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Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Final Semester Project Report

Analysis of Investment in Stock Market


& Portfolio Management Using
Instrument Derivatives - Futures

Under the kind guidance of:


J.P Singh
Department of Management Studies
Indian Institute of Technology, Roorkee

Submitted By:
Mohan Chakradhar V
Enrolment No: 11810047
MBA Class of 2013
Department of Management Studies
Indian Institute of Technology, Roorkee

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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EVALUATION SHEET

This is to certify that Mr. Mohan Chakradhar V,


student of Department of Management Studies, Indian
Institute of Technology Roorkee has completed his final
year project adhering to the submission schedule.
The project titled Analysis of Investment in Stock
Market & Portfolio Management Using
Instrument Derivatives - Futures conducted by Mr.
Mohan Chakradhar V, student of Department of
Management Studies, Indian Institute of Technology
Roorkee has been examined for the degree of Masters
in Business Administration.

________________________

PROJECT GUIDE

___________________________

EXAMINER

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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ACKNOWLEDGEMENT
I express my sincere gratitude to Mr. J.P. Singh who
helped me throughout this extensive project, gave me
the right guidance and his valuable suggestions
regarding the project.
Through this acknowledgment, I express my sincere
gratitude to my colleagues at Department of
Management Studies, IIT Roorkee who have helped me
in this project and made it a worthwhile experience.

Mohan Chakradhar V

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INDEX
1. INDUSTRY PROFILE

2. OBJECTIVE OF THE STUDY

3. METHODOLOGY OF THE PROJECT

4. LIMITATIONS OF THE PROJECT

10

5. ANALYSIS OF INVESTMENT

11

5a. WHAT IS INVESTMENT?

11

5b. TYPES OF INVESTMENT

11

5c. CHARACTERISICS OF INVESTMENT

14

5d. IMPORTANCE

16

5e. INVESTMENTS AVENUES

19

6. RISK RETURN OF VARIOUS INVESTMENT


AVENUES

32

7. PORTFOLIO

38

8. RANDOM PORTFOLIO

50

9. DEFENSIVE PORTFOLIO

53

10. MODRATE PORTFOLIO

56

11. AGGRESSIVE PORTFOLIO

59

12. DERIVATIVES

63

13. INTRODUCTION TO FUTURE

65

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13a. DISTINCTION BETWEEN FUTURE AND FORWARD


CONTRACTS:

66

13b. FUTURE TERMINOLOGY

67

13c. DIFFERENCE BETWEEN FUTURES AND OPTIONS

69
14. PAYOFF FOR DERIVATIVES CONTRACT

70

15. USING INDEX FUTURES

72

16. HEDGING

74

17. SPECULATION

82

18. INDUSTRY ANALYSIS

89

18a.COMPANY ANALYSIS

93

19. RATIO ANALYSIS

101

20. FINDING OF THE REPORT

107

21. RECOMMENDATION

110

22. BIBLIOGRAPHY

111

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INDUSTRY PROFILE
Journey of Indian stock market
Indian Stock Markets are one of the oldest in Asia. Its history dates
back to nearly 200 years ago. The earliest records of security
dealings in India are meager and obscure. The East India Company
was the dominant institution in those days and business in its loan
securities used to be transacted towards the close of the eighteenth
century.
By 1830's business on corporate stocks and shares in Bank and
Cotton presses took place in Bombay. Though the trading list was
broader in 1839, there were only half a dozen brokers recognized
by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial
enterprise and brokerage business attracted many men into the
field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from
United States of Europe was stopped; thus, the 'Share Mania' in
India begun. The number of brokers increased to about 200 to 250.
However, at the end of the American Civil War, in 1865, a disastrous
slump began (for example, Bank of Bombay Share which had
touched Rs 2850 could only be sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of
Civil War in 1874, found a place in a street (now appropriately
called as Dalal Street) where they would conveniently assemble
and transact business. In 1887, they formally established in
Bombay, the "Native Share and Stock Brokers' Association" (which
is alternatively known as "The Stock Exchange "). In 1895, the

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Stock Exchange acquired a premise in the same street and it was


inaugurated in 1899. Thus, the Stock Exchange at Bombay was
consolidated.

Sr. As on 31st
No. December
No. of
1
Stock
Exchanges
2

No. of
Listed Cos.

1946 1961 1971 1975 1980


7

1125 1203 1599 1552 2265

1985

1991

1995

14

20

22

4344

6229

8593

No. of
Stock
1506 2111 2838 3230 3697 6174
8967
11784
Issues of
Listed Cos.
Capital of
Listed
270 753 1812 2614 3973 9723 32041 59583
Cos. (Cr.
Rs.)
Market
value of
Capital of
971 1292 2675 3273 6750 25302 110279 478121
Listed
Cos. (Cr.
Rs.)
Capital per
Listed Cos.
24
63
113 168 175
224
514
693
(4/2)
(Lakh Rs.)
Market
Value of
Capital per
Listed
86
107 167 211 298
582
1770
5564
Cos. (Lakh
Rs.)
(5/2)
Appreciated
value
of Capital
358 170 148 126 170
260
344
803
per
Listed Cos.
(Lakh Rs.)

Growth Pattern of the Indian Stock Market

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OBJECTIVE OF THE STUDY

To provide basic idea of different stock market investment


instruments to investor.
To provide knowledge to investor about various type of
risk associated with various investment instruments.
To provide investor knowledge about P\E, P\BV and Beta
that would help them in selection of script and creation of
portfolio.
To help investor in learning about derivative instrument
future for the purpose of speculation and hedging.

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METHODOLOGY OF THE PROJECT


Research problem:
To identified the Stock Market Investment Avenue and methods to
help investor in selection of script to create portfolio. And the
measures of hedging the portfolio with the use of derivative
instrument future.
Research design:
Research design is exploratory as the basic objective is to identified
the stocks and methods to create and protect portfolio.
Data collection:
Primary data: - Primary data are collected by my regularly tracking
the stock price of various scripts selected
Secondary data: - Secondary data are collected from various
journals, websites and financial news paper.

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LIMITATIONS OF THE PROJECT

The time duration given to complete the report was


not sufficient.
The report is basically is made between the horizon of
two months and the situation of market is very
dynamic so the conclusion or the return might not
reflect the true picture.

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ANALYSIS OF INVESTMENT
WHAT IS INVESTMENT?
Investment is the activity, which is made with the objective of
earning some sort of positive returns in the future. It is the
commitment of the funds to earn future returns and it involves
sacrificing the present investment for the future return. Every
person makes the investment so that the funds he has increases as
keeping cash with himself is not going to help as it will not generate
any returns and also with the passage of time the time value of the
money will come down. As the inflation will rise the purchasing
power of the money will come down and this will result that the
investor who does not invest will become more poor as he will not
have any funds whose value have been increased. Thus every
person whether he is a businessman or a common man will make
the investment with the objective of getting future returns.

TYPES OF INVESTMENT:There are basically three types of investments from which the
investors can choose. The three kinds of investment have their own
risk and return profile and investor will decide to invest taking into
account his own risk appetite. The main types of investments are: -

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Economic investments:These investments refer to the net addition to the capital stock of
the society.

The capital stock of the society refers to the

investments made in plant, building, land and machinery which are


used for the further production of the goods.

This type of

investments are very important for the development of the economy


because if the investment are not made in the plant and machinery
the industrial production will come down and which will bring down
the overall growth of the economy.

Financial Investments:This type of investments refers to the investments made in the


marketable securities which are of tradable nature. It includes the
shares, debentures, bonds and units of the mutual funds and any
other securities which are covered under the ambit of the Securities
Contract Regulations Act definition of the word security. The
investments made in the capital market instruments are of vital
important for the country economic growth as the stock market
index is called as the barometer of the economy.

General Investments:These investments refer to the investments made by the common


investor in his own small assets like the television, car, house,
motor cycle. These types of investments are termed as the
household investments. Such types of investment are important for
the domestic economy of the country. When the demand in the
domestic economy boost the over all productions and the
manufacturing in the industrial sectors also goes up and this causes
rise in the employment activity and thus boost up the GDP growth

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rate of the country. The organizations like the Central Statistical


Organization (CSO) regularly takes the study of the investments
made in the household sector which shows that the level of
consumptions in the domestic markets.

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CHARACTERISICS OF INVESTMENT
Certain features characterize all investments. The following are the
main characteristic features in investments: -

1. Return: All investments are characterized by the expectation of a return. In


fact, investments are made with the primary objective of deriving a
return. The return may be received in the form of yield plus capital
appreciation. The difference between the sale price & the purchase
price is capital appreciation. The dividend or interest received from
the investment is the yield. Different types of investments promise
different rates of return. The return from an investment depends
upon the nature of investment, the maturity period & a host of other
factors.

2. Risk: Risk is inherent in any investment. The risk may relate to loss of
capital, delay in repayment of capital, nonpayment of interest, or
variability of returns. While some investments like government
securities & bank deposits are almost risk less, others are more
risky. The risk of an investment depends on the following factors.
0

The longer the maturity period, the longer is the risk.

The lower the credit worthiness of the borrower, the higher is


the risk.

The risk varies with the nature of investment. Investments in


ownership securities like equity share carry higher risk compared to
investments in debt instrument like debentures & bonds.

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3. Safety: The safety of an investment implies the certainty of return of capital


without loss of money or time. Safety is another features which an
investors desire for his investments. Every investor expects to get
back his capital on maturity without loss & without delay.

4. Liquidity: An investment, which is easily saleable, or marketable without loss


of money & without loss of time is said to possess liquidity. Some
investments like company deposits, bank deposits, P.O. deposits,
NSC, NSS etc. are not marketable. Some investment instrument
like preference shares & debentures are marketable, but there are
no buyers in many cases & hence their liquidity is negligible. Equity
shares of companies listed on stock exchanges are easily
marketable through the stock exchanges.
An investor generally prefers liquidity for his investment, safety of
his funds, a good return with minimum risk or minimization of risk &
maximization of return.

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IMPORTANCE
In the current situation, investment is becomes necessary for
everyone & it is important & useful in the following ways:

1. Retirement planning: Investment decision has become significant as people retire


between the ages of 55 & 60. Also, the trend shows longer life
expectancy. The earning from employment should, therefore, be
calculated in such a manner that a portion should be put away as a
savings. Savings by themselves do not increase wealth; these must
be invested in such a way that the principal & income will be
adequate for a greater number of retirement years. Increase in
working population, proper planning for life span & longevity have
ensured the need for balanced investments.

2. Increasing rates of taxation: Taxation is one of the crucial factors in any country, which introduce
an element of compulsion, in a persons saving. In the form
investments, there are various forms of saving outlets in our
country, which help in bringing down the tax level by offering
deductions in personal income.
For examples: 0

Unit linked insurance plan,

Life insurance,

National saving certificates,

Development bonds,

Post office cumulative deposit schemes etc.

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3. Rates of interest: It is also an important aspect for sound investment plan. It varies
between investment & another. This may vary between risky & safe
investment, they may also differ due different benefits schemes
offered by the investments. These aspects must be considered
before actually investing. The investor has to include in his portfolio
several kinds of investments stability of interest is as important as
receiving high rate of interest.

4. Inflation: Since the last decade, now a days inflation becomes a continuous
problem. In these years of rising prices, several problems are
associated coupled with a falling standard of living. Before funds
are invested, erosion of the resource will have to be carefully
considered in order to make the right choice of investments. The
investor will try & search outlets, which gives him a high rate of
return in form of interest to cover any decrease due to inflation. He
will also have to judge whether the interest or return will be
continuous or there is a likelihood of irregularity. Coupled with high
rate of interest, he will have to find an outlet, which will ensure
safety of principal. Beside high rate of interest & safety of principal
an investor also has to always bear in mind the taxation angle, the
interest earned through investment should not unduly increase his
taxation burden otherwise; the benefit derived from interest will be
compensated by an increase in taxation.

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5. Income: For increasing in employment opportunities in India., investment


decisions have assumed importance. After independence with the
stage of development in the country a number of organization &
services came into being.
For example: The Indian administrative services,
Banking recruitment services,
Expansion in private corporate sector,
Public sector enterprises,
Establishing of financial institutions, tourism, hotels, and education.
More avenues for investment have led to the ability & willingness of
working people to save & invest their funds.

6. Investment channels: The growth & development of country leading to greater economic
activity has led to the introduction of a vast array of investment
outlays. Apart from putting aside saving in savings banks where
interest is low, investor has the choice of a variety of instruments.
The question to reason out is which is the most suitable channel?
Which media will give a balanced growth & stability of return? The
investor in his choice of investment will give a balanced growth &
stability of return? The investor in his choice of investment will have
try & achieve a proper mix between high rates of return to reap the
benefits of both.
For example: 0

Fixed deposit in corporate sector

Unit trust schemes.

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INVESTMENTS AVENUES:There are various investments avenues provided by a country to its


people depending upon the development of the country itself. The
developed countries like the USA and the Japan provide variety of
investments as compared to our country. In India before the post
liberalization era there were limited investments avenues available
to the people in which they could invest. With the opening up of the
economy the number of investments avenues have also increased
and the quality of the investments have also improved due to the
use of the professional activity of the players involved in this
segment. Today investment is no longer a process of trial and error
and it has become a systematized process, which involves the use
of the professional investment solution provider to play a greater
role in the investment process.
Earlier the investments were made without any analysis as the
complexity involved the investment process were not there and also
there was no availability of variety of instruments. But today as the
number of investment options have increased and with the variety
of investments options available the investor has to take decision
according to his own risk and return analysis.

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An investor has a wide array of Investment Avenue. They are


as under:

Investment

Equity

Fixed Income

Deposits

Mutual Fund

Tax Sheltered

Life Insurance

Real Estate

Precious

Financial Derivatives

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EQUITY SHARES: -

Types of Equity Instruments:


Ordinary Shares
Ordinary shareholders are the owners of a company, and each
share entitles the holder to ownership privileges such as dividends
declared by the company and voting rights at meetings. Losses as
well as profits are shared by the equity shareholders. Without any
guaranteed income or security, equity shares are a risk investment,
bringing with them the potential for capital appreciation in return for the
additional risk that the investor undertakes in comparison to debt
instruments with guaranteed income.

Preference Shares
Unlike equity shares, preference shares entitle the holder to dividends
at fixed rates subject to availability of profits after tax. If preference
shares are cumulative, unpaid dividends for years of inadequate
profits are paid in subsequent years. Preference shares do not
entitle the holder to ownership privileges such as voting rights at
meetings.

Equity Warrants
These are long term rights that offer holders the right to purchase
equity shares in a company at a fixed price (usually higher than the
current market price) within a specified period. Warrants are in the
nature of options on stocks.

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Classification in terms of Market Capitalisation


Market capitalisation is equivalent to the current value of a company
i.e. current market price per share times the number of outstanding
shares. There

are

Large

Capitalisation companies, Mid-Cap

companies and Small-Cap companies. Different schemes of a fund


may define their fund objective as a preference for Large or Mid or
Small-Cap companies' shares. Large Cap shares are more liquid and
hence easily tradable. Mid or Small Cap shares may be thought of
as having greater growth potential. The stock markets generally
have different indices available to track these different classes of
shares.

Classification in terms of Anticipated Earnings


In terms of the anticipated earnings of the companies, shares are
generally classified on the basis of their market price in relation to
one of the following measures:
* Price/Earnings Ratio is the price of a share divided by the
earnings per share, and indicates what the investors are willing
to pay for the company's earning potential. Young and/or fast
growing companies usually have high P/E ratios. Established
companies in mature industries may have lower P/E ratios. The
P/E analysis is sometimes supplemented with ratios such as
Market Price to Book Value and Market Price to Cash Flow per
share.

Dividend Yield for a stock is the ratio of dividend paid per share
to current market price. Low P/E stocks usually have high
dividend yields. In India, at least in the past, investors have
indicated a preference for the high dividend paying shares. What
matters to fund managers is the potential dividend yields based on
earnings prospects.

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Based on companies' anticipated earnings and in the light of the


investment management experience the world over, stocks are
classified in the following groups:

Cyclical Stocks are shares of companies whose earnings are


correlated with the state of the economy. Their earnings (and
therefore, their share prices) tend to go up during upward
economic cycles and vice versa. Cement or Aluminum
producers fall into this category, just as an example. These
companies may command relatively lower P/E ratios, and
have higher dividend pay-outs.

Growth Stocks are shares of companies whose earnings are


expected to increase at rates that exceed normal market levels.
They tend to reinvest earnings and usually have high P/E ratios and
low dividend yields. Software or information technology
company shares are an example of this type. Fund managers
try to identify the sectors or companies that have a high growth
potential.

Value Stocks are shares of companies in mature industries


and are expected to yield low growth in earnings. These
companies may, however, have assets whose values have not
been recognised by investors in general. Fund managers try to
identify such currently under-valued stocks that in their opinion
can yield superior returns later. A cement company with a lot of
real estate and a company with good brand names are
examples of potential value shares.

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FIXED INCOME SECURITIES

Many instruments give regular income. Debt instruments may be


secured by the assets of the borrowers as generally in case of
Corporate Debentures, or be unsecured as is the case with Indian
Financial Institution Bonds.
A debt security is issued by a borrower and is often known by the
issuer category, thus giving us Government Securities and Corporate
Securities or FI bonds. Debt instruments are also distinguished by their
maturity profile. Thus, instruments issued with short-term maturities,
typically under one year, are classified as Money Market Securities.
Instruments carrying longer than one-year maturities are generally
called Debt Securities.
Most debt securities are interest-bearing. However, there are
securities that are discounted securities or zero-coupon bonds that
do not pay regular interest at intervals but are bought at a discount
to their face value. A large part of the interest-bearing securities are
generally Fixed Income-paying, while there are also securities that
pay interest on a Floating Rate basis.

A Review of the Indian Debt Market


The Wholesale Debt Market segment deals in fixed income
securities and is fast gaining ground in an environment that has
largely focused on equities.
The Wholesale Debt Market (WDM) segment of the Exchange
commenced operations on June 30, 1994. This provided the first
formal screen-based trading facility for the debt market in the
country.

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This segment provides trading facilities for a variety of debt


instruments including Government Securities, Treasury Bills and
Bonds issued by Public Sector Undertakings/ Corporates/ Banks
like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers,
Certificate of Deposits, Corporate Debentures, State Government
loans, SLR and Non-SLR Bonds issued by Financial Institutions,
Units of Mutual Funds and Securitized debt by banks, financial
institutions, corporate bodies, trusts and others.
Large investors and a high average trade value characterize this
segment. Till recently, the market was purely an informal market
with most of the trades directly negotiated and struck between
various participants. The commencement of this segment by NSE
has brought about transparency and efficiency to the debt market,
along with effective monitoring and surveillance to the market.

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Business Growth in WDM Segment

Year

Market
Number Net Traded
Average
Average
Capitalisation
of
Value
Daily Value Trade Size
(Rs.crores) Trades (Rs.crores) (Rs.crores) (Rs.crores)

20052006

1,553,448

60,159

458,434.94

1,833.74

7.62

20042005

1,461,734 124,308

887,293.66

3,028.31

7.14

20032004

1,215,864 189,518 1,316,096.24

4,476.52

6.94

20022003

864,481 167,778 1,068,701.54

3,598.32

6.37

20012002

756,794 144,851

947,191.22

3,277.48

6.54

20002001

580,835

64,470

428,581.51

1,482.98

6.65

19992000

494,033

46,987

304,216.24

1,034.75

6.47

19981999

411,470

16,092

105,469.13

364.95

6.55

19971998

343,191

16,821

111,263.28

377.16

6.61

19961997

292,772

7,804

42,277.59

145.28

5.42

19951996

207,783

2,991

11,867.68

40.78

3.97

19941995

158,181

1,021

6,781.15

30.41

6.64

Instruments in the Indian Debt Market


Certificate of Deposit

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Certificates of Deposit (CD) are issued by scheduled commercial


banks excluding regional rural banks. These are unsecured
negotiable promissory notes. Bank CDs have a maturity period of 91
days to one year, while those issued by FIs have maturities
between one and three years.
Commercial Paper
Commercial paper (CP) is a short term, unsecured instrument
issued by corporate bodies (public & private) to meet short-term
working capital requirements. Maturity varies between 3 months and
1 year. This instrument can be issued to individuals, banks,
companies and other corporate bodies registered or incorporated in
India. CPs can be issued to NRIs on non-repatriable and nontransferable basis.
Corporate Debentures
The debentures are usually issued by manufacturing companies with
physical assets, as secured instruments, in the form of certificates
They are assigned a credit rating by rating agencies. Trading in
debentures is generally based on the current yield and market values
are based on yield-to-maturity. All publicly issued debentures are
listed on exchanges.

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Floating Rate Bonds (FRB)


These are short to medium term interest bearing instruments
issued by financial intermediaries and corporates. The typical
maturity of these bonds is 3 to 5 years. FRBs issued by financial
institutions are generally unsecured while those from private
corporates are secured. The FRBs are pegged to different reference
rates such as T-bills or bank deposit rates. The FRBs issued by the
Government of India are in the form of Stock Certificates or issued
by credit to SGL accounts maintained by the RBI.
Government Securities
These are medium to long term interest-bearing obligations issued
through the RBI by the Government of India and state governments.
The RBI decides the cut-off coupon on the basis of bids received
during auctions. There are issues where the rate is pre-specified and
the investor only bids for the quantity. In most cases the coupon is
paid semi-annually with bullet redemption features.
Treasury Bills
T-bills are short-term obligations issued through the RBI by the
Government of India at a discount. The RBI issues T-bills for different
tenures: now 91 -days and 364-days. These treasury bills are issued
through an auction procedure. The yield is determined on the
basis of bids tendered and accepted.
Bank/FI Bonds
Most of the institutional bonds are in the form of promissory notes
transferable by endorsement and delivery. These are negotiable
certificates, issued by the Financial Institutions such as the
IDBI/ICICI/ IFCI or by commercial banks. These instruments have

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been issued both as regular income bonds and as discounted longterm instruments (deep discount bonds).
Public Sector Undertakings (PSU) Bonds
PSU Bonds are medium and long term obligations issued by public
sector companies in which the government share holding is
generally greater than 51%. Some PSU bonds carry tax
exemptions. The minimum maturity is 5 years for taxable bonds and
7 years for tax-free bonds. PSU bonds are generally not guaranteed
by the government and are in the form of promissory notes
transferable by endorsement and delivery. PSU bonds in electronic
form (demat) are eligible for repo transactions.

MUTUAL FUND SCHEMES


An investor can participant in various schemes floated by mutual
fund instead of buying equity shares. In mutual funds invest in
equity shares & fixed income securities. There are three broad
types of mutual fund schemes.
Growth schemes
Income schemes
Balanced schemes

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DEPOSITS

It is just like fixed income securities earn a fixed return. However,


unlike fixed

income securities, deposits are negotiable or

transferable. The important types of deposits in India are:


Bank deposits
Company deposits
Postal deposits.

TAX-SHELTERED
TAX-SHELTERED SAVING
SAVING SCHEMES
SCHEMES
It provides benefits to those who participate in them. The most
important tax sheltered saving schemes in India is:
Employee provident fund scheme
Public provident fund schemes
National saving certificate

LIFE INSURANCE
In a broad sense, life insurance may be viewed as an investment.
Insurance premiums represent the sacrifice & the assured sum the
benefit. In India, the important types of insurance polices are:
Endowment assurance policy
Money back policy
Whole life policy
Premium back term assurance policy

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 31 - 31 -

REAL ESTATE

For the bilk of the investors the most important asset in their
portfolio is a residential house. In addition to a residential house,
the more affluent investors are likely to be interested in the following
types of real estate:
Agricultural land
Semi-urban land

PRECIOUS
OBJECTS
PRECIOUS
OBJECTS:
It is highly valuable in monetary terms but generally they are small
in size. The important precious objects are:
Gold & silver
Precious stones
Art objects

FINANCIAL DERIVATIVES

FINANCIAL DERIVATIVES: -

A financial derivative is an instrument whose value is derived from


the value of underlying asset. It may be viewed as a side bet on the
asset. The most import financial derivatives from the point of view of
investors are:
Options
Futures.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 32 - 32 -

RISK RETURN OF VARIOUS INVESTMENT


AVENUES
Every investment is characterized by return & risk. Investors
intuitively understand the concept of risk. A person making an
investment expects to get some return from the investment in the
future. But, as future is uncertain, so is the future expected return. It
is this uncertainty associated with the returns from an investment
that introduces risk into an investment. Risk arises where there is a
possibility of variation between expectation and realization with
regard to an investment.

Meaning of Risk
Risk & uncertainty are an integrate part of an investment
decision. Technically risk can be defined as situation where
the possible consequences of the decision that is to be taken
are known. Uncertainty is generally defined to apply to
situations where the probabilities cannot be estimated.
However, risk & uncertainty are used interchangeably.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Types of risks
1. Systematic risk: Systematic risk is non diversifiable & is associated with the
securities market as well as the economic, sociological, political, &
legal considerations of prices of all securities in the economy. The
affect of these factors is to put pressure on all securities in such a
way that the prices of all stocks will more in the same direction.
Example: During a boom period prices of all securities will rise & indicate that
the economy is moving towards prosperity. Market risk, interest rate
risk & purchasing power risk are grouped under systematic risk.

RISKS

SYSTAMATIC
Market Risk
Interest Rate Risk
Purchasing power Risk

UNSYSTAMATIC
Business Risk
Financial Risk

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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1. Systematic Risk
(A) Market risk
Market risk is referred to as stock variability due to changes in
investors attitudes & expectations. The investor reaction towards
tangible and intangible events is the chief cause affecting market
risk.
(B) Interest rate risk
There are four types of movements in prices of stocks in the
markets. These may termed as (1) long term, (2) cyclical (bull and
bear markets), (3) intermediate or within the cycle, and (4) short
term. The prices of all securities rise or fall depending on the
change in interest rates. The longer the maturity period of a security
the higher the yield on an investment & lower the fluctuations in
prices.
(C) Purchasing Power risk
Purchasing power risk is also known as inflation risk. This risk
arises out of change in the prices of goods & services and
technically it covers both inflation and deflation periods. During the
last two decades it has been seen that inflationary pressures have
been continuously affecting the Indian economy. Therefore, in India
purchasing power risk is associated with inflation and rising prices
in the economy.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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2. Unsystematic Risk: The importance of unsystematic risk arises out of the uncertainty
surrounding of particular firm or industry due to factors like labour
strike, consumer preferences and management policies. These
uncertainties directly affect the financing and operating environment
of the firm. Unsystematic risks can owing to these considerations be
said to complement the systematic risk forces.
(A) Business risk
Every corporate organization has its own objectives and goals and
aims at a particular gross profit & operating income & also accepts
to provide a certain level of dividend income to its shareholders. It
also hopes to plough back some profits. Once it identifies its
operating level of earnings, the degree of variation from this
operating level would measure business risk.
Example:If operating income is expected to be 15% in a year, business risk
will be low if the operating income varies between 14% and 16%. If
the operating income were as low as 10% or as high as 18% it
would be said that the business risk is high.
(B) Financial Risk: Financial risk in a company is associated with the method through
which it plans its financial structure. If the capital structure of a
company tends to make earning unstable, the company may fail
financially. How a company raises funds to finance its needs and
growth will have an impact on its future earnings and consequently
on the stability of earnings. Debt financing provides a low cost
source of funds to a company, at the same time providing financial

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 36 - 36 -

leverage for the common stock holders. As long as the earnings of


the company are higher than the cost of borrowed funds, the
earning per share of common stock is increased. Unfortunately, a
large amount of debt financing also increases the variability of the
returns of the common stock holder & thus increases their risk. It is
found that variation in returns for shareholders in levered firms
(borrowed funds company) is higher than in unlevered firms. The
variance in returns is the financial risk.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Risk Return Of Various Investment Alternatives


Managem
ent
Decision

Market
Investment

Risk

Business Interest

H
M
M
L
L
L
L
L
O
O
O
O
O

Growth stock
Speculative
common stock
Blue chips
Convertible
referred stock
Convertible
debentures
Corporate
bonds
Government
bonds
Short-term
bonds
Money market
funds
Life insurance
Commercial
banks
Unit trusts
Saving a/c
Cash

Power

Risk

Risk

L
L
L

L
L
L

L
L
L

M-H
H
H

Required
H

Purchasing
Risk

So, there are so many investment options & the different option
have different benefits & limitations in the sense risk associated
with it. So it is difficult for them to chose option, which give
maximum return at minimum risk.

PORTFOLIO
Meaning of portfolio:-

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Portfolio
A

combination

of

securities

with

different

risk

&

return

characteristics will constitute the portfolio of the investor. Thus, a


portfolio is the combination of various assets and/or instruments of
investments. The combination may have different features of risk &
return, separate from those of the components. The portfolio is also
built up out of the wealth or income of the investor over a period of
time, with a view to suit his risk and return preference to that of the
portfolio that he holds. The portfolio analysis of the risk and return
characteristics of individual securities in the portfolio and changes
that may take place in combination with other securities due to
interaction among themselves and impact of each one of them on
others.
An investor considering investments in securities is faced with the
problem of choosing from among a large number of securities. His
choice depends upon the risk and return characteristics of individual
securities. He would attempt to choose the most desirable
securities and like to allocate is funds over this group of securities.
Again he is faced with the problem of deciding which securities to
hold and how much to invest in each. The investor faces an infinite
number of possible portfolios or groups of securities. The risk and
return characteristics of portfolio differ from those of individual
securities combining to form a portfolio. The investor tries to choose
the optimal portfolio taking in to consideration the risk return
characteristics of all possible portfolios.
As the economy and the financial environment keep changing the
risk return characteristics of individual securities as well as
portfolios also change. This calls for periodical review and revision
of investment portfolios of investors. An investor invests his funds in
a portfolio expecting to get a good return consistent with the risk

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 39 - 39 -

that he has to bear. The return realized from the portfolio has to be
measured and the performance of the portfolio has to be evaluated.
It is evident that rational investment activity involves creation of an
investment portfolio. Portfolio management comprises all the
processes involved in the creation and maintenance of an
investment portfolio. It deals specifically with the security analysis,
portfolio analysis, portfolio selection, portfolio revision and portfolio
evaluation.

Portfolio

management

makes

use

of

analytical

techniques of analysis and conceptual theories regarding rational


allocation of funds. Portfolio management is a complex process
which tries to make investment activity more rewarding and less
risky.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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PORTFOLIO DESIGN

Before designing a portfolio one will have to know the intention of


the investor or the returns that the investor is expecting from his
investment. This will help in adjusting the amount of risk. This
becomes an important point from the point of view of the portfolio
designer because if the investor will be ready to take more risk at
the same time he will also get more returns. This can be more
appropriately understood from the figure drawn below.

R1

Expected Returns

R2

Risk less
Investment
M1

M2
Risk

From the above figure we can see that when the investor is ready
to take risk of M1, he is likely to get expected return of R 1, and if
the investor is taking the risk of M 2, he will be getting more returns
i.e. R2. So we can conclude that risk and returns are directly
related with each other. As one increases the other will also
increase in same of different proportion and same if one
decreases the other will also decrease.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 41 - 41 -

From the above discussion we can conclude that the investors


can be of the following three types:

1. Investors willing to take minimum risk and at the same time


are also expecting minimum returns.
2. Investors willing to take moderate risk and at the same time
are also expecting moderate returns.
3. Investors willing to take maximum risk and at the same time
are also expecting maximum returns.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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PORTFOLIO AGE RELATIONSHIP

Your age will help you determine what a good mix is / portfolio is
Age
below 30
30 t0 40
40 to 50
50 to 60
above 60

Portfolio
80% in stocks or mutual funds
10% in cash
10% in fixed income
70% in stocks or mutual funds
10% in cash
20% in fixed income
60% in stocks or mutual funds
10% in cash
30% in fixed income
50% in stocks or mutual funds
10% in cash
40% in fixed income
40% in stocks or mutual funds
10% in cash
50% in fixed income

These aren't hard and fast allocations, just guidelines to get you
thinking about how your portfolio should look. Your risk profile will
give you more equities or more fixed income depending on your
aggressive or conservative bias. However, it's important to always
have some equities in your portfolio (or equity funds) no matter
what your age. If inflation roars back, this will be the portion of your
investments that protects you from the damage, not your fixed
income.
Also, the fixed income of your portfolio should be diversified. If you
buy bonds and debentures directly or if you invest in FDs, then
make sure you have at least five different maturities to spread out
the interest rate risk.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Diversifying in equities and bonds means more than buying a


number of positions. Each position needs to be scrutinized as to
how it fits into the stocks or bonds that already are in your portfolio,
and how they might be affected by the same event such as higher
interest rates, lower fuel prices, etc. Put your portfolio together like
a puzzle, adding a piece at a time, each one a little different from
the other but achieving a uniform whole once the portfolio is
complete.

Types of portfolio for study:


In portfolio Design, we are considering only two types of portfolio.
They are as follow:
1. Random Portfolio
2. Sector Portfolio

1. Random portfolio
Random portfolio consists of the scripts that are randomly selected
by the investor by its own knowledge and preference of the stocks.
Here there is no analysis is done of the script, they are selected on
the tips and buts received by the investors from the external
sources.

Features of random portfolio

There is no method used for selection of the script in the


portfolio.

Selection is based on the individual criteria for the scripts.

The investment is made for higher return in short term.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Generally in India most of the portfolio are selected


according to this random methods as no investor himself in
that much analysis of the script.

Advantages of random portfolio

Easier to keep a track on the market as not much time


wasted in the analysis.

This portfolio seems to have perform better in short term as


script are generally which are performing better at that time.

Tips are available every where for the investor to pouch.

It is the experience of the individual that can fetch him good


return.

Disadvantages of random portfolio

There is every chance that you may select a script that has a
very bad background in the market.

Not every time the tips pay off for you. You need to have
strong reason to select that script.

Such portfolios are not able to sustain when there is a crisis


in the market.

There is a very high risk and return involve in such portfolio.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 45 - 45 -

2. Sector specific portfolio


Sector specific portfolio includes securities of those companies
which are in the same business. Sector portfolios are very useful
when there is a particular sector which is doing very good and has a
bright future a head. Sector portfolio has the securities of those
companies that engage in same kind of business.
e.g. In late 1990s sector that was providing the highest return was
information technology. Investors who have invested their money
in these securities had earned very high return.

Features of sector portfolio

Script form the same group of companies that are in to the


similar type of business.

Maximum exposure to the industry/sector. So any news or


event has the direct effect on the portfolio.

Risk regarding the portfolio increases as it is expose to


sector specific ups and downs.

Useful investment tools for speculator and short-sellers.

It is better suited for the sectors which have been providing


good revenue in the near past.

Advantages of sector portfolio

It is better suited to investors who are willing to take risk.

It provides better short term return then other portfolios.

It is easy to keep a watch on one sector rather than many.


You can have a good command over the things happening.

Limited exposure to other sectors keeps the portfolio safe


from the performance of other sectors in the economy.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

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Disadvantages of sector portfolio

It is a highly risky portfolio as risk associated with the sector


directly affects the performance of the portfolio.

These types of portfolios are not suited for long-term investor


as risk taken for the return can be too high.

There is always the possibly many scripts in the sector may not be
giving that much good attractive return as others. They may eat the
profits from other scripts.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 47 - 47 -

Book value is based on historical costs, not current values, but can
provide an important measure of the relative value of a company
over time. Book value can be figured as assets minus liabilities, or
assets minus liabilities and intangible items such as goodwill; either
way, the figure that results is the company's net book value. This is
contrasted with its market capitalization, or total share price value,
which is calculated by multiplying the outstanding shares by their
current market price.
You can also compare a company's market value to its book
value on a per-share basis. Divide book value by the number of
shares outstanding to get book value per share and compare the
result to the current stock price to help determine if the company's
stock is fairly valued. Most stocks trade above book value because
investors believe that the company will grow and the value of its
shares will, too. When book value per share is higher than the
current share price, a company's stock may be undervalued and a
bargain to investors.
In case of our sensex as we can see that it is currently trading at a
P/B ratio of 4.41 this shows the average P/B ratio prevailing in the
market. So any script trading below the P/B of 4.41 can said to be
under valued if we keep the BSE SENSEX as bench mark. But it
would be advisable for an investor to also look at the sector leaders
P/B ratio to know what is the common industry P/B and based on
that he can decide about whether to invest in the company or not.
As such there is no guarantee that low P/B would able to give
better return but this stocks are considered to be undervalued so
one can think that this companies are undervalued so chances of
appreciation are very high in case of low P/B scrip. Such companies
having low P/B ratio can be considered as value stock and one can
thin about investing in those companies.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 48 - 48 -

The P/E ratio as a guide to investment decisions


Earnings per share alone mean absolutely nothing. In order to get a
sense of how expensive or cheap a stock is, you have to look at
earnings relative to the stock price and hence employ the P/E ratio.
The P/E ratio takes the stock price and divides it by the last four
quarters' worth of earnings. If AB ltd is currently trading at Rs. 20 a
share with Rs. 4 of earnings per share (EPS), it would have a P/E of
5. Big increase in earnings is an important factor for share value
appreciation. When a stock's P-E ratio is high, the majority of
investors consider it as pricey or overvalued. Stocks with low P-E's
are typically considered a good value. However, studies done and
past market experience have proved that the higher the P/E, the
better the stock.
First, one can obtain some idea of a reasonable price to pay for the
stock by comparing its present P/E to its past levels of P/E ratio.
One can learn what is a high and what is a low P/E for the individual
company. One can compare the P/E ratio of the company with that
of the market giving a relative measure. One can also use the
average P/E ratio over time to help judge the reasonableness of the
present levels of prices. All this suggests that as an investor one
has to attempt to purchase a stock close to what is judged as a
reasonable P/E ratio based on the comparisons made. One must
also realize that we must pay a higher price for a quality company
with quality management and attractive earnings potential.
In the case if we look at the benchmark of BSE sensex on 1 st of
December it is trading at a P/E of 24.49. So if we just keep the
benchmark P/E in mind then we can say that any stock which is
trading bellow the P/E of 24.49 is available cheaply. But for an
investor it is also advisable to look at the industry P/E as it is more
important because just looking at the above position we can see

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 49 - 49 -

that SBI is trading at a very low P/E of around 8 but if you see that
in banking sector that to public sector banks the normal industry
P/E is 8 all most all banks are trading around 8 or bellow the P/E of
8.
So always it is advisable to look at what is the P/E of industry in
which we want to invest to get the better idea, because if we take
the example of IT industry there almost you will find companies
around P/E of 30. so if any IT company having of P/E would
considered to be a cheap option for the investor to invest in to. So
the investor should also look at the industry average P/E. The new
investor can know about the industry P/E or any other companies
P/E in any financial magazine or from the internet also if he does
not know how to calculate the P/E or is not having the data
available with them.
The formula for calculating the P/E ratio is

P/E = Current Market Price


Earning Per Share

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 50 - 50 -

RANDOM PORTFOLIO
Random portfolio consists of the scripts that are randomly selected
by the investor by its own knowledge and preference of the stocks.
Here there is no analysis is done of the script, they are selected on
the tips and buts received by the investors from the external
sources.
We are considering BETA factor to design our Random Portfolio.

Beta Factor Beta indicates the proportion of the yield of a


portfolio to the yield of the entire market (as indicated by some
index). If there is an increase in the yield of the market, the yield of
the individual portfolio may also go up. If the index goes up by 1.5%
and the yield of your portfolio goes up by 0.9%, the beta is 0.9/1.5
i.e 0.6. in other words, beta indicates that for every 1 % increase in
the market yield, the yield of the portfolio goes up by 0.6%. High
beta shares do move higher than the market when the market rises
and the yield of the fund declines more than the yield of the market
when the market falls. In the Indian context a beta of 1.2% is
considered very bullish.
You can be indifferent to market swings if you know your stocks
well. Or you can put your portfolio into neutral or bias for the upside
if you're bullish or a little for the downside if you're bearish. One way
to do that is to have a mix of stocks that have certain betas in your
portfolio. When investors are bullish on the market, they like to have
high beta stocks in their portfolios because if they're right, then their
stocks go up faster than the market in general, and their
performance is better than the market. If investors are bearish on
the market, then they use the low beta or negative beta stocks
because their portfolios will go down less than the market and their
performance will be better than the general market. And if they want
to be neutral, they can then make sure that they have stocks with a

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- 51 - 51 -

beta of 1 or develop a portfolio that has stocks with betas greater


than 1 and less than 1 so that they have the whole portfolio with an
average beta of 1.
A beta for a stock is derived from historical data. This means it has
no predictive value for the future, but it does show that if the stock
continues to have the same price patterns relative to the market in
general as it has in the past, you've got a way of knowing how your
portfolio will perform in relation to the market. And with a portfolio
with an average beta of 1, you can create your own index fund
since you'll move more or less in tandem with the market.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 52 - 52 -

Interpretation of Beta
When B = 1 means that the scrip has same volatility as compared
to Index. Suitable for moderate investor.
When B>1 means that scrip is more volatile as compared to market
suitable for aggressive investors.
When B<1 then scrip is less volatile as compared to market and
suitable for defensive investors.
Beta of scripts plays vital role in scrip selection in Portfolio
management. Portfolio can be created in many ways as sector
wise, diversified in various sector, beta wise scrip portfolio.
SO BASED ON THIS BETA NOW WE WILL PREPARE THREE
PORTFOLIO TO MATCH THE RISK TAKING CAPACITY OF AN
INVESTOR
THAT IS
PORTFOLIO

AGGRESSIVE

MODERATE

DEFENSIVE

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 53 - 53 -

DEFENSIVE PORTFOLIO

SR
NO.

SCRIPT

BETA PRICE ON 2-01-2013

Wi

ACC

0.72

530.45

9.68

CIPLA

0.78

440.00

10.48

DR REDDY

0.69

963.00

9.27

GRASIM

0.76

1375.3

10.22

HDFC BANK

0.76

713.45

10.22

ITC

0.81

285.65

10.89

RANBUXY

0.69

444.35

9.27

HERO HONDA

0.8

846.10

10.75

HDFC

0.82

1191.3

11.02

10

GLAXO

0.61

1111.6

8.20

Total Portfolio Investment = 10,00,000 Rs.

Total Portfolio Beta = Wi * BETA


=6.97 +8.18+6.40+7.76+7.76
+8.82+6.40+8.60+9.04+5.00
= 74.93 ~ 75

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 54 - 54 -

RETURN ON INDIVIDUAL SCRIPTS


1ST MONTH
SR NO. SCRIPT
1
2
3
4
5
6
7
8
9
10

BETA 2-01-2013 31-01-13 RETURN


IN %
ACC
0.72
530.45
574.20
8.25
CIPLA
0.78
440.00
442.25
0.51
DR REDDY
0.69
963.00
1121.25
16.43
GRASIM
0.76
1375.30
1454.25
5.74
HDFC BANK
0.76
713.45
762.45
6.87
ITC
0.81
140.10
154.80
10.49
RANBUXY
0.69
444.35
399.40
-10.12
HERO HONDA 0.80
846.10
857.20
1.31
HDFC
0.82
1191.30
1339.70
12.46
GLAXO
0.61
1111.60
1282.80
15.40

2ND MONTH
SR NO. SCRIPT
1
2
3
4
5
6
7
8
9
10

ACC
CIPLA
DR REDDY
GRASIM
HDFC BANK
ITC
RANBUXY
HERO HONDA
HDFC
GLAXO

BETA 2-01-13
0.72
0.78
0.69
0.76
0.76
0.81
0.69
0.80
0.82
0.61

28-02-13 RETURN
IN %
530.45
626.30
18.07
440.00
552.15
25.49
963.00 1306.10
35.63
1375.30 1742.60
26.71
713.45
737.15
3.32
140.10
172.45
23.09
444.35
429.50
-3.34
846.10
889.30
5.11
1191.30 1365.65
14.64
1111.60 1315.55
18.35

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- 55 - 55 -

RETURN IN DEFENSIVE PORT FOLIO


TOTAL PORTFOLIO INVESTMENT

= 10,00,000

VALUE OF PORTFOLIO AS ON 28-02-2013

= 1166628.41

TOTAL RETURN ON PORTFOLIO


= 1166628.41 - 1000000
= 166628.41

TOTAL RETURN IN % TERM = 16.66 %

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 56 - 56 -

MODRATE PORTFOLIO
SR NO. SCRIPT

BETA PRICE ON 2-01-2013

Wi

BHARTI

0.99

340.05

10.73

GUJARAT AMBUJA

0.86

79.30

9.32

BAJAJ AUTO

0.85

450.05

9.21

HLL

0.88

195.10

9.53

HINDALCO

1.00

146.20

10.83

LT

0.86

1825.65

9.32

MTNL

0.89

142.15

9.64

ZEE

0.90

157.90

9.75

1.00

1389.90

10.83

1.00

472.00

10.83

BHEL
9
10

PNB

Total Portfolio Investment = 10,00,000/- Rs.

Total Portfolio Beta = Wi * BETA


= 10.62 + 8.01+7.83+8.39+10.83+
8.01+8.58+8.78+10.83+10.83
= 92.72 ~ 93

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 57 - 57 -

RETURN ON INDIVIDUAL SCRIPTS


1ST MONTH
SR NO. SCRIPT
1
2
3
4
5
6
7
8
9
10

BHARTI
GUJARAT AMBUJA
BAJAJ AUTO
HLL
HINDALCO
LT
MTNL
ZEE
BHEL
PNB

BETA 2-01-2013 31-01-13 RETURN


IN %
0.99
340.05
357.25
5.06%
0.86
79.30
88.55
11.66%
0.85
450.05
513.25
14.04%
0.88
195.10
195.25
0.08%
1.00
146.20
164.80
12.72%
0.86
1825.65
2172.10
18.98%
0.89
142.15
141.70
-0.32%
0.90
157.90
164.70
4.31%
1.00
1389.90
1795.60
29.19%
1.00
472.00
465.35
-1.41%

2ND MONTH

SR NO. SCRIPT
1
2
3
4
5
6
7
8
9
10

BHARTI
GUJARAT AMBUJA
BAJAJ AUTO
HLL
HINDALCO
LT
MTNL
ZEE
BHEL
PNB

BETA

2-012013

0.99
0.86
0.85
0.88
1.00
0.86
0.89
0.90
1.00
1.00

340.05
79.30
450.05
195.10
146.20
1825.65
142.15
157.90
1389.90
472.00

28-02RETURN
13
IN %
361.05
6.18%
88.30
11.35%
550.10
22.23%
243.70
24.91%
153.35
4.89%
2396.95 31.29%
142.65
0.35%
196.60
24.51%
2027.00 45.84%
442.10
-6.33%

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 58 - 58 -

RETURN IN MODRATE PORT FOLIO


TOTAL PORTFOLIO INVESTMENT

= 10,00,000/- Rs..

VALUE OF PORTFOLIO AS ON 28-02-2013

= 1162912.70/- Rs.

TOTAL RETURN ON PORTFOLIO


= 1162912.70 Rs. - 1000000 Rs.
= 162912.70 Rs.

TOTAL RETURN IN % TERM = 16.29 %

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 59 - 59 -

AGGRESSIVE PORTFOLIO
SR NO. SCRIPT

BETA PRICE ON 2-01-2013

Wi

ICICI BANK LTD

1.09

597.00

9.64

INFOSYS

1.07

2979.35

9.46

ONGC

1.02

1191.65

9.02

RELIANCE

1.05

441.05

9.28

SATYAM

1.23

731.55

10.88

SBIN

1.09

904.90

9.64

TATA POWER

1.11

434.20

9.81

TATA MOTER

1.19

639.55

10.52

TATA STEEL

1.13

379.00

9.99

10

WIPRO

1.33

461.70

11.76

Total Portfolio Investment = 10,00,000/- Rs.

Total Portfolio Beta = Wi * BETA


=10.50+10.12+9.20+9.75+13.38+
10.50+10.89+12.52+11.29+15.64
= 113.80 ~ 114

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 60 - 60 -

RETURN ON INDIVIDUAL SCRIPTS


1ST MONTH
SR NO. SCRIPT
1
2
3
4
5
6
7
8
9
10

ICICI BANK LTD


INFOSYS
ONGC
RELIANCE
SATYAM
SBIN
TATA POWER
TATA MOTER
TATA STEEL
WIPRO

BETA 2-01-2013 31-01-13 RETURN


IN %
1.09
597.00
609.25
2.05
1.07
2979.35
2880.30
-3.32
1.02
1191.65
1237.30
3.83
1.05
441.05
480.15
8.87
1.23
731.55
746.75
2.08
1.09
904.90
886.35
-2.05
1.11
434.20
471.80
8.66
1.19
639.55
708.45
10.77
1.13
379.00
404.45
6.72
1.33
461.70
529.70
14.73

2ND MONTH

SR NO. SCRIPT
1
2
3
4
5
6
7
8
9
10

ICICI BANK LTD


INFOSYS
ONGC
RELIANCE
SATYAM
SBIN
TATA POWER
TATA MOTER
TATA STEEL
WIPRO

BETA 2-01-2013
1.09
1.07
1.02
1.05
1.23
1.09
1.11
1.19
1.13
1.33

597.00
2979.35
1191.65
441.05
731.55
904.90
434.20
639.55
379.00
461.70

28-0213

RETURN
IN %
615.25
3.06
2828.95
-5.05
1136.40
-4.64
500.55
13.49
769.65
5.21
877.50
-3.03
511.20
17.73
816.20
27.62
431.00
13.72
520.45
12.72

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 61 - 61 -

RETURN IN AGGRESSIVE PORT FOLIO


TOTAL PORTFOLIO INVESTMENT

= 10,00,000/- Rs.

VALUE OF PORTFOLIO AS ON 28-02-2013

=10,84,397.28/- Rs.

TOTAL RETURN ON PORTFOLIO


= 1084397.28 Rs - 1000000Rs
= 84397.28 Rs.

TOTAL RETURN IN % TERM = 8.44 %

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 62 - 62 -

Interpretation of Random Portfolio


As in the theoretical way we have scene that the Beta shows
the movement or change in the price of script vis--vis index.
And a Beta >1 is more riskier and hence should give more
return as compared to the script having Beta < 1. as the
person is taking more risk then he should get more return.
But in our case we have scene that Moderate portfolio
having Beta < 1 has given more return as compared to
Aggressive Portfolio.

So we can easily say that the investment in equity market is


subject to market risk and any one having long-term
investment horizon should only enter into equity market. This
analysis that has been carried out was only for a period of
two month there are chances that in the long run aggressive
portfolio would outperform the other portfolio

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 63 - 63 -

DERIVATIVES
Derivatives is a product whose value is derived from the value of
one or more basic variables, called bases (underlying asset, index,
or reference rate), in a contractual manner. The underlying asset
can be equity, forex or commodity or any other asset. For example,
wheat farmer may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by the date. Such a
transaction is an example of a derivative. The price of this derivative
is driven by the spot price of wheat which is the underlying.
In the Indian context the Securities Contracts (Regulation) Act. 1956
(SC(R)A) defines derivative to include
1. A security derived from a debts instrument, share, loan
whether secured or unsecured, risk instrument or contract for
differences or any other form of security.
2. A contract, which derives its value from the prices, or index
of price, of underlying securities.
The derivatives are securities under the (SC(R)A) and hence the
trading of derivatives is governed by the regulatory framework
under the (SC(R)A).

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 64 - 64 -

TYPES OF DERIVATIVES
The most commonly used types of derivatives are as follows:
o Forwards: A forward contract is a customized contract
between two entities, where settlement takes place on a
specific date in the future at todays pre-agreed price.
o Futures: A future contract is an agreement between two
parties to buy or sell an asset at a certain time in the
future at a certain price. Future contracts are special
types of forward contract in the sense that the former are
standardized exchange-traded contracts.
o Options: Options are of two types call and put. Calls
give the buyer the right but not the obligation to buy a
gives quantity of the underlying asset, at a given price on
or before a given future date. Plus give the buyer the
right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given
date.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 65 - 65 -

INTRODUCTION TO FUTURE
Future markets were designed to solve the problems that exist in
forward markets. A future contract is an agreement between two
parties to buy or sell an asset at a certain time in the future at a
certain price. But unlike forward contracts, the future contracts are
standardized and exchange traded. To facilitate liquidity in the
future contracts, the exchange specifies certain standard features of
the contract. It is a standardized contract with standard underlying
instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for
reference purpose in settlement) and a standard time of such
settlement. A future contract may be offset prior to maturity by
entering into an equal and opposite transaction. More than 99% of
future transactions ate offset this way.
The standardized items in a future contract are:

Quantity of the underlying.

Quality of the underlying.

The date and the month of delivery.

The units of price quotation and minimum price change.

Location of settlement.

FEATURES OF A FUTURE CONTRACT

Future contracts are organized / standardized contracts,


which are traded on the exchanges.

These contracts, being standardized and traded on the


exchanges are very liquid in nature.

In futures market, clearing corporation/ house provides


the settlement guarantee.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 66 - 66 -

DISTINCTION BETWEEN FUTURE AND FORWARD


CONTRACTS:

Future contracts are often confused with future contracts. The


confusion is primarily because both serve essentially the same
economic functions of allocating risk in the presence of future price
uncertainty. However futures are a significant improvement over the
forward contracts as they eliminate counterparty risk and offer more
liquidity.

Features

Forward Contract
Not

Operational

traded

Future Contract

on Traded on exchange

exchange

Mechanism
Differs from trade to Contracts
Contract

trade.

are

standardized

Specifications

contracts.
Exists

Exists, but assumed

Counterparty Risk

by

Clearing

Corporation/ house.
Poor
Liquidation Profile

Liquidity

as Very high Liquidity as

contracts are tailor contracts


maid contracts.

are

standardized
contracts.

Poor; as markets are Better; as fragmented


Price Discovery

fragmented.

markets are brought to


the common platform.

FUTURE TERMINOLOGY

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 67 - 67 -

Spot Price: The price at which an asset trades in the spot


market.

Future Price: The price at which the future contracts trades


in the market.

Contract Cycle: The period over which a contract trades.


The index futures contracts on the NSE have one-month,
two-months and three-months expiry cycle, which expire on
the last Thursday of the month. Thus a January expiration
contract would expire on the last Thursday of January and a
February expiration contract would cease trading on the last
Thursday of February. On the Friday following the last
Thursday, a new contract having a three-month expiry would
be introduced for trading.

Expiry Date: It is the date specified in the future contract.


This is the last day on which the contract will be traded, at
the end of which it will cease to exist.

Contract Size: The amount of asset that has to be delivered


under one contract. For instance, the contract size on NSEs
futures market is 200 Nifties.

Basis: Basis is usually defined as the spot price minus the


future price. There will be a different basis for each delivery
month for each contract. In a normal market, basis will be
negative. This reflects that futures prices normally exceed
spot prices.

Cost of Carry: The relationship between futures prices and


spot prices can be summarized in terms of what is known as

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 68 - 68 -

the cost of carry. This measures the storage cost plus the
interest that is paid to finance the asset less the income
earned on the asset.

Initial Margin: The amount that must be deposited in the


margin account at the time a futures contract is first entered
into is known as initial margin.

Marking-to-Market: In the future market, at the end of each


trading day, the margin account is adjusted to reflect the
investors gain or loss depending upon the futures closing
price. This is called marking-to-market.

Maintenance Margin: This is somewhat lower than the initial


margin. This is set to ensure that the balance in the margin
account never becomes negative. If the balance in the
margin account falls below the maintenance margin, investor
receives a margin call and is expected to top up the margin
account to the initial level before trading commences on the
next day.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 69 - 69 -

DIFFERENCE BETWEEN FUTURES AND OPTIONS


At a practical level, the option buyer faces an interesting situation.
He pays for the option in full at the time it is purchased. After this,
he only has an upside. There is no possibility of the options position
generating any further losses to him (other than the funds already
paid for option). This is different from futures, which is free to enter
into, but can generate very large losses. This characteristic makes
options attractive to many occasional market participants, who
cannot put in the time to closely monitor their future options.
Buying put option means that you are buying insurance. To buy a
put option on Nifty is to buy insurance which reimburses the full
extent to which Nifty drops below the strike price of the put option.
This is attractive to many people, and to mutual funds creating
guaranteed return products. The Nifty index fund industry will find
it very useful to make a bundle of a Nifty index fund and a Nifty put
option to create a new kind of a Nifty index fund, which gives the
investor protection against extreme drops in Nifty.
Selling put option is selling insurance, so anyone who feels like
earning revenues by selling insurance can set himself up to do so
on the index option market.
More generally, option offer nonlinear payoffs whereas futures
only have linear payoffs. By combining futures and options, a wide
variety of innovative and useful payoff structures can be created.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 70 - 70 -

PAYOFF FOR DERIVATIVES CONTRACT


Payoff is likely profit/loss that would accrue to a market participant
with change in the price of the underlying asset. This is generally
depicted in the form of payoff diagrams, which show the price of the
underlying asset on the X-axis and the profit/losses on the Y-axis.
Payoff for Futures:
Future contracts have linear payoffs. It means that the losses as
well as profits for the buyer and the seller of a future contract are
unlimited. These linear payoffs are fascinating as they can be
combined with options and the underlying to generate various
complex payoffs.

Payoff for buyer for futures: Long Futures


The payoff for a person who buys a futures contract is similar to
the payoff for a person who holds an asset. He has a potentially
unlimited upside as well as a potentially unlimited downside.
Take the case of a speculator who buys a two-month Nifty index
futures contract when the Nifty stands at 1220. The underlying
asset in this case is the Nifty portfolio. When the index moves
down it starts making losses.
Profit

1220
0
Nifty
Loss

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 71 - 71 -

Payoff for seller of futures: Short futures


The payoff for a person who sells a futures contracts is similar to
the payoff for a person who shorts an asset. He has a potentially
unlimited upside as well as a potentially unlimited downside.
Take the case of a speculator who sells a two-month Nifty index
futures contract when the Nifty stands at 1220. The underlying
asset in this case is the Nifty portfolio. When the index moves
down, the short future position starts making profits, and when
the index moves up, it starts making losses.

Profit

1220
0
Nifty

Loss

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 72 - 72 -

USING INDEX FUTURES


There is always risk involved when we trade in a stock market. The
risk cannot be eradicated fully but can be minimized up to some
extent. Following are the types of risks that can be minimized
through futures:

Basic objective of introduction of futures is to manage the


price risk.

Index futures are used to manage the systemic risk, vested


in the investment in securities.

Basically there are eight basic modes of trading on the index futures
market;

Hedging
H1 Long stock, short Nifty futures
H2 Short stock, long nifty futures
H3 Have portfolio, short Nifty futures
H4 Have funds, long Nifty futures

Hedge Terminology:
Long hedge- When you hedge by going long in futures market.

Short hedge - When you hedge by going short in futures


market.

Cross hedge - When a futures contract is not available on


an asset, you hedge your position in cash market on this
asset by going long or short on the futures for another asset
whose prices are closely associated with that of your
underlying.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 73 - 73 -

Hedge Contract Month- Maturity month of the contract


through which hedge is accomplished.

Hedge Ratio - Number of future contracts required to hedge


the position.

Speculation
Speculation is all about taking position in the futures market
without having the underlying. Speculators operate in the market
with motive to make money. They take:
Naked positions - Position in any future contract.
Spread positions - Opposite positions in two future
contracts. This is a conservative speculative strategy.
Speculators bring liquidity to the system, provide insurance to the
hedgers and facilitate the price discovery in the market.
S1 Bullish index, long Nifty futures
S2 Bearish index, short Nifty futures

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 74 - 74 -

HEDGING

H1: long stock, short Nifty futures


A person who feels that the stocks will be intrinsically under
evaluated or the profits and the quality of the company will make it
more worth as compared to the market will always like to take a
long position on the cash market. While doing so he will have to
face the following kinds of risks:
1. His understanding can be wrong, and the company is really
not worth more than the market prices.
2. The entire market moves against him and generate losses
even though the underlying idea was correct.
The second outcome happens all time. A person may buy Reliance
at Rs.190 thinking hat it would announce good results and the stock
price would rise. A few days later, Nifty drops, so he makes losses,
even if his understanding of Reliance was correct.
There is a peculiar problem here. Every buy position on a stock is
simultaneously a buy position on Nifty. This is because a, LONG
RELIANCE position generally gains if Nifty rises and generally
losses if Nifty drops. In this sense, a LONG RELIANCE position is
not a focused play on the valuation of Reliance. It carries a LONG
NIFTY position along with it, as incidental baggage. The stock
picker may be thinking that he wants to be LONG RELIANCE but a
long position on Reliance effectively forces him to be LONG
RELIANCE + LONG NIFTY.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 75 - 75 -

If we think that WIPRO is under evaluated, the position LONG


WIPRO is not purely about WIPRO; it is also partly about Nifty.
Every trader who has a LONG WIPRO position is forced to be an
index speculator, even though he may not have no interest in the
index.
Those who are bullish about the index should just buy
Nifty futures; the need not trade individual stocks.
Those who are bullish about WIPRO do wrong by
carrying along a long position on Nifty as well.
There is a simple way out. Every time we adopt a long position on a
stock, we should sell some amount of Nifty futures. This will help in
offsetting the hidden Nifty exposure that is every long-stock
position. Once this is done, we will have a position which will be
purely about the performance of the stock. The position LONG
WIPRO + SHORT NIFTY is a pure play on the value of WIPRO,
without any risk from fluctuation of the market index. When this will
be done the stockpicker has hedged away his index exposure.
The basic point of this hedging strategy is that the stockpicker
proceeds with his core skill, i.e. picking stocks, at the cost of lower
risk.

NOTE: hedging does not remove losses. The best that can be
achieved by using hedging is the removal of unwanted exposure,
i.e. unnecessary risk. The hedged position will make less profit than
the un-hedged position, half the time. One should not enter into a
hedging strategy hoping profit for sure; all that can come out of
hedging is reduced risk.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 76 - 76 -

H2: Short stock, long Nifty futures


If a person feels that the stock is over evaluated or the profits and
the quality of the company made it worth a lot less as compared to
what the market thinks, he can take a short position on the cash
market. This will give rise to two types of risks:
1. His understanding can be wrong, and the company is really
worth more than the market price.
2. The entire market moves against him and generates losses
even though the underlying idea was correct.
The second outcome happens all time. A person may sell Reliance
at Rs.190 thinking that Reliance would announce poor result and
the stock price would fall. And if after few days if the Nifty rises, he
will incur loss, even if the intrinsic understanding of Reliance was
correct.
There is a peculiar problem here. Every sell position on a stock is
simultaneously a sell position on Nifty. This is because a SHORT
RELIANCE position generally gains if Nifty falls and generally loses
if Nifty rises. In this sense, a SHORT RELIANCE position is not a
focused play on the valuation of Reliance. It carries a SHORT
NIFTY position along with it, as incidental baggage. The stockpicker
may be thinking he wants to be SHORT RELIANCE, but a short
position on Reliance on the market effectively forces him to be
SHORT RELIANCE + SHORT NIFTY.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 77 - 77 -

Even if we think that WIPRO is overvalued, the position SHORT


WIPRO is not purely about WIPRO; it is also about the Nifty. Every
trader who has a SHORT WIPRO position is forced to be an index
speculator, even though he may not have any interest in the index.
Those who are bearish about the index should just sell
Nifty futures; the need not trade individual stocks.
Those who are bearish about WIPRO do wrong by
carrying along a short position on Nifty as well.
There is a simple way out. Every time we adopt a short position on
a stock, we should buy some amount of Nifty futures. This will help
in offsetting the hidden Nifty exposure that is every short-stock
position. Once this is done, we will have a position, which will be
purely about the performance of the stock. The position SHORT
WIPRO + LONG NIFTY is a pure play on the value of WIPRO,
without any risk from fluctuation of the market index. When this will
be done the stockpicker has hedged away his index exposure.
The basic point of this hedging strategy is that the stockpicker
proceeds with his core skill, i.e. picking stocks, at the cost of lower
risk.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 78 - 78 -

H3: Have Portfolio, short Nifty futures


Some of us might have experienced the feeling of owing an equity
portfolio, and then one day, we become uncomfortable about the
overall stock market. Sometimes we have a view that the stock
prices will fall in the near future. At other times, we may see that the
market is in for a few days or weeks of massive volatility, and we do
not have an appetite for this kind of volatility. The best example of
this volatility is the union budget. Market positions become volatile
for one week before and two weeks after the budget. Many
investors want to eradicate this three weeks volatility.
This becomes a peculiar problem if we are thinking of selling the
shares in the near future, for example, in order to finance a
purchase a house. This planning can go wrong if by the time we sell
shares, Nifty has dropped sharply.
There are two main alternatives, when one faces this type of
problem:
1. Sell shares immediately. This sentiment generates panic
selling which is rarely optimal for the investor.
2. Do nothing, i.e. suffer the pain of volatility. This leads to
political pressure for government to do something when
stock prices fall.
Here in this case, with the index futures market, a third and a
remarkable alternative becomes available:
3. Remove your exposure to index fluctuations temporarily
using index futures. This will allow rapid response to market
conditions, without panic selling of shares. It will allow an
investor to be in control of his risk, instead of doing nothing
and suffering the risk.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 79 - 79 -

The idea here is that every portfolio contains a hidden index


exposure. This statement is true for all portfolios, whether a portfolio
is composed of index stock or not. In the case of portfolios, most of
the portfolio risk is accounted for by index fluctuations. Hence a
position LONG PORTFOLIO + SHORT NIFTY can often become
one-tenth as risky as the LONG PORTFOLIO position.
Is suppose we have a portfolio of Rs.1 billion, which is having a
beta of 1.25. Then a complete hedge is obtained by selling Rs.1.25
million of Nifty futures.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 80 - 80 -

H4: Have funds, buy Nifty futures


A person may be in a situation where he is having funds, which
needed to be invested in equity, or he may be expecting to get
funds in future to be invested in equity. The following can be the
occurrences in the above conditions:
A closed-end fund, which just finished its initial public
offering, has cash, which is not yet invested.
If a person is planning to sell some of his shares. The
land deal is slow and will take time to complete. It takes
several weeks from the date that it becomes sure that the
funds will come to the date that the funds are actually are
in hands.
An open-ended fund has just sold fresh units and has
received funds.
To get oneself invested in equity sounds quite easy but it involves
the following problems:
1. A person may need time to research stocks, and carefully
pick stocks that are expected to do well. This process of
research takes time. For that time the investor is partly
invested in cash and partly invested in stocks. During this
time, he is exposed to the risk of missing out if the overall
market index goes up.
2. A person may have made up his mind on what portfolio he
seeks to buy, but going to the market and placing the market
order would generate large impact cost. The execution
would be improved substantially if he could instead place a
limit orders and gradually accumulate the portfolio at

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 81 - 81 -

favorable prices. This takes time, and during this time, he is


exposed to the risk of missing out if the Nifty goes up.
3. In some cases, such as land sale above, the person may not
simply have cash to immediately buy the shares, hence he is
forces to wait even if he feels that Nifty is unusually cheap.
He is exposed to the risk of missing out if Nifty rises.
The three alternatives that are available with an investor are as
follows:
The investor would obtain the desired equity exposure by
buying index futures, immediately. A person who expects
to obtain Rs.5 million by selling land would immediately
enter into a position LONG NIFTY worth Rs.5 million.
Similarly a close-end fund, which has just finished its
initial public offering and has cash, which is not yet
invested, can immediately enter into a LONG NIFTY to
the extent it wants to be invested into equity. The index
futures market is likely to be more liquid than individual
stocks so it is possible to take extremely large position at
a low impact cost.
Later, the investor / close-end fund can gradually acquire
stocks. As and when shares are obtained, one would
scale down the LONG NIFTY position correspondingly.
No matter how slowly the stocks are purchased, this
strategy would fully capture a rise in Nifty, so there is no
risk of missing out on a broad rise in the stock market
while this process is taking place. Hence, this strategy
allows the investor to take more care and spend more
time in choosing stocks and placing aggressive limit
orders.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 82 - 82 -

SPECULATION

S1: Bullish index, long Nifty futures


We may sometimes think that the market index is going to rise and
we can make profits by adopting a position on the index. After a
good budget, or good corporate results, or the onset of the stable
government, many people may feel that the index would go up.
Now a days people have the following two strategies to get benefit
from an upward movement in the index:
1. Buy selected liquid securities, which move with the index,
and sell them at a later date.
2. Buy the entire index portfolio and then sell it at a later date.
The first alternative is widely used. A lot of the trading volume on
the liquid stock is based on using these liquid stocks as an index
proxy. However, these positions run the risk of making losses owing
to company. The second alternative is cumbersome and expensive
in terms of the transaction cost involved in it.
Taking a position on the index is effortless using the index futures
market. By using the index futures an investor can buy or sell
the entire index by trading on one singe security. Once a person is
LONG NIFTY using the futures market, he gains if the index rises
and losses if the index falls.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 83 - 83 -

S2: Bearish index, short Nifty futures


We may sometimes think that the market is going to fall and we can
make profit by adopting a position on the index. After a bad budget,
or bad corporate results, or the onset of a coalition government,
many people feel that the index would go down. So to get the
benefit from the downward movement in the index we are having
the following two choices:
1. Sell selected liquid securities, which move with the index,
and buy them at a later date.
2. Sell the entire index portfolio and then buy it at a later date.
The first alternative is widely used. A lot of the trading volume on
liquid stock is based on using these positions run the risk of making
losses owing to company.
The second alternative is hard to implement. This strategy is
cumbersome and also expensive in terms of the transaction cost
involved.
Taking a position on the index is effortless using the index futures
market. By using the index futures an investor can buy or sell
the entire index by trading on one singe security. Once a person is
SHORT NIFTY using the futures market, he gains if the index falls
and losses if the index rises.

Now after learning about the futures what we can do is that as we


are having our three portfolios we would see how we could hedge
our position using the futures contract. As we know that Hedging

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 84 - 84 -

does not always make money. The best way that can be achieved
using hedging is the removal of unwanted exposure, i.e.
unnecessary risk. The hedged position will make less profit than the
unhedged position. One should not enter into a hedging strategy
hoping to make excess profits for sure; all that can come out of
hedging is reduced risk. So one should go for hedging only if the
movement of market makes him uncomfortable.
Here we are having a portfolio of script so to hedge our position we
would have to know what the portfolio BETA is
The Portfolio BETA = Wi * Beta

Where, Wi = the weightage of scrip in the portfolio


Beta =

% Change in Scrip Return

% Change in Market Return


The BETA of scrip can be easily found out from the website of
National Stock Exchange and also from the website of Bombay
stock exchange
Here for the purpose of hedging we will have to short nifty futures
as we are having the portfolio and the future contracts may not be
available for all the scrip. But as we have seen earlier that all scrip
have hidden exposure to nifty. So we will short the nifty future
contract for the purpose of hedging our portfolio.
The current nifty lot size is 200. Now for the purpose of hedging the
portfolio we will have to decide about the number of lots of Nifty that
the investor will have to sell in order to hedge his position. To find
out that figure we will have to do the following calculations: -

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 85 - 85 -

DEFENSIVE PORTFOLIO
Amount of Nifty to be short = Investment * Portfolio Beta
The current Nifty level
= 1000000 * 0.75
2813.7
= 266.55

As the nifty that are required to be short comes out to be 266.55 but
as we know that the nifty is available in the lot size of 300 so this
will give our portfolio a partial hedge as we are unable to short the
exact nifty figure that we have calculated.
During this two month the nifty has moved to 3064.4 this shows that
nifty has increased by 250.70 in % terms nifty has gone up by 8.91
%
Now as we have short position of one nifty contract we would
require to pay the buyer of contract 250.70*300 =75,210Rs.
If we take in to account the profit that we now earn is 1,66,628
75210= 91418/- Rs.
So we can easily see that the hedging as reduced our profit we
were earning 1,66,628 with hedging it has reduced to 75210. talking
in % terms we can say that we were earning 16.66% but due to
hedging the profit comes down to 9.14%
PROFIT ( Rs. )

PROFIT ( % )

WITHOUT HEDGING

1,66,628

16.66 %

WITH HEDGING

91,418

9.14 %

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 86 - 86 -

MODERATE PORTFOLIO
Amount of Nifty to be short = Investment * Portfolio Beta
The current Nifty level
= 162612.70* 0.93
2813.7
= 53.74 ~ 54

As the nifty that are required to be short comes out to be 54 but as


we know that the nifty is available in the lot size of 100 so this will
give our portfolio a partial hedge as we are unable to short the
exact nifty figure that we have calculated.
During 2 month the nifty has moved to 3064.4 this shows that nifty
has increased by 250.70 in % terms nifty has gone up by 8.91 %
Now as we have short position of one nifty contract we would
require to pay the buyer of contract 250.70*100 =25,070 Rs.
If we take in to account the profit that we now earn Is 1,40,350
25,070= 1,15,280Rs.
So we can easily see that the hedging as reduced our profit we
were earning 1,40,350 Rs. with hedging it has reduced to 25070.
talking in % terms we can say that we were earning 16.29% but due
to hedging the profit comes down to 11.53%
PROFIT ( Rs. )

PROFIT ( % )

WITHOUT HEDGING

1,40,350

16.29 %

WITH HEDGING

1,15,280

11.53 %

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 87 - 87 -

AGGRESSIVE PORTFOLIO
Amount of Nifty to be short = Investment * Portfolio Beta
The current Nifty level
= 10,00,000 *1.14
2813.7
= 405.16
As the nifty that are required to be short comes out to be 405.16 but
as we know that the nifty is available in the lot size of 400 so this
will give our portfolio a partial hedge as we are unable to short the
exact nifty figure that we have calculated.
During this two month the nifty has moved to 3064.4 this shows that
nifty has increased by 250.70 in % terms nifty has gone up by 8.91
%
Now as we have short position of one nifty contract we would
require to pay the buyer of contract 250.70*400 =1,00,280Rs.
If we take in to account the profit that we now earn is 84,397
1,00,280

= ( 15,883) Rs.

So we can easily see that the hedging as reduced our profit we


were earning 84,397with hedging it has reduced to (15,883). talking
in % terms we can say that we were earning 8.44% but due to
hedging the profit comes down to ( 1.58 )%
PROFIT ( Rs. )

PROFIT ( % )

WITHOUT HEDGING

84,397

8.44 %

WITH HEDGING

( 15,883)

(1.58 ) %

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 88 - 88 -

SECTOR PORTFOLIO
Sector specific portfolio includes securities of those companies
which are in the same business. Sector portfolios are very useful
when there is a particular sector which is doing very good and has a
bright future a head. Sector portfolio has the securities of those
companies that engage in same kind of business.
e.g. In late 1990s sector that was providing the highest return was
information technology. Investors who have invested their money
in these securities had earned very high return.
We are considering Telecom Sector as our Sector Portfolio.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 89 - 89 -

Industry analysis
Telecom sector
Objectives and targets of the New Telecom Policy
1999
The objectives of the NTP 1999 are as under:

Access to telecommunications is of utmost importance for


achievement of t

he country's social and economic goals. Availability of


affordable and effective communications for the citizens is at
the core of the vision and goal of the telecom policy.

Strive to provide a balance between the provision of


universal service to all uncovered areas, including the rural
areas, and the provision of high-level services capable of
meeting the needs of the country's economy;

Encourage development of telecommunication facilities in


remote, hilly and tribal areas of the country;

Create

modern

and

efficient

telecommunications

infrastructure taking into account the convergence of IT,


media, telecom and consumer electronics and thereby propel
India into becoming an IT superpower;

Convert PCO's, wherever justified, into Public Teleinfo


centres having multimedia capability like ISDN services,
remote database access, government and community
information systems etc.

Transform in a time bound manner, the telecommunications


sector to a greater competitive environment in both urban
and rural areas providing equal opportunities and level
playing field for all players;

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 90 - 90 -

Strengthen research and development efforts in the country


and provide an impetus to build world-class manufacturing
capabilities.

Achieve

efficiency

and

transparency

in

spectrum

management.

Protect defence and security interests of the country.

Service Provider
1 BSNL All India
2 MTNL
3 Bharti Telesonic Ltd
Tamil Nadu,

Area of Operation
(Except Delhi & Mumbai)
Delhi & Mumbai
AP, MP, Delhi, Haryana,
Chennai, Karnataka,

Kerala, Gujarat,
Punjab, Maharashtra,
Mumbai, UP(E),
including Uttaranchal,
West Bengal and
Kolkata
4 Tata Teleservices
(Maharashtra) Ltd
5 Tata Teleservices Ltd

Maharastra, Mumbai
AP, TN, Chennai,
Karnataka, Gujarat,

Delhi, Bihar, Orissa,


Rajasthan, Punjab,
Haryana, Himachal
Pradesh, Kerala,
Madhya Pradesh, U.P. (E),
U.P (W) including
Uttaranchal, West Bengal
6 HFCL Infotel Ltd
7 Shyam Telelink Ltd
8 Reliance Infocomm.Ltd.
Gujarat, Haryana, HP,

and Kolkata
Punjab
Rajasthan
AP, Bihar,

Delhi,

Karnataka, Kerala,
MP, Maharashtra,
Mumbai, Orissa,
Punjab, Rajasthan, Tamil
Nadu, Chennai,
UP(E), West Bengal,
Kolkata

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 91 - 91 -

Subscribers Base
The Mobile (GSM and CDMA) Industry has reached the 65.07
million subscribers mark (GSM 50.86 million & CDMA 14.21 million)
for the quarter ending 30th September 2005.
Addition in Subscribers Base
The subscribers base stood at 65.07 million as against 57.37
million for the quarter ending 30.9.2005. Around 7.70 million
subscribers were added in this quarter.
Growth Rate
The growth rate for this quarter is 13.42% (13.16% in GSM and
14.37% in CDMA) as against 9.86% (9.44% in GSM and 12.43% in
CDMA) for the quarter ending June 2005. M/s Bharti remains the
largest mobile operator followed by M/s Reliance and M/s BSNL.
Company wise Market Share:
a) The Subscriber Base of different Mobile operators is given in
Table 2.1. The top five Mobile operators on the basis of market
share are as under: Cellular Group Subscribers

Market Share

Technology Used
Bharti

14.07

21.62

GSM

Reliance

12.99

19.96

GSM

&

12.38

19.03

GSM

&

Hutchison

9.71

14.92

GSM

IDEA

5.94

9.13

GSM

CDMA
BSNL
CDMA

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 92 - 92 -

Change in Market Structure


M/s Bharti, M/s Reliance and BSNL/MTNL has licenses to offer
mobile services in all 23 service area. The largest mobile operator,
M/s Bharti is offering services in all the 23 service areas. M/s
Reliance is presently offering services in all service areas except
J&K circle. BSNL is also offering services in all its 21 circles (Except
Delhi & Mumbai). M/s Tata Teleservices is offering services in all its
licensed 20 service areas. M/s Tata Teleservices does not have
license to offer access services in J&K, Assam & North East.
Market share of all company
Subscriber Base
Bharat Sanchar Nigam Ltd.
Mahanagar Telephone Nigam Ltd.
Sify Ltd.
Videsh Sanchar Nigam Ltd.
Reliance Communications Infrastructure Ltd.
Data Infosys others
Bharti Televentures Ltd.(Bharti Infotel)

37%
20%
14%
8%
5%
4%
3%

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 93 - 93 -

Company analysis
Telecom sector
1. Bharti Tele-Ventures Ltd.
Company at glance
Industry: - Telecommunications
52 Week High: - 377.00
52 Week Low: - 195.80
Volume: - 59847
Face Value: - 10.00
P/E Ratio: - 57.24
EPS: - 6.29

Three Months chart


The bellow given chart shows the performance of the script in the
bse for last three months. It shows the volatility of the stock for the
months of November, December and January.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 94 - 94 -

FINANCIAL PERFORMANCE
For the year

Mar-02

Mar-03

Mar-04

Mar-05

Operating
Income

62.97

71.35

62.98

8,142.44

Net Profit

62.97

0.22

0.37

1,210.67

Net Worth

4,816.27

4,819.75

4,823.55

4,134.07

No. of
Shares (in
crore)

185.34

185.34

185.34

185.34

Adjusted
EPS (Rs)

6.29

Book value
per Share
(Rs)

25.99

26.01

26.03

24.12

Dvdnd per
Share (Rs)

Net Profit
Margin (%)

0.19

0.58

0.58

14.83

74.86

668.08

233.91

0.51

0.1

0.98

Current
Ratio
Lt Debt
Equity

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 95 - 95 -

2. Tata Telecom Ltd.


Company at glance
Industry:
52 Week High:
52 Week Low:
P/E Ratio:
EPS:
Volume:
Face Value:

Telecom
531.00
289.00
30.15
13.73
878
10.00

Three Months chart


The bellow given chart shows the performance of the script in the
bse for last three months. It shows the volatility of the stock for the
months of November, December and January.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 96 - 96 -

FINANCIAL PERFOMANCE
For the year
Operating Income
Net Profit
Net Worth
No. of Shares (in crore)

02-Mar
228.2
15.68
70.52
1.42

03-Mar
285.5
18.56
85.06
1.42

04-Mar
394.5
32.67
110.5
1.42

05-Mar
323.8
24.92
128.1
1.42

Adjusted EPS (Rs)

12.13

13.06

23.29

13.73

Book value per Share (Rs)


Dvdnd per
Share(Rs)

65.44

75.66

93.55

105.9

2.5

4.5

4.5

Net Profit Margin (%)

6.06

5.78

8.24

7.65

Current Ratio

1.97

1.88

1.76

1.55

Lt Debt Equity

0.04

0.03

0.02

0.01

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 97 - 97 -

3.Videsh Sanchar Nigam Ltd.


Industry:
52 Week High:
52 Week Low:
P/E Ratio:
EPS:
Volume:
Face Value:

Telecom
444.60
161.00
31.18
12.21
2365926
10.00

Three Months chart


The bellow given chart shows the performance of the script in the
bse for last three months. It shows the volatility of the stock for the
months of November, December and January.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 98 - 98 -

FIANCIAL PERFOMANCE
For the year
Operating Income
Net Profit

02-Mar
6,508.09
1,407.42

03-Mar
4,538.55
780.07

04-Mar
3,163.54
377.66

05-Mar
3,303.04
756.37

Net Worth
4,834.54
No. of Shares (in 28.5
crore)
Adjusted EPS (Rs)
46.05

5,341.32
28.5

4,961.00
28.5

5,522.06
28.5

29.62

13.12

12.21

Book value per Share 176.98


(Rs)
Dvdnd per Share(Rs)
87.5
Net Profit Margin (%)
20.08

194.75

181.3

200.98

8.5
16.12

4.5
11.24

6
22.19

Current Ratio
Lt Debt Equity

2.67
0

1.59
0

1.84
0

2.45
0

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 99 - 99 -

4.Mahanagar Telephone Nigam Ltd.


Industry:
52 Week High:
52 Week Low:
P/E Ratio:
EPS:
Volume:
Face Value:

Telecom
154.50
108.00
10.79
12.86
76690
10.00

Three Months chart


The bellow given chart shows the performance of the script in the
bse for last three months. It shows the volatility of the stock for the
months of November, December and January.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 100 - 100 -

FIANCIAL PERFOMANCE
For the year
Operating Income

02-Mar
6,145.07

03-Mar
5,807.26

04-Mar
6,370.40

05-Mar
5,593.25

Net Profit

1,300.68

877.16

1,234.60

948.43

7,795.60

8,250.63

8,947.49

9,492.66

63

63

63

63

20.3

14.05

18.24

12.86

150.75

163.93

173.71

4.5

4.5

4.5

Net Worth
No. of Shares
crore)

(in

Adjusted EPS (Rs)

Book value per Share


141.9
(Rs)
Dvdnd per Share(Rs)
4.5
Net Profit Margin (%)

20.56

14.61

18.79

16.1

Current Ratio

1.67

1.27

1.29

1.29

Lt Debt Equity

0.29

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 101 - 101 -

RATIO ANLYSIS
PER SHARE RATIO
Reported Cash EPS Ratio

Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
0.4
13.49
63.05
36.93
0.04
14.75
53.96
33.61
0.04
16.63
32.53
27.69
0.03
31.22
19.29
28.23
12.9
24.27
35.11
24.39
13.41
100.36
203.94
150.85
2.682
20.072
40.788
30.17

Operating Profit per Share

Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
2.96
-1.62
68.78
41.26
0.07
4.44
57.63
39.11
0.2
2.93
41.42
31.14
0.14
46.74
18.62
31.62
16.17
30.98
27.85
22.31
19.54
83.47
214.3
165.44
3.908
16.694
42.86
33.088

Book Value per Share

Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
152.67
39.26
231.18
132.51
25.99
65.44
176.98
141.9
26.01
75.66
194.75
150.75
26.03
93.55
181.3
163.93
24.13
105.95
200.98
173.71
254.83
379.86
985.19
762.8
50.966
75.972
197.038
152.56

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 102 - 102 -

Net Operating Income Per Share

Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
5.25
138.64
138.64
91.87
0.33
160.32
160.32
97.54
0.38
200.52
200.52
92.18
0.33
277.15
277.15
101.12
43.93
227.49
115.9
88.78
50.22
1004.12
892.53
471.49
10.044
200.824
178.506
94.298

Free Reserve per Share

Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
142.67
28.97
213.88
107.18
15.99
39.54
159.63
113.74
16.01
49.75
177.41
120.96
16.03
67.64
164.07
132.02
12.31
80.01
183.76
140.68
203.01
265.91
898.75
614.58
40.602
53.182
179.75
122.916

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 103 - 103 -

Profitability Ratio
Operatig Margin in %
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
56.48
-1.16
26.86
44.19
23.45
2.76
25.23
40.09
54.13
1.46
26.01
33.78
43.21
16.86
16.77
31.27
36.81
13.61
24.03
25.13
214.08
33.53
118.9
174.46
42.816
6.706
23.78
34.892

Gross Profit margin in %


Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
50.29
-3.88
25.27
31.61
18.33
0.75
23.23
26.8
49.08
-0.32
22.77
18.85
37.06
13.88
11.33
22.73
24.29
10.33
16.64
14.62
179.05
20.76
99.24
114.61
35.81
4.152
19.848
22.922

Net Profit Margin in %


Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
0.66
5.87
21.8
25.8
0.19
6.06
16.12
20.56
0.3
5.78
16.12
14.61
0.58
8.24
11.24
18.79
14.83
7.65
22.19
16.1
16.56
33.6
87.47
95.86
3.312
6.72
17.494
19.172

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 104 - 104 -

Return on long term fund in %

Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Average

Bharti Tele Tata tele


VSNL
MTNL
1.83
26.1
34.21
18.49
0.18
32.25
23.99
15.81
0.65
30.63
30.63
13.57
0.42
41.63
10.71
15.95
20.41
22.96
11.43
10.16
23.49
153.57
110.97
73.98
4.698
30.714
22.194
14.796

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 105 - 105 -

Portfolio in Telecom Sector

Bharti Tele
Tata Tele
VSNL
MTNL

Average return Portfolio


Wi
143.87
79663.1
7.96631
415.04
229814
22.9814
722.26
399927
39.9927
524.81
290596
29.0596
1805.98
1000000
100

Total Portfolio = 10,00,000 Rs.

Price as on particular date


Company
Bharti Tele
TTML
VSNL
MTNL

02-01-06
340.05
27.8
381.15
142.15

28-02-06
361.05
24.75
364.95
142.65

Total Return on investment


= Total return total investment
= 963730.3 1000000
= -36269.7

Bharti Tele
TTML
VSNL
MTNL

Total return on investment ( in %) = - 3.62 %

6.175562417
-10.97122302
-4.250295159
0.351741119

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 106 - 106 -

Interpretation of Sector Portfolio

As we can see that sector specific portfolio has perform


negatively during the period of the report. That is due to the
fact that there is a systematic risk involve with the portfolio as
lack of diversification. If we look at the performance of the
Sensex during this period than we will find that Sensex has
perform better than the sector portfolio. It is mainly doe to
diversification of risk as Sensex has the 30 script from
different sectors, so any ups and downs in a sectors
performance will not effect the overall Sensex that badly that
in the case of sector portfolio.

We can see in the plotted graph that all the four script in the
sector portfolio are following a same kind of trend in the
given one month of the study. It is due to the fact that they all
belong to the same sector and they all face same systematic
risk as other in the sector. So the performance of the scripts
rightly indicates the need of diversification to remove the
systematic risk from the portfolio. As its gets highly risky
investment, such portfolio are very rarely been used by
individual in the general scenario.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 107 - 107 -

FINDING OF THE REPORT


Findings of the report gives the fruit of the all the analysis done on
the research of measuring and comparing performance of the
portfolio with the market portfolio.

Random portfolio

After understanding the various concepts about what are the


investments option and what are the risks associated with
the various investment avenues. And also about how one
can use Derivative to be specific Future for the purpose of
Hedging and Speculation.

But it is advisable to use the direct equity investment only if


the investors have adequate knowledge about selection of
stocks. There task does not ends with the selection of script
but they are also required to pay close attention to the
various happening in the economy that have direct or indirect
effect on stock market as we have learn that the price of the
script is affected by two factor, one is company specific news
and the other is economy specific news so any investor
investing in the equity directly has to keep the close track of
the economy as well as the company in which they invest to
look out for any new development that take place

As in the theoretical way we have scene that the Beta shows


the movement or change in the price of script vis--vis index.
And a Beta >1 is more riskier and hence should give more
return as compared to the script having Beta < 1. as the
person is taking more risk then he should get more return.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 108 - 108 -

But in our case we have scene that Moderate portfolio


having Beta < 1 has given more return as compared to
Aggressive Portfolio.

So we can easily say that the investment in equity market is


subject to market risk and any one having long-term
investment horizon should only enter into equity market. This
analysis that has been carried out was only for a period of
two month there are chances that in the long run aggressive
portfolio would outperform the other portfolio.

And we have also scene the Derivative- Future how one can
use it for the purpose of speculation and hedging. But
hedging is only for the removal of unnecessary risk or
exposure one should not go for hedging for earning excess
return.

So if one does not have enough knowledge, expertise &


analytical capabilities then one should avoid going for direct
equity investment as the chances of loss increases. And the
other very important aspect is the regular monitoring of the
portfolio and reviewing is also an important aspect that one
needs to pay close attention to.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 109 - 109 -

Sector portfolio

Sector portfolio has given negative return in the month of the


study as there is systemic risk as very high in the sector
portfolio because of non diversification. This portfolio has
given -3.62% returns on the one month performance so it is
advisable for the investor not to go for such a high risky
investment options.

All the individual scripts and the portfolio showing very


steady chart, there is very little movement in the performance
chart.

There is a very high Beta of majority of the scripts in the


portfolio edging more than 2 in most of the script. Only one
script having a Beta under 1 but it is too low to give a good
return on the investment. Because of that the overall portfolio
Beta is also sizing more than 2.

In the sector portfolio the volatility of the majority of script is


under 10. Thats shows less risk with the portfolio and also
less fluctuation means less chance of return.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 110 - 110 -

RECOMMENDATION
From the above given findings and the conclusions of the study
done by me, here are the list of recommendations that comes out of
the study.

Form the study it is also proven that even in short run sector
portfolio is highly risky option for investment. Here in the
study it is providing negative return. That shows that
investors who want to have safe return must think twice
before selecting sector portfolio for a long term investment.

Though random portfolio is having scripts with highest return


and volatility, but for a long term prospect is becomes hard
to fetch good return out of it as it is hard to take use of high
volatility.

There is a requirement for frequent portfolio checking to


maintain the higher return and to make use of high volatility.

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 111 - 111 -

Bibliography
Books
1. Derivatives Module of NSE ( NCFM )
2. Securities analysis and Portfolio Management
-B.K. Bhalla

Web Bibliography
1. www.kotaksecurities.com
2. www.nseindia.com
3. www.bseindia.com
4. www.derivativesindia.com
5. www.moneycontrol.com
6. www.icicidirect.com

Others
1. Magazines
-

Business World

2. News Papers
-

Economic Times of India

Times of India

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 112 - 112 -

Annexure
Balance Sheet of BHARTI TELE VENTURE
05/0304/0303/0302/03(12)
(12)
(12)
(12)
CAPITAL & LIABILITIES
Owners' Fund
Equity Share
Capital
Share
Application
Money
Reserves &
Surplus
Other
Liabilities &
Provisions
Total
Cash &
Balances with
RBI
Investments
Fixed Assets
Gross Block
Less:
Revaluation
Reserve
Less:
Accumulated
Depreciation
Net Block
Capital Workin-progress
Other Assets
Miscellaneous
Expenses not
written off
Total
Contingent
liabilities
Book Value of
Unqouted
Investment
Market Value

1,853.37
2.72

1,853.37
0.00

1,853.37

1,853.37

106.24

0.00

0.00

46.31
1,515.69

2,675.38

2,971.49

2,971.12

2,970.90

4,570.79

15.77

5.00

40.61

9,102.26

4,840.63 4,829.49
ASSETS

384.14

0.13

931.90

1,762.67

13,240.63

31.84

2.13

0.00

3,475.64

01/03(12)

4,864.88

41.82
1,710.06

0.34

22.52

13.30

1,467.79

1,899.67

794.47

28.02

24.73

0.00

0.00

0.00

17.29

13.79

10.51

9,762.86

14.56

16.83

17.51

994.46

0.10

30.62

0.00

0.00

7.40
17.33
4.36

2,348.99

3,688.36

3,341.31

3,040.22

893.90

58.35

1.30

4.74

7.99

0.00

14,480.70

5,467.12

4,831.01

4,987.91

1,723.36

3,017.26

4,874.99

4,085.39

2,695.06

34.89

460.83

1,434.63

382.95

590.00

415.52

472.71

334.24

38.79

473.21

155.32

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 113 - 113 -

of Qouted
Investment

Balance sheet of TATA TELE


04/03
03/03
05/03
CAPITAL & LIABILITIES
Owners' Fund
Equity Share
Capital
Reserves &
Surplus
Other
Liabilities &
Provisions
Total
Cash &
Balances with
RBI
Investments
Fixed Assets
Gross Block
Less:
Accumulated
Depreciation
Net Block
Capital Workin-progress
Other Assets
Miscellaneous
Expenses not
written off
Total
Contingent
liabilities
Book Value of
Unqouted
Investment
Market Value
of Qouted
Investment

14.23
2,675.38
216.00

02/03

14.23

14.23

14.23

2,971.49

2,971.12

2,970.90

167.34

113.68

91.48

01/03

14.23
1,515.69

77.04
366.75

101.57

300.48
221.38
ASSETS
32.42
87.17

184.63

133.64

19.39
21.65

9.09

0.09

0.09

0.05

66.93
41.90

65.62
36.04

61.53
28.33

57.87
27.80

0.11
57.21
25.82

25.03

29.58
0.12

33.20

333.91
0.00

294.88
0.00

213.41
0.00

180.56
0.00

173.87
0.72

470.32
18.46

411.84

279.33
3.08

230.06
3.28

227.74
15.47

9.09

0.09

0.09

0.05

0.00

0.00

0.00

0.00

0.72

9.64

0.12

30.06
0.00

31.39
0.00

0.00

0.12

Balance sheet of VSNL

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 114 - 114 -

04/0303/0302/0305/03(12)
(12)
(12)
(12)
CAPITAL & LIABILITIES
Owners' Fund
Equity Share
Capital
Reserves &
Surplus
Other
Liabilities &
Provisions
Total
Cash &
Balances with
RBI
Investments
Gross Block
Less:
Accumulated
Depreciation
Net Block
Capital Workin-progress
Other Assets
Miscellaneous
Expenses not
written off
Total
Contingent
liabilities
Book Value of
Unqouted
Investment
Market Value
of Qouted
Investment

285.00
5,443.05
1,978.87

285.00

285.00

285.00

4,882.18

5,265.42

4,758.98

1,976.65

1,708.24

2,062.85

01/03(12)

285.00
6,303.74

3,480.52
7,706.92

1,409.12
1,200.58
3,182.68
835.65

7,143.83 7,258.66
ASSETS
2,358.59
1,046.71

7,106.83

2,089.14
655.87
Fixed Assets
2,348.54 3,290.23
590.81
1,015.19

366.29

10,069.26

2,534.94
4,840.07
110.65

2,835.29
862.12

2,658.79
742.99

2,347.03

1,757.73
216.63

2,275.03

1,973.17

1,915.80

114.23

298.39

497.19

3,646.14
0.00

3,143.31
0.00

4,567.52
0.00

5,044.12
0.00

7,545.63
0.72

9,116.04
2,280.87

8,253.52

9,971.24
1,829.85

10,216.91
1,810.53

14,909.34
366.60

1,200.58

2,032.91

599.59

366.29

110.65

0.00

99.77

68.24

97.35

513.17

2,422.66

0.00

Balance sheet of MTNL

Equity Share

04/0303/0305/03(12)
(12)
(12)
CAPITAL & LIABILITIES
Owners' Fund
630.00
630.00
630.00

02/03(12)

630.00

01/03(12)

630.00

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 115 - 115 -

Capital
Reserves &
Surplus
Other
Liabilities &
Provisions
Total
Cash &
Balances with
RBI
Investments
Fixed Assets
Gross Block
Less:
Accumulated
Depreciation
Net Block
Capital Workin-progress
Other Assets
Miscellaneous
Expenses not
written off
Total
Contingent
liabilities
Book Value of
Unqouted
Investment
Market Value
of Qouted
Investment

10,313.83
11,797.75

9,697.63

8,866.97

8,309.64

11,083.65

10,087.91

8,024.41

7,718.15

5,658.39
22,741.58

2,517.40
397.47
14,252.25
7,783.62

21,411.28
221.38
ASSETS
1,815.39
2,553.07

184.63

133.64

2,444.65
2,482.83

380.69

371.01

102.68

13,562.93
7,352.65

12,665.21
7,148.03

11,732.22
6,420.43

0.00
10,680.95
5,653.07

6,468.63

6,210.28
508.25

5,517.17

5,311.80

5,027.89

918.74

797.81

815.50

14,312.0
5
0.00

12,777.96

13,370.77

11,044.15

0.00

0.00

0.72

25,258.98
6,477.15

23,964.34

21,400.27
3,965.93

22,027.71
3,922.25

19,370.37
15.47

9.09

0.09

0.09

0.05

0.00

0.00

0.00

0.00

0.00

651.51
815.50
0.00

4,853.10

0.12

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 116 - 116 -

NIFTY VALUES
S.No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49

Security Symbol
ABB
ACC
BAJAJAUTO
BHARTI
BHEL
BPCL
CIPLA
DABUR
DRREDDY
GAIL
GLAXO
GRASIM
GUJAMBCEM
HCLTECH
HDFC
HDFCBANK
HEROHONDA
HINDALCO
HINDLEVER
HINDPETRO
ICICIBANK
INFOSYSTCH
IPCL
ITC
JETAIRWAYS
LT
MARUTI
M&M
MTNL
NATIONALUM
ONGC
ORIENTBANK
PNB
RANBAXY
REL
RELIANCE
SAIL
SATYAMCOMP
SBIN
SCI
SUNPHARMA
TATACHEM
TATAPOWER
TATATEA
TATAMOTORS
TCS
TATASTEEL
VSNL
WIPRO

Equity
423,816,750
1,851,909,460
1,011,835,100
18,933,749,010
2,447,600,000
3,000,000,000
599,740,466
573,302,784
383,034,985
8,456,516,000
847,030,170
916,736,360
2,705,593,000
644,351,768
2,494,075,020
3,127,855,080
399,375,000
1,159,684,963
2,201,243,793
3,393,300,000
8,896,209,860
1,372,625,815
2,482,256,220
3,755,157,950
863,340,110
273,798,272
1,444,550,300
2,360,812,020
6,300,000,000
6,443,096,280
14,259,339,920
2,505,397,000
3,153,025,000
1,862,370,965
2,019,042,510
13,935,080,410
41,304,005,450
646,924,048
5,262,988,780
2,823,024,300
927,578,150
2,151,026,510
1,978,978,640
562,198,570
3,767,922,890
480,114,809
5,534,728,560
2,850,000,000
2,841,478,198

Weightage %
0.75%
0.81%
1.84%
4.77%
3.46%
0.91%
1.15%
0.44%
0.70%
1.61%
0.78%
1.11%
0.83%
1.37%
2.37%
1.61%
1.24%
1.24%
3.74%
0.77%
3.82%
5.41%
0.40%
4.52%
0.59%
2.29%
1.66%
0.97%
0.63%
1.25%
11.30%
0.42%
0.97%
1.12%
0.87%
6.89%
1.84%
1.74%
3.22%
0.30%
1.01%
0.36%
0.71%
0.36%
2.14%
5.69%
1.66%
0.73%
5.16%

Beta
0.71
0.78
0.82
0.98
1.09
0.69
0.83
0.98
0.7
1.05
0.7
0.86
0.97
1.15
0.84
0.79
0.81
1.16
0.89
0.81
1.16
1.03
1.16
0.86
0.75
0.94
1.14
0.95
1.04
1.27
1.03
0.96
1.23
0.82
1.09
1.06
1.44
1.26
1.19
0.79
0.47
0.81
1.27
0.78
1.29
1.03
1.23
1.65
1.26

R2
0.15
0.27
0.21
0.25
0.32
0.14
0.17
0.19
0.13
0.35
0.16
0.27
0.26
0.3
0.18
0.19
0.17
0.39
0.21
0.24
0.29
0.39
0.36
0.23
0.16
0.22
0.34
0.29
0.24
0.32
0.37
0.23
0.36
0.13
0.34
0.43
0.32
0.39
0.48
0.21
0.08
0.19
0.43
0.24
0.38
0.34
0.42
0.31
0.41

Volatility %
1.6
1.62
2.19
1.29
1.79
1.77
3.43
1.62
3.21
1.27
2.06
2.35
1.53
1.16
2.07
1.8
1.93
1.87
2.77
1.67
2.35
1.38
1.78
2.07
2.47
3.18
1.77
1.87
2.8
3.45
1.81
1.44
1.73
3.01
1.31
1.2
3.03
1.55
1.27
1.82
1.92
1.44
1.72
2.68
2.32
1.15
1.71
1.72
1.5

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 117 - 117 -

50

ZEETELE

412,505,012

0.51%

1.05

0.16

2.86

NIFTY JUNIOR

S. No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46

Security Symbol
ANDHRABANK
APOLLOTYRE
ASHOKLEY
ASIANPAINT
AUROPHARMA
AVENTIS
BANKBARODA
BANKINDIA
BEL
BHARATFORG
BIOCON
BONGAIREFN
CADILAHC
CANBK
CHENNPETRO
CMC
COCHINREFN
CORPBANK
CUMMINSIND
GESHIPPING
CONCOR
I-FLEX
IBP
IDBI
IFCI
INGERRAND
IOB
JPASSOCIAT
KOTAKBANK
LICHSGFIN
LUPIN
MOSERBAER
MPHASISBFL
NICOLASPIR
NIRMA
PATNI
PFIZER
POLARIS
PUNJABTRAC
RAYMOND
SIEMENS
STER
SYNDIBANK
TTML
TVSMOTOR
UNIONBANK

Equity
4,850,000,000
383,379,770
1,189,294,200
962,789,280
266,350,000
230,306,220
3,670,000,000
4,874,002,000
800,000,000
441,018,830
500,000,000
1,998,179,000
314,034,270
4,100,000,000
1,489,432,000
151,500,000
1,384,697,800
1,434,400,000
396,000,000
1,903,424,050
649,913,970
380,429,100
221,473,690
7,236,162,580
6,386,757,620
315,680,000
5,448,000,000
1,855,970,840
3,092,166,250
849,326,000
401,411,340
1,115,129,440
1,606,343,030
418,035,212
793,824,840
275,596,798
298,414,400
490,710,810
607,557,000
613,808,530
331,384,030
556,549,450
5,219,682,820
15,205,344,350
237,543,557
4,601,179,000

Weightage %
1.73%
0.47%
1.86%
2.63%
1.21%
1.71%
3.34%
2.67%
3.59%
3.75%
1.98%
0.56%
1.37%
4.79%
1.36%
0.31%
0.99%
1.97%
1.82%
1.91%
3.83%
3.30%
0.50%
2.47%
0.29%
0.49%
2.25%
3.36%
2.89%
0.69%
1.53%
1.00%
1.14%
2.02%
1.58%
2.63%
1.23%
0.44%
0.58%
1.09%
6.11%
6.02%
1.99%
1.53%
1.16%
2.29%

Beta
1.17
0.62
1.24
0.4
0.94
0.65
1.55
1.81
1.01
1.19
0.56
0.98
0.44
1.37
1.08
0.5
0.76
1
0.91
0.86
0.41
0.83
0.62
1.4
1.55
0.72
1.15
1.23
1
1.02
0.75
0.92
0.94
0.94
0.81
0.97
0.5
1.44
0.67
0.8
0.76
1.27
1.26
1.19
1.1
1.23

R2
0.25
0.13
0.3
0.08
0.13
0.15
0.39
0.34
0.26
0.34
0.12
0.25
0.08
0.31
0.23
0.07
0.18
0.18
0.15
0.15
0.05
0.17
0.15
0.27
0.22
0.08
0.2
0.18
0.13
0.24
0.13
0.18
0.21
0.18
0.16
0.24
0.07
0.25
0.15
0.18
0.14
0.27
0.24
0.27
0.21
0.27

Volatility %
2.04
1.55
2.88
2.09
2.01
2.42
1.94
3.98
2.49
2.72
1.44
0.97
1.45
3.95
1.33
1.17
2.03
1.85
3.74
2.14
2.54
1.53
2.1
1.9
4.78
2.92
2.47
2.58
2.49
1.9
2.55
2.67
0.95
1.56
2.45
2.03
2.42
2.3
1.5
1.7
1.39
2.75
2.92
1.14
1.61
1.78

Analysis of Investment in Stock Market & Portfolio Management Using Instrument Derivatives Futures

- 118 - 118 -

47
48
49
50

UTIBANK
VIJAYABANK
INGVYSYABK
WOCKPHARMA

2,786,241,460
4,335,178,000
905,644,160
546,903,005

3.72%
1.01%
0.55%
2.29%

0.83
1.2
0.94
1.02

0.12
0.29
0.2
0.24

2.4
1.74
1.35
2.04