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What is 'Fundamental Analysis'

Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic
value, by examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts study anything that can affect the security's value, including
macroeconomic factors such as the overall economy and industry conditions, and microeconomic
factors such as financial conditions and company management. The end goal of fundamental
analysis is to produce a quantitative value that an investor can compare with a security's current
price, thus indicating whether the security is undervalued or overvalued.
The Basics of Fundamental Analysis

Fundamental analysis uses real, public data in the evaluation a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security. For example, an investor can perform fundamental analysis on a
bond's value by looking at economic factors such as interest rates and the overall state of the
economy. He can also look at information about the bond issuer, such as potential changes in
credit ratings.
The fundamentals include the qualitative and quantitative information that contributes to the
economic well-being and the subsequent financial valuation of a company, security or currency.
Analysts and investors analyze these fundamentals to develop an estimate as to whether the
underlying asset is considered a worthwhile investment. For businesses, information such as
revenue, earnings, assets, liabilities and growth are considered some of the fundamentals.
BREAKING DOWN 'Fundamentals'

In business and economics, the fundamentals represent the basic qualities and reported
information needed to analyze the health and stability of business or asset in question. This can
include topics within both the macroeconomic and microeconomic disciplines that are
considered standards for determining the financial values attributed to the assets.

Macroeconomics and Microeconomics

Macroeconomic fundamentals include topics that affect an economy at large. This can include
statistics regarding unemployment, supply and demand, growth, and inflation, as well as
considerations for monetary or fiscal policy and international trade. These categories can be
applied to analysis of a large-scale economy as a whole or can be related to individual business
activity to make changes based on macroeconomic influences.

Microeconomic fundamentals focus on the activities within smaller segments of the economy,
such as a particular market or sector. This can include issues of supply and demand within the
specified segment, as well as the theory of firms, theory of consumers and labor issues as related
to a particular industry.

fundamentals in company:
By looking at the economics of a business, such as the balance sheet, the income statement,
overall management and cash flow, investors are looking at a company's fundamentals, which
help determine the company's health as well as its growth prospects. A company with little debt
and a lot of cash is considered to have strong fundamentals.
Strong fundamentals suggest that a business has a viable framework or financial structure, while
those with weak fundamentals may have issues in the areas of debt obligation management, cost
control or overall organizational management. A business with strong fundamentals may be more
likely to survive negative events, such as economic recessions or depressions, than one with
weaker fundamentals and may indicate less risk should an investor consider purchasing securities
associated with the aforementioned businesses.

Each industry has differences in terms of its customer base, market share among firms, industrywide growth, competition, regulation and business cycles. Learning about how the industry
works will give an investor a deeper understanding of a company's financial health.
Customers
Some companies serve only a handful of customers, while others serve millions. In general, it's a
red flag (a negative) if a business relies on a small number of customers for a large portion of its
sales because the loss of each customer could dramatically affect revenues. For example, think of
a military supplier who has 100% of its sales with the U.S. government. One change in
government policy could potentially wipe out all of its sales. For this reason, companies will
always disclose in their 10-K if any one customer accounts for a majority of revenues.
Market Share
Understanding a company's present market share can tell volumes about the company's business.
The fact that a company possesses an 85% market share tells you that it is the largest player in its
market by far. Furthermore, this could also suggest that the company possesses some sort of
"economic moat," in other words, a competitive barrier serving to protect its current and future
earnings, along with its market share. Market share is important because of economies of scale.
When the firm is bigger than the rest of its rivals, it is in a better position to absorb the high fixed
costs of a capital-intensive industry.
Industry Growth
One way of examining a company's growth potential is to first examine whether the amount of
customers in the overall market will grow. This is crucial because without new customers, a
company has to steal market share in order to grow.

In some markets, there is zero or negative growth, a factor demanding careful consideration. For
example, a manufacturing company dedicated solely to creating audio compact cassettes might
have been very successful in the '70s, '80s and early '90s. However, that same company would
probably have a rough time now due to the advent of newer technologies, such as CDs and
MP3s. The current market for audio compact cassettes is only a fraction of what it was during the
peak of its popularity.
Competition
Simply looking at the number of competitors goes a long way in understanding the competitive
landscape for a company. Industries that have limited barriers to entry and a large number of
competing firms create a difficult operating environment for firms.
One of the biggest risks within a highly competitive industry is pricing power. This refers to the
ability of a supplier to increase prices and pass those costs on to customers. Companies operating
in industries with few alternatives have the ability to pass on costs to their customers. A great
example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart
practically sets the price for any of the suppliers wanting to do business with them. If you want
to sell to Wal-Mart, you have little, if any, pricing power.
Regulation
Certain industries are heavily regulated due to the importance or severity of the industry's
products and/or services. As important as some of these regulations are to the public, they can
drastically affect the attractiveness of a company for investment purposes.
In industries where one or two companies represent the entire industry for a region (such as
utility companies), governments usually specify how much profit each company can make. In
these instances, while there is the potential for sizable profits, they are limited due to regulation.
In other industries, regulation can play a less direct role in affecting industry pricing. For
example, the drug industry is one of most regulated industries. And for good reason - no one
wants an ineffective drug that causes deaths to reach the market. As a result, the U.S.Food and
Drug Administration (FDA) requires that new drugs must pass a series of clinical trials before
they can be sold and distributed to the general public. However, the consequence of all this
testing is that it usually takes several years and millions of dollars before a drug is approved.
Keep in mind that all these costs are above and beyond the millions that the drug company has
spent on research and development.
All in all, investors should always be on the lookout for regulations that could potentially have a
material impact upon a business' bottom line. Investors should keep these regulatory costs in
mind as they assess the potential risks and rewards of investing.

1. Who is a Portfolio Manager?

A portfolio manager is a body corporate who, pursuant to a contract or

arrangement with a client, advises or directs or undertakes on behalf of the
client (whether as a discretionary portfolio manager or otherwise), the
management or administration of a portfolio of securities or the funds of the
client.
2. What is the difference between a discretionary portfolio manager and a
non- discretionary portfolio manager?
The discretionary portfolio manager individually and independently
manages the funds of each client in accordance with the needs of the client.
The non-discretionary portfolio manager
accordance with the directions of the client.

manages

the

funds

in

3. What is the procedure of obtaining registration as a portfolio manager

from SEBI?
For registration as a portfolio manager, an applicant is required to pay a nonrefundable application fee of Rs.1,00,000/- by way of demand draft drawn in
favour of Securities and Exchange Board of India, payable at Mumbai.
The application in Form A along with additional information (Form A and
additional information available on SEBI Website : www.sebi.gov.in.)
submitted to the at the below mentioned address
Investment Management Department - Division of Funds- 1
Securities and Exchange Board of India
SEBI Bhavan, 3rd Floor A Wing,
Plot No. C4-A, G Block,
Bandra-Kurla Complex,
Bandra (E), Mumbai - 400 051.
4.

What is the capital adequacy requirement of a portfolio manager?

The portfolio manager is required to have a minimum networth of Rs. 2 crore.

5. Is there any registration fee to be paid by the portfolio managers?

Yes. Every portfolio manager is required to pay Rs. 10 lakhs as registration
fees at the time of grant of certificate of registration by SEBI.

6. How long does the certificate of registration remain valid?

The certificate of registration remains valid for three years. The portfolio
manager has to apply for renewal of its registration certificate to SEBI, 3

months before the expiry of the validity of the certificate, if it wishes to

continue as a registered portfolio manager.
7. How much is the renewal fee to be paid by the portfolio manager?
The portfolio manager is required to pay Rs. 5 lakh as renewal fees to SEBI.
8. Is there any contract between the portfolio manager and its client?
Yes. The portfolio manager, before taking up an assignment of management
of funds or portfolio of securities on behalf of the client, enters into an
agreement in writing with the client, clearly defining the inter se relationship
and setting out their mutual rights, liabilities and obligations relating to the
management of funds or portfolio of securities, containing the details as
specified in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993.
9.

What fees can a portfolio manager charge from its clients for the
services rendered by him?
SEBI Portfolio Manager Regulations have not prescribed any scale of fee to
be charged by the portfolio manager to its clients.
However, the regulations provide that the portfolio manager shall charge a fee
as per the agreement with the client for rendering portfolio management
services. The fee so charged may be a fixed amount or a return based fee or
a combination of both. The portfolio manager shall take specific prior
permission from the client for charging such fees for each activity for which
service is rendered by the portfolio manager directly or indirectly (where such
service is outsourced).

10. Is there any specified value of funds or securities below which a

portfolio manager cant accept from the client while opening the
account for the purpose of rendering portfolio management service to
the client?
The portfolio manager is required to accept minimum Rs. 5 lakhs or securities
having a minimum worth of Rs. 5 lakhs from the client while opening the
account for the purpose of rendering portfolio management service to the
client.
Portfolio manager can only invest and not borrow on behalf of his clients.
11. Are investors required to open demat accounts for PMS services?

Yes. For investment in listed securities, an investor is required to open a

demat account in his/her own name.
12. What kind of reports can the client expect from the portfolio manager?
The portfolio manager shall furnish periodically a report to the client, as
agreed in the contract, but not exceeding a period of six months and as and
when required by the client and such report shall contain the following details,
namely:(a) the composition and the value of the portfolio, description of security,
number of securities, value of each security held in the portfolio, cash balance
and aggregate value of the portfolio as on the date of report;
(b) transactions undertaken during the period of report including date of
transaction and details of purchases and sales;
(c) beneficial interest received during that period in respect of interest,
dividend, bonus shares, rights shares and debentures;
(d) expenses incurred in managing the portfolio of the client;
(e) details of risk foreseen by the portfolio manager and the risk relating to the
securities recommended by the portfolio manager for investment or
disinvestment.
This report may also be available on the website with restricted access to
each client. The portfolio manager shall, in terms of the agreement with the
client, also furnish to the client documents and information relating only to the
management of a portfolio. The client has right to obtain details of his portfolio
from the portfolio managers.
13. What is the disclosure mechanism of the portfolio managers to their
clients?
The portfolio manager provides to the client the Disclosure Document at least
two days prior to entering into an agreement with the client.
The Disclosure Document contains the quantum and manner of payment of
fees payable by the client for each activity, portfolio risks, complete
disclosures in respect of transactions with related parties, the performance of
the portfolio manager and the audited financial statements of the portfolio
manager for the immediately preceding three years.
Please note that the disclosure document is neither approved nor
disapproved by SEBI nor does SEBI certify the accuracy or adequacy of the
contents of the Documents.

14. Does SEBI approve any of the services offered by portfolio managers?
No. SEBI does not approve any of the services offered by the Portfolio
Manager. An investor has to invest in the services based on the terms and
conditions laid out in the disclosure document and the agreement between
the portfolio manager and the investor.
15. Does SEBI approve the disclosure document of the portfolio manager?
The Disclosure Document is neither approved nor disapproved by SEBI. SEBI
does not certify the accuracy or adequacy of the contents of the Disclosure
Document.
16. What are the rules governing services of a Portfolio Manager?
The services of a Portfolio Manager are governed by the agreement between
the portfolio manager and the investor. The agreement should cover the
minimum details as specified in the SEBI Portfolio Manager Regulations.
However, additional requirements can be specified by the Portfolio Manager
in the agreement with the client. Hence, an investor is advised to read the
agreement carefully before signing it.

17. Is premature withdrawal of Funds/securities by an investor allowed?

The funds or securities can be withdrawn or taken back by the client before
the maturity of the contract. However, the terms of the premature withdrawal
would be as per the agreement between the client and the portfolio manager.
18. Can a Portfolio Manager impose a lock-in on the investor?
Portfolio managers cannot impose a lock-in on the investment of their clients.
However, a portfolio manager can charge exit fees from the client for early
exit, as laid down in the agreement.
19. Can a Portfolio Manager offer indicative or guaranteed returns?
Portfolio manager cannot offer/ promise indicative or guaranteed returns to
clients.
20. On what basis is the performance of the portfolio manager calculated?
The performance of a discretionary portfolio manager is calculated using
weighted average method taking each individual category of investments for

the immediately preceding three years and in such cases performance

indicator is also disclosed.
21.

Where can an investor look out for information on portfolio

managers?
Investors can log on to the website of SEBI www.sebi.gov.in for information on
SEBI regulations and circulars pertaining to portfolio managers. Addresses of
the registered portfolio managers are also available on the website.

22. How can the investors redress their complaints?

Investors would find in the Disclosure Document the name, address and
telephone number of the investor relation officer of the portfolio manager who
attends to the investor queries and complaints. The grievance redressal and
dispute mechanism is also mentioned in the Disclosure Document. Investors
can approach SEBI for redressal of their complaints. On receipt of complaints,
SEBI takes up the matter with the concerned portfolio manager and follows
up with them.

Morgan Stanley Wealth Management is an American multinational financial services

corporation specializing in retail brokerage. It is the wealth & asset management division of
Morgan Stanley. On January 13, 2009, Morgan Stanley and Citigroup announced that Citigroup
would sell 51% of Smith Barney to Morgan Stanley, creating Morgan Stanley Smith Barney,
which was formerly a division of Citi Global Wealth Management. The combined brokerage
house has 17,649 financial advisors and manages $2 trillion in client assets.[1] Clients range from
individual investors to small- and mid-sized businesses, as well as large corporations, non-profit
organizations and family foundations.
On September 25, 2012, Morgan Stanley announced that its U.S. wealth management business
was renamed "Morgan Stanley Wealth Management." The broker-dealer designation for Morgan
Stanley Wealth Management will remain "Morgan Stanley Smith Barney LLC.
Sale to Morgan Stanley

During the major financial crisis beginning in late 2008, Citigroup suffered large losses in its
retained collateralized debt obligation exposure (loans that Citi underwrote but was not able to
sell), and had to be rescued by the U.S. federal government. They decided to sell or close "noncore" businesses in order to raise money. On January 13, 2009, Morgan Stanley and Citigroup
announced the merger of Smith Barney with Morgan Stanley's Global Wealth Management
Group, with Morgan Stanley paying $2.7 billion cash upfront to Citigroup for a 51% stake in the
joint venture. The joint venture operates as Morgan Stanley Smith Barney.[11] Morgan Stanley

itself was in a financially cash-strapped position like Citigroup during that time, but they were
helped by $9 billion investment from Mitsubishi UFJ Financial Group for a 21% stake in
Morgan Stanley.
On June 1, 2009, Morgan Stanley and Citigroup Inc. announced they closed early on the launch
of their joint venture that combines Morgan Stanley's wealth management unit (including many
former Dean Witter assets) with Citi's Smith Barney brokerage division. The new venture, called
Morgan Stanley Smith Barney, was supposed to launch during the third quarter. The combined
entity generates about $14 billion in net revenue, has 18,500 financial advisers, 1,000 locations
worldwide and serves about 6.8 million households.[12]
Citigroup disclosed on September 17, 2009, they would sell their remaining shares in the group
to partner Morgan Stanley