehicles. Owning a portfolio involves making choices
-- that is, deciding what additional stocks, bonds, or other financial instruments to buy;
when to buy; what and when to sell; and so forth. Making such decisions is a form of
management. The management of a portfolio is goal-driven. For an investment portfolio,
the specific goal is to increase the value. Managing a portfolio involves inherent risks. 9
10. 10. Projectsformba.blogspot.com CHAPTER2 INTRODUCTON TO KOTAK SECURITIES
LTD.The Kotak Mahindra Group was born in 1985 as Kotak Capital ManagementFinance
Limited. Uday Kotak, Sidney A. A. Pinto and Kotak & Companypromoted this company.
Industrialists Harish Mahindra and Mahindra took astake in 1986, and thats when the
company changed its name to KotakMahindra Finance Limited. Since then its been a
steady and confident journey togrowth and success.Kotak Securities Ltd. is one of Indias
largest brokerage and securitiesdistribution house in India. Over the years Kotak
Securities has been one ofthe leading investment broking houses catering to the needs
of bothinstitutional and non-institutional investor categories with presence all over
thecountry through franchisees and co-ordinates. Kotak Securities Ltd. offers onlineand
offline services based on well-researched expertise and financial products tothe noninstitutional investors.Kotak Securities Limited is t he world of Capital Markets where
everythingnewsworthy exists only in the present moment and where knowing
theimportance of timing, sentiments and strategic forecasting makes the
differencebetween profit and loss.Kotak Securities Limited, a strategic joint venture
between Kotak Mahindra Bankand Goldman Sachs (holding 25% one of the worlds
leading investment banksand brokerage firms) is Indias leading stock broking house with
a market shareof 7 - 8 %.Kotak Securities Limited is one of the larger players in
distribution of IPOs - itwas ranked number One in 2003-04 as Book Running Lead
Manager in publicequity offerings by PRIME Database. It has also won the Best Equity
HouseAward from Finance Asia -April 2004.The Company has a full-fledged Research
division involved in macroeconomicstudies, Sectoral research and Company specific
equity research combined witha strong and well networked sales force which helps
deliver current and up-to-date market information and news. 10
11. 11. Projectsformba.blogspot.comKotak Securities Limited is also a depository participant
with National SecuritiesDepository Limited (NSDL) and Central Depository Services
Limited (CDSL)providing dual benefit services wherein the investors can use the
brokerageservices of the Company for executing the transactions and the
depositoryservices for settling them.Kotak Securities has 122 branches servicing more
than 1, 70,000 customer andCoverage of 18 cities. Kotaksecurities.com, the online
division of KotakSecurities Limited offers Internet Broking services and also online IPO
andMutual Fund Investments. Kotak Securities Limited manages assets over 2500cores
of Assets under Management (AUM).Kotak securities provide portfolio Management
Services, catering to the high endof the market. Portfolio Management from Kotak

Securities comes as an answerto those who would like to grow exponentially on the crest
of the stock market,with the backing of an expert.Kotak Securities Limited manages
assets over Rs. 1700crores through itsPortfolio Management Services (PMS) servicing
high net worth clients with alarge investible surplus through its preferred client services in
the mass affluentand wealth management segments.The company has a full-fledged
research division involved in Macro Economicstudies, Sectoral research and Company
Specific Equity Research combinedwith a strong and well networked sales force which
helps deliver current and upto date market information and news. 11
12. 12. Projectsformba.blogspot.com KOTAK SECURITIES RESEARCH CENTER Kotak
Securities Research Center is a special research cell where some of Indias finest
financial analysts bring you intensive research reports on how the stock market is faring,
when is the right time to invest, when to execute your order and more. KSL provides both
type of research reports. Fundamental Research reports a. Intraday calls b. Special
Reports c. Market Mornings d. Daily Market Brief e. Sectoral Report f. Stock Ideas g.
Derivatives Reports h. Portfolio Advices Technical Research reports a. Weekly
Technical AnalysisDepending on what kind of investor you are, Kotak Securities Ltd.
(KSL) bringscustomers from fundamental or basic research and technical research. As
aninvestor with Kotak Securities, Customers get access to these research
reportsexclusively. Customers get access to the following reports. Research process
isgiven below. 12
13. 13. Projectsformba.blogspot.com PRODUCTS OFFERED BY KOTAK SECURITIES
LIMITED 1. Portfolio Management Services [PMS]: KOTAK Securities is among the
Largest private client asset managers in the Country today with an equity asset base of
around 1700crores (US$ 400 million). Kotak clients include some of the most affluent
families and high net worth individuals in the Country and customer assets under
management rival some of the larger mutual funds in India. 2) Margin Trading Facility 3)
Demat Account Facility 4) IPOs 5) Mutual FundsAWARDS GRAB BY KOTAK
SECURITIES LTD. Prime Ranking Award (2003-04) - Largest Distributor of IPOs
Finance Asia Award (2004)- Indias best Equity House Finance Asia Award (2005)-Best
Broker in India Euromoney Award (2005)-Best Equities House in India Finance Asia
Award (2006) - Best Broker in India Euromoney Award (2006) - Best Provider of
Portfolio Management in Equities 13
14. 14. Projectsformba.blogspot.com CHAPTER3 MEANING OF PORTFOLIO
MANAGEMENT Portfolio management in common parlance refers to the selection of
securities andtheir continuous shifting in the portfolio to optimize returns to suit the
objectives of aninvestor. This however requires financial expertise in selecting the right
mix of securitiesin changing market conditions to get the best out of the stock market. In
India, as wellas in a number of western countries, portfolio management service has
assumed therole of a specialized service now a days and a number of professional
merchantbankers compete aggressively to provide the best to high net worth clients, who
havelittle time to manage their investments. The idea is catching on with the boom in
thecapital market and an increasing number of people are inclined to make profits out
oftheir hard-earned savings. Portfolio management service is one of the merchant
banking activities recognizedby Securities and Exchange Board of India (SEBI). The
service can be rendered eitherby merchant bankers or portfolio managers or
discretionary portfolio manager as definein clause (e) and (f) of Rule 2 of Securities and

Exchange Board of India(PortfolioManagers)Rules, 1993 and their functioning are guided

by the SEBI. According to the definitions as contained in the above clauses, a portfolio
managermeans any person who is pursuant to contract or arrangement with a client,
advises ordirects or undertakes on behalf of the client (whether as a discretionary
portfoliomanager or otherwise) the management or administration of a portfolio of
securities orthe funds of the client, as the case may be. A merchant banker acting as a
PortfolioManager shall also be bound by the rules and regulations as applicable to the
portfoliomanager. 14
15. 15. Projectsformba.blogspot.com Realizing the importance of portfolio management
services, the SEBI has laid downcertain guidelines for the proper and professional
conduct of portfolio managementservices. As per guidelines only recognized merchant
bankers registered with SEBI areauthorized to offer these services. Portfolio
management or investment helps investors in effective and efficientmanagement of their
investment to achieve this goal. The rapid growth of capitalmarkets in India has opened
up new investment avenues for investors. The stock markets have become attractive
investment options for the common man.But the need is to be able to effectively and
efficiently manage investments in order tokeep maximum returns with minimum risk.
Portfolio is a collection of asset. The asset may be physical or financial like Shares
Bonds, Debentures, and Preference Shares etc. The individual investor or a fund
manager would not like to put all his money in the shares of one company, for that would
amount to great risk. Main objective is to maximize portfolio return and at the same
time minimizing the portfolio risk by diversification. Portfolio management is the
management of various financial assets, which comprise the portfolio. According to
Securities and Exchange Board of India (Portfolio manager) Rules, 1993; portfolio
means the total holding of securities belonging to any person; Designing portfolios to
suit investor requirement often involves making several projections regarding the future,
based on the current information. When the actual situation is at variance from the
projections portfolio composition needs to be changed. One of the key inputs in
portfolio building is the risk bearing ability of the investor. 15
16. 16. Projectsformba.blogspot.com Portfolio management can be having institutional, for
example, Unit Trust, Mutual Funds, Pension Provident and Insurance Funds, Investment
Companies and non-Investment Companies.Over time, other industry sectors have
adapted and applied these ideas toother types of "investments," including the
following:Application portfolio management: This refers to the practice of managing an
entiregroup or major subset of software applications within a portfolio. Organizations
regardthese applications as investments because they require development (or
acquisition)costs and incur continuing maintenance costs. Also, organizations must
constantlymake financial decisions about new and existing software applications,
includingwhether to invest in modifying them, whether to buy additional applications, and
when to"sell" -- that is, retire -- an obsolete software application.Product portfolio
management: Businesses group major products that they developand sell into (logical)
portfolios, organized by major line-of-business or businesssegment. Such portfolios
require ongoing management decisions about what newproducts to develop (to diversify
investments and investment risk) and what existingproducts to transform or retire (i.e.,
spin off or divest). Project or initiative portfoliomanagement, an initiative, in the simplest
sense, is a body of work with: A specific (and limited) collection of needed results or

work products. A group of people who are responsible for executing the initiative and
use resources, such as funding. A defined beginning and end.Managers can group a
number of initiatives into a portfolio that supports a businesssegment, product, or product
line. These efforts are goal-driven; that is, they supportmajor goals and/or components of
the enterprises business strategy. Managers mustcontinually choose among competing
initiatives (i.e., manage the organizationsinvestments), selecting those that best support
and enable diverse business goals (i.e., 16
17. 17. Projectsformba.blogspot.comthey diversify investment risk). They must also manage
their investments by providingcontinuing oversight and decision-making about which
initiatives to undertake, which tocontinue, and which to reject or discontinue.Indian Bank
enters into a Strategic Alliance with PnbPrincipalChennai, January 25, 2006: Indian Bank
is enlarging its activities to deliver value-added services to its customers. The Bank is
presently selling the Insurance products,both Life and Non-life as a Corporate Agent. The
Bank is concentrating on optimizingthe 3 Ps, People, Process and Products to give
maximum advantage to its customersand to face the market competition by exploiting the
emerging opportunities.Indian Bank today announced a strategic alliance with Pnb
Principal Insurance AdvisoryCo., Pvt. Ltd. in the insurance advisory business and Pnb
Principal Financial PlannersPvt. Ltd. in the financial planning business. As the alliance
will enable access to thefinancial products of 30 Insurance companies both life and nonlife and an equalnumber of Investment solutions to the Banks Customers under one roof,
the Banksemphasis would be to serve as an agent to its customers.As per the scope of
the alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd.,Indian Bank has taken
an equity stake in the Company. This partnership will also deliverrisk management
solutions to Indian Bank customers through the Insurance advisoryroute. The solutions
offered will include risk assessment, insurance portfolio analysis &placement, insurance
portfolio administration, and claims management.As per Indian Banks strategic alliance
with Pnb Principal Financial Planners Pvt. Ltd.,the Bank will distribute the investment
solutions offered by Pnb Principal FinancialPlanners through its extensive branch
network. Pnb Principal Financial Planners willprovide support in the area of financial
planning, investment advisory, research,systems and business development to Indian
Bank. The strategic alliance will enablecustomers of Indian Bank to access a wide range
of superior investment solutions.Announcing the partnership with Indian Bank, Sanjay
Sachdev, Country Manager-India,and Principal International said, Banks have currently
emerged as the largestdistribution channel for financial investment options. We are
pleased to associateourselves with Indian Bank. This partnership with Indian Bank will
make a range ofinvestment solutions more accessible to retail investors of Indian
Bank.Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said, The
alliancewith Pnb Principal in the areas of Risk Management, Insurance and Investment
will helpin providing a One-stop solution to the 15 million strong customers of Indian Bank
17
18. 18. Projectsformba.blogspot.comthroughout the country. The Tie-up will help realize our
cherished goal of making ourBank, the best people to bank with. CHPTER4
METHODOLOGYPortfolio Management is used to select a portfolio of new product
development projectsto achieve the following goals: Maximize the profitability or value of
the portfolio Provide balance Support the strategy of the enterprisePortfolio
Management is the responsibility of the senior management team of anorganization or

business unit. This team, which might be called the Product Committee,meets regularly
to manage the product pipeline and make decisions about the productportfolio. Often,
this is the same group that conducts the stage-gate reviews in theorganization.A logical
starting point is to create a product strategy - markets, customers, products,strategy
approach, competitive emphasis, etc. The second step is to understand thebudget or
resources available to balance the portfolio against. Third, each project mustbe assessed
for profitability (rewards), investment requirements (resources), risks, andother
appropriate factors.The weighting of the goals in making decisions about products varies
from company.But organizations must balance these goals: risk vs. profitability, new
products vs.improvements, strategy fit vs. reward, market vs. product line, long-term vs.
short-term.Several types of techniques have been used to support the portfolio
managementprocess: 18
19. 19. Projectsformba.blogspot.com Heuristic models Scoring techniques Visual or
mapping techniquesThe earliest Portfolio Management techniques optimized projects
profitability orfinancial returns using heuristic or mathematical models. However, this
approach paidlittle attention to balance or aligning the portfolio to the organizations
strategy. Scoringtechniques weight and score criteria to take into account investment
requirements,profitability, risk and strategic alignment. The shortcoming with this
approach can be anover emphasis on financial measures and an inability to optimize the
mix of projects.Mapping techniques use graphical presentation to visualize a portfolios
balance. Theseare typically presented in the form of a two-dimensional graph that shows
the trade-offsor balance between two factors such as risks vs. profitability, marketplace fit
vs. productline coverage, financial return vs. probability of success, etcThe recommended
approach is to start with the overall business plan that should definethe planned level of
R&D investment, resources (e.g., headcount, etc.), and relatedsales expected from new
products. With multiple business units, product lines or typesof development, we
recommend a strategic allocation process based on the businessplan. This strategic
allocation should apportion the planned R&D investment intobusiness units, product
lines, markets, geographic areas, etc. It may also breakdownthe R&D investment into
types of development, e.g., technology development, platformdevelopment, new
products, and upgrades/enhancements/line extensions, etc.Once this is done, then a
portfolio listing can be developed including the relevantportfolio data. We favor use of the
development productivity index (DPI) or scores fromthe scoring method. The
development productivity index is calculated as follows: (NetPresent Value x Probability
of Success) / Development Cost Remaining. It factors theNPV by the probability of both
technical and commercial success. By dividing this resultby the development cost
remaining, it places more weight on projects nearer completionand with lower
uncommitted costs. The scoring method uses a set of criteria (potentiallydifferent for each
stage of the project) as a basis for scoring or evaluating each project. 19
20. 20. Projectsformba.blogspot.comAn example of this scoring method is shown with the
worksheet below. Weightingfactors can be set for each criterion. The evaluators on a
Product Committee scoreprojects (1 to 10, where 10 are best). The worksheet computes
the average scores andapplies the weighting factors to compute the overall score. The
maximum weightedscore for a project is 100.This portfolio list can then be ranked by
either thedevelopment priority index or the score. An example of the portfolio list is shown
belowand the second illustration shows the category summary for the scoring

method.Once the organization has its prioritized list of projects, it then needs to
determinewhere the cutoff is based on the business plan and the planned level of
investment ofthe resources available. This subset of the high priority projects then needs
to be further 20
21. 21. Projectsformba.blogspot.comanalyzed and checked. The first step is to check that the
prioritized list reflects theplanned breakdown of projects based on the strategic allocation
of the business plan.Pie charts such as the one below can be used for this purpose.Other
factors can also be checked using bubble charts. For example, the risk-rewardbalance is
commonly checked using the bubble chart shown earlier. A final check is toanalyze
product and technology roadmaps for project relationships. For example, if alower priority
platform project was omitted from the protfolio priority list, the subsequenthigher priority
projects that depend on that platform or platform technology would beimpossible to
execute unless that platform project were included in the portfolio prioritylist.Finally, this
balanced portfolio that has been developed is checked against the businessplan as
shown below to see if the plan goals have been achieved - projects within theplanned
R&D investment and resource levels and sales that have met the goals. 21
22. 22. Projectsformba.blogspot.comWith the significant investments required to develop new
products and the risksinvolved, Portfolio Management is becoming an increasingly
important tool to makestrategic decisions about product development and the investment
of companyresources. In many companies, current year revenues are increasingly based
on newproducts developed in the last one to three years.INVESTMENT PORTFOLIO
MANAGEMENT AND PORTFOLIO THEORYPortfolio theory is an investment approach
developed by University of Chicagoeconomist Harry M. Markowitz (1927 - ), who won a
Nobel Prize in economics in 1990.Portfolio theory allows investors to estimate both the
expected risks and returns, asmeasured statistically, for their investment
portfolios.Markowitz described how to combine assets into efficiently diversified
portfolios. It washis position that a portfolios risk could be reduced and the expected rate
of return couldbe improved if investments having dissimilar price movements were
combined. In otherwords, Markowitz explained how to best assemble a diversified
portfolio and proved thatsuch a portfolio would likely do well.There are two types of
Portfolio Strategies:A. Passive Portfolio StrategyA strategy that involves minimal
expectation input, and instead relies on diversificationto match the performance of some
market index.B. Active Portfolio StrategyA strategy that uses available information and
forecasting techniques to seek a betterperformance than a portfolio that is simply
diversified broadly 22
23. 23. Projectsformba.blogspot.com CHAPTER5 BASIC CONCEPTS AND COMPONENTS
FOR PORTFOLIO MANAGEMENTNow that we understand some of the basic dynamics
and inherent challengesorganizations face in executing a business strategy via
supporting initiatives, lets lookat some basic concepts and components of portfolio
management practices.1. The PortfolioFirst, we can now introduce a definition of portfolio
that relates more directly to thecontext of our preceding discussion. In the IBM view, a
portfolio is: One of a number ofmechanisms, constructed to actualize significant elements
in the Enterprise BusinessStrategy.It contains a selected, approved, and continuously
evolving, collection of Initiativeswhich are aligned with the organizing element of the
Portfolio, and, which contribute tothe achievement of goals or goal components identified
in the Enterprise BusinessStrategy. The basis for constructing a portfolio should reflect

the enterprises particularneeds. For example, you might choose to build a portfolio
around initiatives for aspecific product, business segment, or separate business unit
within a multinationalorganization.2. The Portfolio StructureAs we noted earlier, a portfolio
structure identifies and contains a number of portfolios.This structure, like the portfolios
within it, should align with significant planning and 23
24. 24. Projectsformba.blogspot.comresults boundaries, and with business components. If
you have a product-orientedportfolio structure, for example, then you would have a
separate portfolio for each majorproduct or product group. Each portfolio would contain
all the initiatives that help thatparticular product or product group contribute to the
success of the enterprise business3. The Portfolio ManagerThis is a new role for
organizations that embrace a portfolio management approach. Aportfolio manager is
responsible for continuing oversight of the contents within aportfolio. If you have several
portfolios within your portfolio structure, then you will likelyneed a portfolio manager for
each one. The exact range of responsibilities (andauthority) will vary from one
organization to another, but the basics are as follows: One portfolio manager oversees
one portfolio. The portfolio manager provides day-to-day oversight. The portfolio
manager periodically reviews the performance of, and conformance to expectations for,
initiatives within the portfolio. The portfolio manager ensures that data is collected and
analyzed about each of the initiatives in the portfolio. The portfolio manager enables
periodic decision making about the future direction of individual initiatives.4. Portfolio
Reviews and Decision MakingAs initiatives are executed, the organization should conduct
periodic reviews of actual(versus planned) performance and conformance to original
expectations. Typically,organization managers specify the frequency and contents for
these periodic reviews,and individual portfolio managers oversee their planning and
execution. The reviewsshould be multi-dimensional, including both tactical elements (e.g.,
adherence to plan,budget, and resource allocation) and strategic elements (e.g., support
for businessstrategy goals and delivery of expected organizational benefits).A significant
aspect of oversight is setting multiple decision points for each initiative, sothat managers
can periodically evaluate data and decide whether to continue the work. 24
25. 25. Projectsformba.blogspot.comThese "continue/change/discontinue" decisions should
be driven by an understanding(developed via the periodic reviews) of a given initiatives
continuing value, expectedbenefits, and strategic contribution, Making these decisions at
multiple points in theinitiatives lifecycle helps to ensure that managers will continually
examine and assesschanging internal and external circumstances, needs, and
performance.5. GovernanceImplementing portfolio management practices in an
organization is a transformationeffort that typically involves developing new capabilities to
address new work efforts,defining (and filling) new roles to identify portfolios (collections
of work to be done), anddelineating boundaries among work efforts and collections.
Implementing portfoliomanagement also requires creating a structure to provide planning,
continuing direction,and oversight and control for all portfolios and the initiatives they
encompass. That iswhere the notion of governance comes into play. The IBM view of
governance is:An abstract, collective term that defines and contains a framework for
organization,exercise of control and oversight, and decision-making authority, and within
whichactions and activities are legitimately and properly executed; together with the
definitionof the functions, the roles, and the responsibilities of those who exercise this
oversightand decision-making.Portfolio management governance involves multiple

dimensions, including: Defining and maintaining an enterprise business strategy.

Defining and maintaining a portfolio structure containing all of the organizations initiatives
(programs, projects, etc.). Reviewing and approving business cases that propose the
creation of new initiatives. Providing oversight, control, and decision-making for all
ongoing initiatives. Ownership of portfolios and their contents. 25
26. 26. Projectsformba.blogspot.comEach of these dimensions requires an owner -- either an
individual or a collective -- todevelop and approve plans, continuously adjust direction,
and exercise control throughperiodic assessment and review of conformance to
expectations.A good governance structure decomposes both the types of work and the
authority toplan and oversee work. It defines individual and collective roles, and links
them to anauthority scheme. Policies that are collectively developed and agreed upon
provide aframework for the exercise of governance. The complexities of governance
structuresextend well beyond the scope of this article. Many organizations turn to experts
for helpin this area because it is so critical to the success of any business transformation
effortthat encompasses portfolio management. For now, suffice it to say that it is
worthinvesting time and effort to create a sound and flexible governance structure before
youattempt to implement portfolio management practices.6. Portfolio management
essentialsEvery practical discipline is based on a collection of fundamental concepts that
peoplehave identified and proven (and sometimes refined or discarded) through
continuousapplication. These concepts are useful until they become obsolete, supplanted
bynewer and more effective ideas.For example, in Roman times, engineers discovered
that if the upstream supports of abridge were shaped to offer little resistance to the
current of a stream or river, theywould last longer. They applied this principle all across
the Roman Empire. Then, in themiddle Ages, engineers discovered that such supports
would last even longer if theirdownstream side was also shaped to offer little resistance to
the current. So thatbecame the new standard for bridge construction.Portfolio
management, like bridge-building, is a discipline, and a number of authors
andpractitioners have documented fundamental ideas about its exercise. Recently,
basedon our experiences with clients who have implemented portfolio management
practicesand on our research into the discipline, we have started to shape an IBM view
offundamental ideas around portfolio management. We are beginning to express this
view 26
27. 27. Projectsformba.blogspot.comas a collection of "essentials" that are, in turn, grouped
around a small collection ofportfolio management themes. OBJECTIVES OF
PORTFOLIO MANAGEMENT The basic objective of Portfolio Management is to
maximize yield and minimize risk. The other objectives are as follows: a) Stability of
Income: An investor considers stability of income from his investment. He also considers
the stability of purchasing power of income. b) Capital Growth: Capital appreciation has
become an important investment principle. Investors seek growth stocks which provide a
very large capital appreciation by way of rights, bonus and appreciation in the market
price of a share. c) Liquidity: An investment is a liquid asset. It can be converted into cash
with the help of a stock exchange. Investment should be liquid as well as marketable. The
portfolio should contain a planned proportion of high-grade and readily salable
investment. d) Safety: safety means protection for investment against loss under
reasonably variations. In order to provide safety, a careful review of economic and

28.

29.

30.

31.

industry trends is necessary. In other words, errors in portfolio are unavoidable and it
requires extensive diversification. 27
28. Projectsformba.blogspot.com e) Tax Incentives: Investors try to minimize their tax
liabilities from the investments. The portfolio manager has to keep a list of such
investment avenues along with the return risk, profile, tax implications, yields and other
returns There are three goals of portfolio management: 1. Maximize the value of the
portfolio 2. Seek balance in the portfolio 3. Keep portfolio projects strategically alignedIt
provides a set of portfolio management tools to help achieve these goals. Withmultiple
business units, product lines or types of development, we recommend astrategic
allocation process based on the business plan. The Master ProjectSchedule provides a
summary of all-active as well as proposed projects andclassifies them by status (active,
proposed, on-hold) and by businessunit/product line to align projects with the strategic
allocation. The Master ProjectSchedule also provides additional portfolio information to
prioritize projects usingeither a scorecard method or the development productivity index
(DPI *). Inaddition to this prioritization, PD-Trek provides a Risk-Reward Bubble Chart
anda Project Type Pie Chart to assure balance. A Product or Technology Roadmap 28
29. Projectsformba.blogspot.comtemplate is provided to help visualize platform and
technology relationships toassure critical project relationships are not overlooked with this
prioritization. Thiswill allow management to develop a balanced approach to selecting
andcontinuing with the appropriate mix of projects to satisfy the three goals. 29
30. Projectsformba.blogspot.com FUNCTIONS OF PORTFOLIO MANAGEMENTThe
basic purpose of portfolio management is to maximize yield and minimize risk.Every
investor is risk averse. In order to diversify the risk by investing into varioussecurities
following functions are required to be performed.The functions undertaken by the
portfolio management are as follows: 1. To frame the investment strategy and select an
investment mix to achieve the desired investment objective; 2. To provide a balanced
portfolio which not only can hedge against the inflation but can also optimize returns with
the associated degree of risk; 3. To make timely buying and selling of securities; 4. To
maximize the after-tax return by investing in various taxes saving investment instruments.
ELEMENTS OF PORTFOLIO MANAGEMENT:Portfolio management is on-going process
involving the following basictasks: 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. 30
31. Projectsformba.blogspot.com PROSPECTS OF POTFOLIO MANAGEMENT At
present, there are a very few agencies which render this type of services in an organized
and professional way. However, their share in the total volume is very small. There is
no constraint on the demand for this type of financial service as every entity would be
saving and investing and interested in optimizing the rate of return. The size of capital
market is increasing. There is an increase in the number of stock exchanges. New
instruments are being introduced in the capital market. The equity cult is spreading in
the interiors and rural areas. The percentage of investment of the household savings is
bound to go up. It is conservatively estimated that during the eighth plan resources to
the tune of over Rs.50000crore will be mobilized through the stock market. India today
has 20 million investors, as compared to 2 million in 1980. . 31

32. 32. Projectsformba.blogspot.com STEPS IN PORTFOLIO MANAGEMENT Performance

Portfolio Evaluation Revision Portfolio Execution STEPS Selection of Asset Mix
Identification Portfolio Of Strategy Objectives 1) IDENTIFICATION OF THE OBJECTIVES
The starting point in this process is to determine the characteristics of the various
investments and then matching them with the individuals need and preferences. All the
personal investing is designed in order to achieve certain objectives. 32
33. 33. Projectsformba.blogspot.com These objectives may be tangible such as buying a
car, house etc. and intangible objectives such as social status, security etc. Similarly,
these objectives may be classified as financial or personal objectives. Financial
objectives are safety, profitability and liquidity. Personal or individual objectives may be
related to personal characteristics of individuals such as family commitments, status,
depends, educational requirements, income, consumption and provision for retirement
etc. 2) FORMULATION OF PORTFOLIO STRATEGY The aspect of Portfolio
Management is the most important element of proper portfolio investment and
speculation. While planning, a careful review should be conducted about the financial
situation and current capital market conditions. This will suggest a set of investment
and speculation policies to be followed. The statement of investment policies includes
the portfolio objectives, strategies and constraints. Portfolio strategy means plan or
policy to be followed while investing in different types of assets. There are different
investment strategies. They require changes as time passes, investors wealth
changes, security price change, investors knowledge expands. Therefore, the optional
strategic asset allocation also changes. The strategic asset allocation policy would call
for broad diversification through an indexed holding of virtually all securities in the asset
class. 33
34. 34. Projectsformba.blogspot.com 3) SELECTION OF ASSET MIX The most important
decision in portfolio management is selection of asset mix. It means spreading out
portfolio investment into different asset classes like bonds, stocks, mutual funds etc. In
other words selection of asset mix means investing in different kinds of assets and
reduces risk and volatility and maximizes returns in investment portfolio. Selection of
asset mix refers to the percentage to the invested in various security classes. The
security classes are simply the type of securities as under: money market instrument
fixed income security equity shares real estate investment international securities
Once the objective of the portfolio is determined the securities to be included in the
portfolio must be selected. Normally the portfolio is selected from a list of high-quality
bonds that the portfolio manager has at hand. The portfolio manager has to decide the
goals before selecting the common stock. The goal may be to achieve pure growth,
growth with some income or income only. Once the goal has been selected, the portfolio
manager can select the common stocks. 34
35. 35. Projectsformba.blogspot.com 3) PORTFOLIO EXECUTION: The process of
portfolio management involves a logical set of steps common to any decision, plan,
implementation and monitor. Applying this process to actual portfolios can be complex.
Therefore, in the execution stage, three decisions need to be made, if the percentage
holdings of various asset classes are currently different from desired holdings. The
portfolio than, should be rebalanced. If the statement of investment policy requires pure
investment strategy, this is only thing, which is done in the execution stage. However,
many portfolio managers engage in the speculative transactions in the belief that such

transactions will generate excess risk-adjusted returns. Such speculative transactions

are usually classified as timing or selection decisions. Timing decisions over or under
weight various asset classes, industries or economic sectors from the strategic asset
allocation. Such timing decisions are known as tactical asset allocation and selection
decision deals with securities within a given asset class, industry group or economic
sector. The investor has to begin with periodically adjusting the asset mix to the desired
mix, which is known as strategic asset allocation. Then the investor or portfolio
manager can make any tactical asset allocation or security selection decision.5)
PORTFOLIO REVISION 35
36. 36. Projectsformba.blogspot.com Portfolio management would be an incomplete
exercise without periodic review. The portfolio, which is once selected, has to be
continuously reviewed over a period of time and if necessary revised depending on the
objectives of investor. Thus, portfolio revision means changing the asset allocation of a
portfolio. Investment portfolio management involves maintaining proper combination of
securities, which comprise the investors portfolio in a manner that they give maximum
return with minimum risk. For this purpose, investor should have continuous review and
scrutiny of his investment portfolio. Whenever adverse conditions develop, he can
dispose of the securities, which are not worth. However, the frequency of review
depends upon the size of the portfolio, the sum involved, the kind of securities held and
the time available to the investor. The review should include a careful examination of
investment objectives, targets for portfolio performance, actual results obtained and
analysis of reason for variations. The review should be followed by suitable and timely
action. There are techniques of portfolio revision. Investors buy stock according to
their objectives and return-risk framework. These fluctuations may be related to
economic activity or due to other factors. Ideally investors should buy when prices are
low and sell when prices rise to levels higher than their normal fluctuations. The
investor should decide how often the portfolio should be revised. If revision occurs to
often, transaction and analysis costs may be high.6) PORTFOLIO PERFORMANCE
EVALUATION: 36
37. 37. Projectsformba.blogspot.com Portfolio management involves maintaining a proper
combination of securities, which comprise the investors portfolio in a manner that they
give maximum return with minimum risk. The investor should have continues review
and scrutiny of his investment portfolio. These rates of return should be based on the
market value of the assets of the fund. Complete evaluation of the portfolio
performance must include examining a measure of the degree of risk taken by the fund.
A portfolio manager, by evaluating his own performance can identify sources of strength
or weakness. It can be viewed as a feedback and control mechanism that can make
the investment management process more effective. Good performance in the past
might have resulted from good luck, in which case such performance may not be
expected to continue in the future. On the other hand, poor performance in the past
might have been result of bad luck. Therefore, the first task in performance evaluation
is to determine whether past performance was good or poor. Then the second task is to
determine whether such performance was due to skill or luck. Good performance in the
past may have resulted from the actions of a highly skilled portfolio manager. The
performance of portfolio should be measured periodically, preferably once in a month or a

quarter. The performance of an individual stock should be compared with the overall
performance of the market. CHAPTER6 37
38. 38. Projectsformba.blogspot.com TYPES OF PORTFOLIO MANAGEMENT:The two
types of portfolio management services are available o the investors: Discretionary
portfolio Non-discretionary Management portfolio ManagementThe Discretionary portfolio
management services (DPMS): In this type of services, the client parts with his money
in favor of manager, who in return, handles all the paper work, makes all the decisions
and gives a good return on the investment and for this he charges a certain fees. In this
discretionary PMS, to maximize the yield, almost all portfolio managers parks the funds in
the money market securities such as overnight market, 182 days treasury bills and 90
days commercial bills. Normally, return on such investment varies from 14 to 18 per
cent, depending on the call money rates prevailing at the time of investment. 2. The Nondiscretionary portfolio management services: The manager function as a counselor,
but the investor is free to accept or reject the managers advice; the manager for a
services charge also undertakes the paper work. The manager concentrates on stock
market instruments with a portfolio tailor made to the risk taking ability of the
investor.EQUITY PORTFOLIO MANAGEMENT. 38
39. 39. Projectsformba.blogspot.com It is logical that the expected return of a portfolio
should depend on the expected return of the security contained in it. There are two
approaches to the selection of equity portfolio. One is technical analysis and the other
is fundamental analysis. Technical analysis assumes that the price of a stock depends
on supply and demand in the stock market. All financial and market information of
given security is already reflected in the market price. Charts are drawn to identify price
movements of a given security over a period of time. These charts enable the investors
to predict the future movement of the price of security. Equity portfolio is a risky
portfolio, but at the same time the return is also higher. Equity portfolio provides
highest returns. An efficient portfolio manager can obviously give more weight age to
fundamental analysis than the technical analysis. The fundamental analysis includes
the study of ratio analysis, past and present track record of the company, quality of
management, government policies etc. There may be several combinations of
investment portfolio. BONDS PORTFOLIO MANAGEMENT 39
40. 40. Projectsformba.blogspot.com The individual investors can invest in bond portfolio.
The portfolio can be spared over variety of securities. Investment in bond is less
risky and safe as compared to equity investment. However, the return on bond is very
low. There are no much fluctuations in bond prices. Therefore, there is no capital
appreciation in this case. Some bonds are tax saving which help the investor to reduce
his tax liability. There is no much liquidity in bonds, investment in bond portfolio is less
risky and safe but, return is reasonable, low liquidity and tax saving are some of the more
important features of bond portfolio investment. However, it is suitable for normal
investors for getting average return over their investment. Bond portfolio includes
different types of bond, tax free bonds and taxable bonds. Tax free bonds are issued by
public sector undertaking or Government on which interest s compounded half yearly and
payable accordingly. They have a maturity of 7 to 10 years with the facility for buyback.
The tax free bonds means the interest income on these bonds is not Therefore, the
interest rates on these bonds are very low. ADVANTAGES OF PORTFOLIO
MANAGEMENT 40

41. 41. Projectsformba.blogspot.com Individuals will benefits immensely by taking portfolio

management services for the following reason: - a) Whatever may be the status of the
capital market; over the long period capital markets have given an excellent return when
compared to other forms of investment. The return from bank deposits, units etc., is much
less than from stock market. b) The Indian stock markets are very complicated. Though
there are thousands of companies that are listed only a few hundred, which have the
necessary liquidity. It is impossible for any individual whishing to invest and sit down and
analyses all these intricacies of the market unless he does nothing else. c) Even if an
investor is able to visualize the market, it is difficult to investor to trade in all the major
exchanges of India, look after his deliveries and payments. This is further complicated by
the volatile nature of our markets, which demands constant reshuffling of port 41
42. 42. Projectsformba.blogspot.com IMPORTANCE OF PORTFOLIO MANAGEMENT In
the past one-decade, significant changes have taken place in the investment climate in
India. Portfolio management is becoming a rapidly growing area serving a broad array
of investors- both individual and institutional-with investment portfolios ranging in asset
size from thousands to cores of rupees. It is becoming important because of: i.
Emergence of institutional investing on behalf of individuals. A number of financial
institutions, mutual funds, and other agencies are undertaking the task of investing
money of small investors, on their behalf. ii. Growth in the number and the size of
invisible fundsa large part of household savings is being directed towards financial
assets. iii. Increased market volatility- risk and return parameters of financial assets are
continuously changing because of frequent changes in governments industrial and fiscal
policies, economic uncertainty and instability. iv. Greater use of computers for processing
mass of data. v. Professionalization of the field and increase use of analytical methods
(e.g. quantitative techniques) in the investment decision-making, and vi. Larger direct and
indirect costs of errors or shortfalls in meeting portfolio objectives- increased competition
and greater scrutiny by investors. 42
43. 43. Projectsformba.blogspot.com CHAPTER7PERSONS INVOLVED IN PORTFOLIO
MANAGEMENT 1) INVESTOR: Are the people who are interested in investing their
funds? 2) PORTFOLIO MANAGERS: Is a person who is in the wake of a contract
agreement with a client, advices ordirects or undertakes on behalf of the clients, the
management or distribution ormanagement of the funds of the client as the case may be.
3) DISCRETIONARY PORTFOLIO MANAGER: Means a manager who exercise under a
contract relating to a portfoliomanagement exercise any degree of discretion as to the
investment ormanagement of portfolio or securities or funds of clients as the case may
be. Therelationship between an investor and portfolio manager is of a highly
interactivenature. The portfolio manager carries out all the transactions pertaining to
theinvestor under the power of attorney during the last two decades, and
increasingcomplexity was witnessed in the capital market and its trading procedures
inthis context a key (uninformed) investor formed ) investor found himself in atricky
situation , to keep track of market movement ,update his knowledge, yetstay in the capital
market and make money , therefore in looked forward toresuming help from portfolio
manager to do the job for him . The portfoliomanagement seeks to strike a balance
between risks and return. The generally rule in that greater risk more of the profits but
S.E.B.I. in itsguidelines prohibits portfolio managers to promise any return to investor. 43

44. 44. Projectsformba.blogspot.comPortfolio management is not a substitute to the inherent

risks associated withequity investment. QUALITIES OF PORTFOLIO MANAGER 1.
Sound general knowledge: Portfolio management is an existing and challenging job.
He has to work in an extremely uncertain and conflicting environment. In the stock
market every new piece of information affects the value of the securities of different
industries in a different way. He must be able to judge and predict the effects of the
information he gets. He must have sharp memory, alertness, fast intuition and selfconfidence to arrive at quick decisions. 2. Analytical Ability: He must have his own
theory to arrive at the value of the security. An analysis of the securitys values,
company, etc. is continues job of the portfolio manager. A good analyst makes a good
financial consultant. 44
45. 45. Projectsformba.blogspot.com The analyst can know the strengths, weakness,
opportunities of the economy, industry and the company. 45
46. 46. Projectsformba.blogspot.com 3. Marketing skills: He must be good salesman. He
has to convince the clients about the particular security. He has to compete with the
Stock brokers in the stock market. In this Marketing skills help him a lot. 4. Experience:
In the cyclical behavior of the stock market history is often repeated, therefore the
experience of the different phases helps to make rational decisions. The experience of
different types of securities, clients, markets trends etc. makes a perfect professional
manager. 46
47. 47. Projectsformba.blogspot.com FACTORS AFFECTING THE INVESTORThere may be
many reasons why the portfolio of an investor may have to be changed.The portfolio
manager always remains alert and sensitive to the changes in therequirements of the
investor. The following are the some factors affecting the investor,which make it
necessary to change the portfolio composition. 1) Change in Wealth According to the
utility theory, the risk taking ability of the investor increases with increase in wealth. It
says that people can afford to take more risk as they grow rich and benefit from its
reward. But, in practice, while they can afford, they may not be willing. As people get
rich, they become more concerned about losing the newly got riches than getting richer.
So they may become conservative and vary risk- averse. The fund manager should
observe the changes in the attitude of the investor towards risk and try to understand
them in proper perspective. If the investor turns to be conservative after making huge
gains, the portfolio manager should modify the portfolio accordingly. 47
48. 48. Projectsformba.blogspot.com 2) Change in the Time Horizon As time passes, some
events take place that may have an impact on the time horizon of the investor. Births,
deaths, marriages, and divorces all have their own impact on the investment horizon.
There are, of course, many other important events in the persons life that may force a
change in the investment horizon. The happening or the non-happening of the events
will naturally have its effect. For example, a person may have planned for an early
retirement, considering his delicate health. But, after turning 55 years of age, if his
health improves, he may not take retirement. 3) Change in Liquidity Needs Investors
very often ask the portfolio manager to keep enough scope in the portfolio to get some
cash as and they want. This forces portfolio manager to increase the weight of liquid
investments in the asset mix. Due to this, the amounts available for investment in the
fixed income or growth securities that actually help in achieving the goal of the investor
get reduced. 48

49. 49. Projectsformba.blogspot.com That is, the money taken out today from the portfolio
means that the amount and the return that would have been earned on it are no longer
available for achievement of the investors goals. 4) Changes in Taxes It is said that
there are only two things certain in this world- death and taxes. The only uncertainties
regarding them relate to the date, time, place and mode. Portfolio manager have to
constantly look out for changes in the tax structure and make suitable changes in the
portfolio composition. The rate of tax under long- term capital gains is usually lower
than the rate applicable for income. If there is a change in the minimum holding period for
long-term capital gains, it may lead to revision. The specifics of the planning depend on
the nature of the investments 5) Others There can be many of other reasons for which
clients may ask for a change in the asset mix in the portfolio. For example, there may
be change in the return available on the investments that have to be compulsorily made
with the government say, in the form of provident fund. This may call for a change in
the return required from the other investments. 49
50. 50. Projectsformba.blogspot.com CHAPTER 8 RISK RETURN ANALYSISRISK ON
PORTFOLIO : The expected returns from individual securities carry some degree of risk.
Riskon the portfolio is different from the risk on individual securities. The risk isreflected in
the variability of the returns from zero to infinity. Risk of the individualassets or a portfolio
is measured by the variance of its return. The expected returndepends on the probability
of the returns and their weighted contribution to therisk of the portfolio. These are two
measures of risk in this context one is theabsolute deviation and other standard deviation.
Most investors invest in a portfolio of assets, because as to spread risk by notputting all
eggs in one basket. Hence, what really matters to them is not the riskand 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: 1) 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. 50
51. 51. Projectsformba.blogspot.com 2) Purchasing Power Risk: 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. 3) 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. 4) 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
51
52. 52. Projectsformba.blogspot.com companys earnings per share are more but
dependence on borrowings exposes it to risk of winding up for its inability to honor 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. 5)
Systematic Risk or Market Related Risk: 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. 6) 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 ownrisk or uncertainty; these risks arise out of variability of yields and
uncertainty ofappreciation or depreciation of share prices, losses of liquidity etc The risk
over time can be represented by the variance of the returns while thereturn over time is
capital appreciation plus payout, divided by the purchaseprice of the share. 52
53. 53. Projectsformba.blogspot.com Normally, the higher the risk that the investor takes, the
higher is the return.There is, however, a risk less return on capital of about 12% which is
the bank,rate charged by the R.B.I or long term, yielded on government securities
ataround 13% to 14%. This risk less return refers to lack of variability of return andno
uncertainty in the repayment or capital. But other risks such as loss of liquiditydue to
parting with money etc., may however remain, but are rewarded by thetotal return on the
capital. Risk-return is subject to variation and the objectives of the portfolio managerare
to reduce that variability and thus reduce the risk by choosing an appropriateportfolio.
Traditional approach advocates that one security holds the better, it isaccording to the
modern approach diversification should not be quantity thatshould be related to the
quality of scripts which leads to quality of portfolio. Experience has shown that beyond
the certain securities by adding moresecurities expensive.RETURNS ON
PORTFOLIO:Each security in a portfolio contributes return in the proportion of its
investmentsin security. Thus the portfolio expected return is the weighted average of
theexpected return, from each of the securities, with weights representing theproportions
share of the security in the total investment. Why does an investorhave so many
securities in his portfolio? If the security ABC gives the maximumreturn why not he
invests in that security all his funds and thus maximize return? 53
54. 54. Projectsformba.blogspot.comThe answer to this questions lie in the investors
perception of risk attached toinvestments, his objectives of income, safety, appreciation,
liquidity and hedgeagainst loss of value of money etc. this pattern of investment in
different assetcategories, types of investment, etc., would all be described under the
caption ofdiversification, which aims at the reduction or even elimination of non-

systematicrisks and achieve the specific objectives of investors CHAPTER9 ASSEST

ALLOCATION INTRODUCTION The portfolio manager has to invest in these securities
that form the optimalportfolio. Once a portfolio is selected the next step is the selection of
the specificassets to be included in the portfolio. Assets in this respect means group
ofsecurity or type of investment. While selecting the assets the portfolio managerhas to
make asset allocation. It is the process of dividing the funds amongdifferent asset class
portfolios. ASSET ALLOCATION The different asset class definitions are widely
debated, but four commondivisions are stocks, bonds, real-estate and commodities. The
exercise ofallocating funds among these assets (and among individual securities
withineach asset class) is what investment management firms are paid for. 54
55. 55. Projectsformba.blogspot.com Asset classes exhibit different market dynamics, and
different interactioneffects; thus, the allocation of monies among asset classes will have a
significanteffect on the performance of the fund. Some research suggests that
allocationamong asset classes has more predictive power than the choice of
individualholdings in determining portfolio return. Arguably, the skill of a
successfulinvestment manager resides in constructing the asset allocation, and
separatelythe individual holdings, so as to outperform certain benchmarks (e.g., the
peergroup of competing funds, bond and stock indices). In order to achieve long term
success, individual investors should concentrateon the allocation of their money among
stocks, bonds and cash. It means howmuch to invest in stocks? How much to invest in
bonds? And how much to keepin cash reserves? Thus, the asset allocation decision is
the most importantdeterminant of investment performance. The basic long term objective
of any investor should be to maximize his realoverall return on initial investment after
investment. To achieve this objective, theinvestor should look where the best bargains lie.
55
56. 56. Projectsformba.blogspot.com Asset allocation means different things to different
people. The portfoliomanager has to complete the following stages before making asset
allocation.(a) SECURITY SELECTION: This means identifying groups of securities in
each asset class and decides theoptimal portfolio. The following are the different asset
classes:(1) Equity shares-new issues (5) PSU bonds(2) Equity shares-old issues (6)
Government Securities(3) Preference Shares (7) Company Fixed Deposits(4)
DebenturesPortfolio management is handling the fund on behalf of the company or
institutionin order to determine the suitable combination of different assets so that the
totalrisk can be reduced to the minimum while the return can be achieved to themaximum
extent. This is a tricky job which needs efficiency of high caliber.Therefore, the portfolio
manager has to keep in mind the following factors whilemaking asset allocation and
design an efficient portfolio. a) Liquidity or marketability f) Capital appreciation or gain b)
Safety of investment g) Funds requirements c) Tax Saving d) Maximization of return e)
Minimization of return 56
57. 57. (b) BASIS OF SELECTION OF EQUITY PORTFOLIO: A portfolio is a collection of
securities. It is essential that every securitybe viewed in a portfolio context. It is logical
that the expected return of aportfolio should depend on the expected return of each of the
securitycontained in it. Moreover, the amounts invested in each security shouldalso be
important. There are two approaches to the selection of equity portfolio. One istechnical
analysis and the other is fundamental analysis. Technicalanalysis assumes that the price
of a stock depends on supply and demandin the capital market. All financial and market

58.

59.

60.

61.

62.

information of given securityis already reflected in the market price. Charts are drawn to
identify pricemovements of a given security over a period of time. These charts enableus
to predict the future movement of the security. The fundamental analysis includes the
study of ratio analysis, past andpresent track record of the company, quality of
management, governmentpolicies etc an efficient portfolio manager can obviously give
moreweight to fundamental analysis than technical analysis.
DIVERSIFICATIONInvesting funds in a single security is advisable only if the
securitysperformance is rewarding. To reduce risk of a portfolio investors resort
todiversification. Diversification means shifting form one security to anothersecurity. The
maximum benefits of risk reduction can be achieved by justhaving of 10 to 15 carefully
selected securities.
58. Portfolio risk can be divided into two groups- diversible risk and non-diversible risk.
Diversible risk arises from companys specific factors.Hence, such risk can be diversified
by including stocks of other companiesin the portfolio.Non-diversible risk arises from the
influence of economy wide factorswhich affect returns of all companies; investors cannot
avoid the riskarising from them. Often investors tend to buy or sell securities on
casualtips, prevailing mood in the market, sudden impulse, or to follow others. Aninvestor
should investigate the following factors about the stock to beincluded in his portfolio:(a)
Earnings per share (b) Growth potential (c) Dividend and bonus records (d) Business,
financial and market risks (e) Behavior of price-earnings ratio (f) High and low prices of
the stock (g) Trend of share prices over the few months or weeks. Y C
--------------------------------------- B HIGH RISK (SHARES) A (DEBENT) MEDIUM RISK O X
Risk free (Bank Deposits)We can observe from the above diagram that the strategy of an
investorshould be at A, B or C respectively, depending upon his preferences andincome
requirements. If he takes some risk at B or C, the risk can bereduced if it is concerned
with a specific company risk, but the market riskis outside his control. The risk can be
reduced by a proper diversification of
59. scripts in the portfolio. There may be a combination of A, B and C positionsin his
portfolio so that he can have a diversified risk-return pattern. Thisdiversification can help
to minimize risk and maximum the returns.
60. CHAPTER10 PRIMARY SURVEYPurpose of the study: To ascertain investor
awareness about services provided by portfolio management institutions and the interest
shown by investor to invest in portfolio management services. To know whether they
are interested to hire such services in future and if not, why?
61. QUESTIONNAIRESurvey on investors views about Portfolio Management Name:
Age: Occupation: Are you aware of services offered by portfolio manager? Yes No If
yes, what types of services you are aware of? Management of Mutual fund investment
Management of Equities Management of Money market investment Advisory or
consultancy services Others Would you want to hire a portfolio manager at present or
in future? Yes No
62. If yes, for what type of services? Investments in Mutual Funds Investments in
Equities Investments in Money market Investments in other[s] (If other please specify)
Advisory or consultancy service If No why? What is the Percentage of commission that
you are ready to pay to portfolio manager for services provided by him in? Equities
Money market investment Mutual fund investment Advisory or consultancy services Other
investment (If other please specify)

63. 63. Do you think there will be growth in portfolio management in future? If Yes why? If
No, why? What type of services would you want from portfolio manager in future?
Suggestions if any: ____________ Signature
64. 64. CHAPTER11 FINDINGSThis case study has been conducted on various age groups
of individualinvestors on portfolio management. These consist of age group ranging
from18-30, 30-45, 45-60 and 60 & above. Following interpretation has been made onthe
basis of the information collected from individual investors of various agegroups through
questionnaire: Age group of 18-30 is more aware about services offered by portfolio
manager whereas age group of 60 & above is less aware of such services.
Management of mutual fund investment, management of equities, management of money
market investment, advisory and consultancy services are the services provided by the
portfolio management institution. Amongst these, advisory and consultancy services are
the services that the individual investors are more aware of. Due to lack of experience
and market knowledge, the age group of 45-60 is more interested to hire portfolio
manager at present in order to manage their portfolio. The age group ranging from 18-30
is more interested in making investment in equities whereas group ranging from 60 &
above are more interested in making investment in mutual fund. On the other hand, age
group of 30-45 and 45-60 are least interested in any of the services
65. 65. provided by portfolio management institution. Reasons specified for the presence of
disinterest in any of these services were that the investors are having good hold on their
investment. Also they possess good knowledge with regards to market fluctuations,
investment portfolios and other factors relating to portfolio management. All the age
groups of individual investors in portfolio management believe that there is a better scope
for portfolio management in future. CHAPTER12 CONCLUSIONFrom the above
discussion it is clear that portfolio functioning is based onmarket risk, so one can get the
help from the professional portfoliomanager or the Merchant banker if required before
investment becauseapplicability of practical knowledge through technical analysis can
help aninvestor to reduce risk. In other words Security prices are determined bymoney
manager and home managers, students and strikers, doctors anddog catchers, lawyers
and landscapers, the wealthy and the wanting. Thisbreadth of market participants
guarantees an element of unpredictabilityand excitement. If we were all totally logical and
could separate ouremotions from our investment decisions then, the determination of
pricebased on future earnings would work magnificently. And since we would allhave the
same completely logical expectations, price would only changewhen quarterly reports or
relevant news was released. I believe the future is only the past again, entered through
anothergate Sir Arthur wing Pinero. 1893.
66. 66. If price are based on investors expectations, then knowing what asecurity should sell
for become less important than knowing what otherinvestors expect it to sell for. There
are two times of a mans life when heshould not speculate; when he cant afford it and
when he can MarkTwin, 1897. A Casino make money on a roulette wheel, not by
knowing whatnumber will come up next, but by slightly improving their odds with
theaddition of a 0 and 00. Yet many investors buy securities withoutattempting to
control the odds. If we believe that this dealings is not aGambling we have to start up it
with intelligent way. CHAPTER13 BIBLIOGRAPHYREFERENCE BOOKS:Security
Analysis and Portfolio Management - Dr. P.K.BANDGARInvestment Analysis and Portfolio
ManagementEconomic TimesNDTV ProfitForbes India MagazineDARE MagazineMoney

control.comSecurities Analysis and Portfolio Management, sixth edition, Donald EFisher,

Ronald J. Jordan, Portfolio management 571-572, WEBLIOGRAPHYSOURCES:
www.google.com www.yahoo.com
67. 67. www.wikipedia.comwww.Kotaksecurities.com