UNIVERSITY OF MUMBAI

PROJECT ON

OVERVIEW OF PORTFOLIO MANAGEMENT IN INDIA.

Submitted

In Partial Fulfillment of the requirements

For the Award of the Degree of
Bachelor of Management

By

ANIL. C. CHAVAN.

PROJECT GUIDE

MRS. JAYASHRI KARVE

BACHELOR OF MANAGEMENT STUDIES

SEMESTER V
(2010-2011)

K.V.PENDHARKAR COLLEGE OF ARTS,

SCIENCE&COMMERCE

1
 Declaration

I ANIL.C CHAVAN student of BMS – Semester V (2010-2011) hereby

Declare that I have completed this project on “OVERVIEW OF

PORTFOLIO MANAGEMENT IN INDIA

The information submitted is true & original to the best of my

knowledge.

The conclusions and recommendations written in this project are

based on
The data collected by me while preparing this report.

Signature

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 ACKNOWLEDGEMENT

It gives me great pleasure to submit this project to the University of

Mumbai as a part of curriculum of my BMS course. I take this opportunity
with great pleasure to present before you this project on “OVERVIEW OF
PORTFOLIO MANAGEMENT IN INDIA" which is a result of co-operation,
hard work and good wishes of many people. The most pleasant part of any
project is to express the gratitude towards all those who have contributed
to the success of the project.
I would like to thank Mrs. JAYASHRI KARVE who has been my mentor for
this project. It was only through her excellence assistance and good
suggestions that I have been able to complete this project.
Library Staff:

For giving valuable information about the various books related to this
project.
With all the heartiest thanks; I hope my final project report will be a great
success and a good source of learning and information.

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 INDEX

CHAPTER TABLE OF CONTENTS PAGE NO.

CHATER-1 Introduction to Portfolio Management 8

Introduction to kotak securities ltd.
10
CHAPTER-2
Meaning of portfolio management
14
CHAPTER-3
Methodology
CHAPTER-4 18
Basic concepts &
components for portfolio management
CHAPTER-5 23
Types of portfolio management
CHAPTER-6 37
Persons involved in portfolio management

CHAPTER-7 42
Risk –Return analysis

CHAPTER-8 49
Assest allocation

CHAPTER-9 53
Primary survey
CHAPTER-10 58
Findings

CHAPTER-11 62
conclusion

CHAPTER-12 63
Bibliography/Webliography
CHAPTER-13 64

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 NEED FOR SELECTING THE PROJECT

 To get the overall knowledge of securities and investment.

 To know how the investment made in different securities

minimizes the risk and maximizes the returns.

 To get the knowledge of different factors that affects the investment

decision of investors.

 To know how different companies are managing their portfolio

i.e. when and in which sectors they are investing.

 To know what is the need of appointing a Portfolio Manager and

how does he meets the needs of the various investors.

 To get the knowledge about the role (played) and functions of

portfolio manager.

 To get the knowledge of investment decision and asset

allocation.

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 EXECUTIVE SUMMARY

Investing in equities requires time, knowledge and constant monitoring of the market.
For those who need an expert to help to manage their investments, portfolio
management service (PMS) comes as an answer.

The business of portfolio management has never been an easy one. Juggling the
limited choices at hand with the twin requirements of adequate safety and sizeable
returns is a task fraught with complexities.

Given the unpredictable nature of the market it requires solid experience and strong
research to make the right decision. In the end it boils down to make the right move in
the right direction at the right time. That’s where the expert comes in.

The term portfolio management in common practice refers to selection of securities

and their continuous shifting in a way that the holder gets maximum returns at minimum
possible risk. Portfolio management services are merchant banking activities recognized
by SEBI and these activities can be rendered by SEBI authorized portfolio managers or
discretionary portfolio managers.

A portfolio manager by the virtue of his knowledge, background and experience helps
his clients to make investment in profitable avenues. A portfolio manager has to comply
with the provisions of the SEBI (portfolio managers) rules and regulations, 1993.

This project also includes the different services rendered by the portfolio manager. It
includes the functions to be performed by the portfolio manager.

What is the difference between the value of time and money? In other words, learn to
separate time from money.

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 When it comes to the importance of time, how many of us believe that time is money.
We all know that the work done by us is calculated by units of time. Have you ever
considered the difference between an employee who is working on an hourly rate and
the other who is working on salary basis? The only difference between them is of the unit
of time. No matter whether you get your pay by the hour, bi-weekly, or annually; one
thing common in all is that the amount is paid to you according to amount of time you
spent on working.

In other words, time is precious and holds much more importance than money. That
is the reason the time is considered as an important factor in wealth creation.

The project also shows the factors that one considers for making an investment
decision and briefs about the information related to asset allocation.

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 CHAPTER: 1

PORTFOLIO MANAGEMENT

INTRODUCTION

Stock exchange operations are peculiar in nature and most of the Investors feel
insecure in managing their investment on the stock market because it is difficult for an
individual to identify companies which have growth prospects for investment. Further
due to volatile nature of the markets, it requires constant reshuffling of portfolios to
capitalize on the growth opportunities. Even after identifying the growth oriented
companies and their securities, the trading practices are also complicated, making it a
difficult task for investors to trade in all the exchange and follow up on post trading
formalities.

Investors choose to hold groups of securities rather than single security that offer the
greater expected returns. They believe that a combination of securities held together will
give a beneficial result if they are grouped in a manner to secure higher return after
taking into consideration the risk element. That is why professional investment advice
through portfolio management service can help the investors to make an intelligent and

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informed choice between alternative investments opportunities without the worry of post
trading hassles.
From The Rational Edge: The first in a new series of articles on portfolio
management, this introduction expresses IBM’s viewpoint about the foundations and
essentials of portfolio management, and discusses ideas and assets that support and
enable effective portfolio management practices.

A good way to begin understanding what portfolio management is (and is not) may be to
define the term portfolio. In a business context, we can look to the mutual fund industry
to explain the term's origins. Morgan Stanley's Dictionary of Financial Terms offers the
following explanation:

If you own more than one security, you have an investment portfolio. You build the
portfolio by buying additional stocks, bonds, mutual funds, or other investments. Your
goal is to increase the portfolio's value by selecting investments that you believe will go
up in price

According to modern portfolio theory, you can reduce your investment risk by creating a
diversified portfolio that includes enough different types, or classes, of securities so that
at least some of them may produce strong returns in any economic climate.

Note that this explanation contains a number of important ideas:

• A portfolio contains many investment vehicles.

• Owning a portfolio involves making choices -- that is, deciding what additional
stocks, bonds, or other financial instruments to buy; when to buy; what and when
to sell; and so forth. Making such decisions is a form of management.
• The management of a portfolio is goal-driven. For an investment portfolio, the
specific goal is to increase the value.
• Managing a portfolio involves inherent risks.

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 CHAPTER2

INTRODUCTON TO KOTAK SECURITIES LTD.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management
Finance Limited. Uday Kotak, Sidney A. A. Pinto and Kotak & Company
promoted this company. Industrialists Harish Mahindra and Mahindra took a
stake in 1986, and that's when the company changed its name to Kotak
Mahindra Finance Limited. Since then it's been a steady and confident journey to
growth and success.

Kotak Securities Ltd. is one of India's largest brokerage and securities

distribution house in India. Over the years Kotak Securities has been one of
the leading investment broking houses catering to the needs of both
institutional and non-institutional investor categories with presence all over the
country through franchisees and co-ordinates. Kotak Securities Ltd. offers online
and offline services based on well-researched expertise and financial products to
the non-institutional investors.

Kotak Securities Limited is t he world of Capital Markets where everything

newsworthy exists only in the present moment and where knowing the
importance of timing, sentiments and strategic forecasting makes the difference
between profit and loss.

Kotak Securities Limited, a strategic joint venture between Kotak Mahindra Bank
and Goldman Sachs (holding 25% one of the world’s leading investment banks
and brokerage firms) is India’s leading stock broking house with a market share
of 7 - 8 %.

Kotak Securities Limited is one of the larger players in distribution of IPOs - it

was ranked number One in 2003-04 as Book Running Lead Manager in public
equity offerings by PRIME Database. It has also won the “Best Equity House”
Award from Finance Asia -April 2004.

The Company has a full-fledged Research division involved in macroeconomic

studies, Sectoral research and Company specific equity research combined with
a strong and well networked sales force which helps deliver current and up-to-
date market information and news.

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Kotak Securities Limited is also a depository participant with National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL)
providing dual benefit services wherein the investors can use the brokerage
services of the Company for executing the transactions and the depository
services for settling them.

Kotak Securities has 122 branches servicing more than 1, 70,000 customer and
Coverage of 18 cities. Kotaksecurities.com, the online division of Kotak
Securities Limited offers Internet Broking services and also online IPO and
Mutual Fund Investments. Kotak Securities Limited manages assets over 2500
cores of Assets under Management (AUM).

Kotak securities provide portfolio Management Services, catering to the high end
of the market. Portfolio Management from Kotak Securities comes as an answer
to those who would like to grow exponentially on the crest of the stock market,
with the backing of an expert.

Kotak Securities Limited manages assets over Rs. 1700crores through its
Portfolio Management Services (PMS) servicing high net worth clients with a
large investible surplus through its preferred client services in the mass affluent
and wealth management segments.

The company has a full-fledged research division involved in Macro Economic

studies, Sectoral research and Company Specific Equity Research combined
with a strong and well networked sales force which helps deliver current and up
to date market information and news.

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 KOTAK SECURITIES RESEARCH CENTER

Kotak Securities Research Center is a special research cell where some of

India's finest financial analysts bring you intensive research reports on how
the stock market is faring, when is the right time to invest, when to execute
your order and more. KSL provides both type of research reports.

 Fundamental Research reports

a. Intraday calls

b. Special Reports

c. Market Mornings

d. Daily Market Brief

e. Sectoral Report

f. Stock Ideas

g. Derivatives Reports

h. Portfolio Advices

 Technical Research reports

a. Weekly Technical Analysis

Depending on what kind of investor you are, Kotak Securities Ltd. (KSL) brings
customers from fundamental or basic research and technical research. As an
investor with Kotak Securities, Customers get access to these research reports
exclusively. Customers get access to the following reports. Research process is
given below.

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 PRODUCTS OFFERED BY KOTAK SECURITIES LIMITED
1. Portfolio Management Services [PMS]: KOTAK Securities is among the
Largest private client asset managers in the Country today with an equity
asset base of around 1700crores (US$ 400 million). Kotak clients include
some of the most affluent families and high net worth individuals in the
Country and customer assets under management rival some of the larger
mutual funds in India.

2) Margin Trading Facility

3) Demat Account Facility

4) IPOs

5) Mutual Funds

AWARDS GRAB BY KOTAK SECURITIES LTD.

 Prime Ranking Award (2003-04) - Largest Distributor of IPOs

 Finance Asia Award (2004)- India's best Equity House

 Finance Asia Award (2005)-Best Broker in India

 Euromoney Award (2005)-Best Equities House in India

 Finance Asia Award (2006) - Best Broker in India

 Euromoney Award (2006) - Best Provider of Portfolio Management in Equities

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 CHAPTER3
MEANING OF PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities and

their continuous shifting in the portfolio to optimize returns to suit the objectives of an
investor. This however requires financial expertise in selecting the right mix of securities
in changing market conditions to get the best out of the stock market. In India, as well
as in a number of western countries, portfolio management service has assumed the
role of a specialized service now a days and a number of professional merchant
bankers compete aggressively to provide the best to high net worth clients, who have
little time to manage their investments. The idea is catching on with the boom in the
capital market and an increasing number of people are inclined to make profits out of
their hard-earned savings.

Portfolio management service is one of the merchant banking activities recognized

by Securities and Exchange Board of India (SEBI). The service can be rendered either
by merchant bankers or portfolio managers or discretionary portfolio manager as define
in clause (e) and (f) of Rule 2 of Securities and Exchange Board of India(Portfolio
Managers)Rules, 1993 and their functioning are guided by the SEBI.

According to the definitions as contained in the above clauses, a portfolio manager

means any person who is pursuant to 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, as the case may be. A merchant banker acting as a Portfolio
Manager shall also be bound by the rules and regulations as applicable to the portfolio
manager.

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 Realizing the importance of portfolio management services, the SEBI has laid down
certain guidelines for the proper and professional conduct of portfolio management
services. As per guidelines only recognized merchant bankers registered with SEBI are
authorized to offer these services.
Portfolio management or investment helps investors in effective and efficient
management of their investment to achieve this goal. The rapid growth of capital
markets in India has opened up new investment avenues for investors.

The stock markets have become attractive investment options for the common man.
But the need is to be able to effectively and efficiently manage investments in order to
keep maximum returns with minimum risk.

 Portfolio is a collection of asset.

 The asset may be physical or financial like Shares Bonds, Debentures,
and Preference Shares etc.
 The individual investor or a fund manager would not like to put all his
money in the shares of one company, for that would amount to great risk.
 Main objective is to maximize portfolio return and at the same time
minimizing the portfolio risk by diversification.
 Portfolio management is the management of various financial assets,
which comprise the portfolio.
 According to Securities and Exchange Board of India (Portfolio manager) Rules, 1993; “
portfolio” means the total holding of securities belonging to any person;
 Designing portfolios to suit investor requirement often involves making several
projections regarding the future, based on the current information.
 When the actual situation is at variance from the projections portfolio composition needs
to be changed.
 One of the key inputs in portfolio building is the risk bearing ability of the investor.

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 Portfolio management can be having institutional, for example, Unit Trust, Mutual
Funds, Pension Provident and Insurance Funds, Investment Companies and non-
Investment Companies.
Over time, other industry sectors have adapted and applied these ideas to
other types of "investments," including the following:

Application portfolio management: This refers to the practice of managing an entire

group or major subset of software applications within a portfolio. Organizations regard
these applications as investments because they require development (or acquisition)
costs and incur continuing maintenance costs. Also, organizations must constantly
make financial decisions about new and existing software applications, including
whether to invest in modifying them, whether to buy additional applications, and when to
"sell" -- that is, retire -- an obsolete software application.

Product portfolio management: Businesses group major products that they develop
and sell into (logical) portfolios, organized by major line-of-business or business
segment. Such portfolios require ongoing management decisions about what new
products to develop (to diversify investments and investment risk) and what existing
products to transform or retire (i.e., spin off or divest). Project or initiative portfolio
management, an initiative, in the simplest sense, is a body of work with:

• A specific (and limited) collection of needed results or work products.

• A group of people who are responsible for executing the initiative and use
resources, such as funding.
• A defined beginning and end.

Managers can group a number of initiatives into a portfolio that supports a business
segment, product, or product line. These efforts are goal-driven; that is, they support
major goals and/or components of the enterprise's business strategy. Managers must
continually choose among competing initiatives (i.e., manage the organization's
investments), selecting those that best support and enable diverse business goals (i.e.,

16
they diversify investment risk). They must also manage their investments by providing
continuing oversight and decision-making about which initiatives to undertake, which to
continue, and which to reject or discontinue.

Indian Bank enters into a Strategic Alliance with Pnb

Principal

Chennai, January 25, 2006: Indian Bank is enlarging its activities to deliver value-
added services to its customers. The Bank is presently selling the Insurance products,
both Life and Non-life as a Corporate Agent. The Bank is concentrating on optimizing
the 3 Ps, People, Process and Products to give maximum advantage to its customers
and to face the market competition by exploiting the emerging opportunities.

Indian Bank today announced a strategic alliance with Pnb Principal Insurance Advisory
Co., Pvt. Ltd. in the insurance advisory business and Pnb Principal Financial Planners
Pvt. Ltd. in the financial planning business. As the alliance will enable access to the
financial products of 30 Insurance companies both life and non-life and an equal
number of Investment solutions to the Bank’s Customers under one roof, the Bank’s
emphasis would be to serve as an “agent to its customers”.

As per the scope of the alliance with Pnb Principal Insurance Advisory Co., Pvt. Ltd.,
Indian Bank has taken an equity stake in the Company. This partnership will also deliver
risk management solutions to Indian Bank customers through the Insurance advisory
route. The solutions offered will include risk assessment, insurance portfolio analysis &
placement, insurance portfolio administration, and claims management.

As per Indian Bank’s strategic alliance with Pnb Principal Financial Planners Pvt. Ltd.,
the Bank will distribute the investment solutions offered by Pnb Principal Financial
Planners through its extensive branch network. Pnb Principal Financial Planners will
provide support in the area of financial planning, investment advisory, research,
systems and business development to Indian Bank. The strategic alliance will enable
customers of Indian Bank to access a wide range of superior investment solutions.

Announcing the partnership with Indian Bank, Sanjay Sachdev, Country Manager-India,
and Principal International said, “Banks have currently emerged as the largest
distribution channel for financial investment options. We are pleased to associate
ourselves with Indian Bank. This partnership with Indian Bank will make a range of
investment solutions more accessible to retail investors of Indian Bank.”

Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian Bank said,” The alliance
with Pnb Principal in the areas of Risk Management, Insurance and Investment will help
in providing a One-stop solution to the 15 million strong customers of Indian Bank

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throughout the country. The Tie-up will help realize our cherished goal of making our
Bank, “the best people to bank with”.

CHPTER4

METHODOLOGY
Portfolio Management is used to select a portfolio of new product development projects
to achieve the following goals:

• Maximize the profitability or value of the portfolio

• Provide balance
• Support the strategy of the enterprise

Portfolio Management is the responsibility of the senior management team of an

organization or business unit. This team, which might be called the Product Committee,
meets regularly to manage the product pipeline and make decisions about the product
portfolio. Often, this is the same group that conducts the stage-gate reviews in the
organization.

A logical starting point is to create a product strategy - markets, customers, products,

strategy approach, competitive emphasis, etc. The second step is to understand the
budget or resources available to balance the portfolio against. Third, each project must
be assessed for profitability (rewards), investment requirements (resources), risks, and
other appropriate factors.

The weighting of the goals in making decisions about products varies from company.
But organizations must balance these goals: risk vs. profitability, new products vs.
improvements, strategy fit vs. reward, market vs. product line, long-term vs. short-term.

Several types of techniques have been used to support the portfolio management
process:

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 • Heuristic models
• Scoring techniques
• Visual or mapping techniques

The earliest Portfolio Management techniques optimized projects' profitability or

financial returns using heuristic or mathematical models. However, this approach paid
little attention to balance or aligning the portfolio to the organization's strategy. Scoring
techniques weight and score criteria to take into account investment requirements,
profitability, risk and strategic alignment. The shortcoming with this approach can be an
over emphasis on financial measures and an inability to optimize the mix of projects.
Mapping techniques use graphical presentation to visualize a portfolio's balance. These
are typically presented in the form of a two-dimensional graph that shows the trade-off's
or balance between two factors such as risks vs. profitability, marketplace fit vs. product
line coverage, financial return vs. probability of success, etc

The recommended approach is to start with the overall business plan that should define
the planned level of R&D investment, resources (e.g., headcount, etc.), and related
sales expected from new products. With multiple business units, product lines or types
of development, we recommend a strategic allocation process based on the business
plan. This strategic allocation should apportion the planned R&D investment into
business units, product lines, markets, geographic areas, etc. It may also breakdown
the R&D investment into types of development, e.g., technology development, platform
development, new products, and upgrades/enhancements/line extensions, etc.

Once this is done, then a portfolio listing can be developed including the relevant
portfolio data. We favor use of the development productivity index (DPI) or scores from
the scoring method. The development productivity index is calculated as follows: (Net
Present Value x Probability of Success) / Development Cost Remaining. It factors the
NPV by the probability of both technical and commercial success. By dividing this result
by the development cost remaining, it places more weight on projects nearer completion
and with lower uncommitted costs. The scoring method uses a set of criteria (potentially
different for each stage of the project) as a basis for scoring or evaluating each project.

19
An example of this scoring method is shown with the worksheet below. Weighting
factors can be set for each criterion. The evaluators on a Product Committee score
projects (1 to 10, where 10 are best). The worksheet computes the average scores and
applies the weighting factors to compute the overall score. The maximum weighted
score for a project is 100.This portfolio list can then be ranked by either the
development priority index or the score. An example of the portfolio list is shown below
and the second illustration shows the category summary for the scoring method.

Once the organization has its prioritized list of projects, it then needs to determine
where the cutoff is based on the business plan and the planned level of investment of
the resources available. This subset of the high priority projects then needs to be further

20
analyzed and checked. The first step is to check that the prioritized list reflects the
planned breakdown of projects based on the strategic allocation of the business plan.

Pie charts such as the one below can be used for this purpose.

Other factors can also be checked using bubble charts. For example, the risk-reward
balance is commonly checked using the bubble chart shown earlier. A final check is to
analyze product and technology roadmaps for project relationships. For example, if a
lower priority platform project was omitted from the protfolio priority list, the subsequent
higher priority projects that depend on that platform or platform technology would be
impossible to execute unless that platform project were included in the portfolio priority
list.

Finally, this balanced portfolio that has been developed is checked against the business
plan as shown below to see if the plan goals have been achieved - projects within the
planned R&D investment and resource levels and sales that have met the goals.

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With the significant investments required to develop new products and the risks
involved, Portfolio Management is becoming an increasingly important tool to make
strategic decisions about product development and the investment of company
resources. In many companies, current year revenues are increasingly based on new
products developed in the last one to three years.

INVESTMENT PORTFOLIO MANAGEMENT AND PORTFOLIO

THEORY

Portfolio theory is an investment approach developed by University of Chicago

economist Harry M. Markowitz (1927 - ), who won a Nobel Prize in economics in 1990.
Portfolio theory allows investors to estimate both the expected risks and returns, as
measured statistically, for their investment portfolios.

Markowitz described how to combine assets into efficiently diversified portfolios. It was
his position that a portfolio's risk could be reduced and the expected rate of return could
be improved if investments having dissimilar price movements were combined. In other
words, Markowitz explained how to best assemble a diversified portfolio and proved that
such a portfolio would likely do well.

There are two types of Portfolio Strategies:

A. Passive Portfolio Strategy

A strategy that involves minimal expectation input, and instead relies on diversification
to match the performance of some market index.

B. Active Portfolio Strategy

A strategy that uses available information and forecasting techniques to seek a better
performance than a portfolio that is simply diversified broadly

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 CHAPTER5
BASIC CONCEPTS AND COMPONENTS FOR
PORTFOLIO MANAGEMENT

Now that we understand some of the basic dynamics and inherent challenges
organizations face in executing a business strategy via supporting initiatives, let's look
at some basic concepts and components of portfolio management practices.

1. The Portfolio
First, we can now introduce a definition of portfolio that relates more directly to the
context of our preceding discussion. In the IBM view, a portfolio is: One of a number of
mechanisms, constructed to actualize significant elements in the Enterprise Business
Strategy.
It contains a selected, approved, and continuously evolving, collection of Initiatives
which are aligned with the organizing element of the Portfolio, and, which contribute to
the achievement of goals or goal components identified in the Enterprise Business
Strategy. The basis for constructing a portfolio should reflect the enterprise's particular
needs. For example, you might choose to build a portfolio around initiatives for a
specific product, business segment, or separate business unit within a multinational
organization.

2. The Portfolio Structure

As we noted earlier, a portfolio structure identifies and contains a number of portfolios.
This structure, like the portfolios within it, should align with significant planning and

23
results boundaries, and with business components. If you have a product-oriented
portfolio structure, for example, then you would have a separate portfolio for each major
product or product group. Each portfolio would contain all the initiatives that help that
particular product or product group contribute to the success of the enterprise business

3. The Portfolio Manager

This is a new role for organizations that embrace a portfolio management approach. A
portfolio manager is responsible for continuing oversight of the contents within a
portfolio. If you have several portfolios within your portfolio structure, then you will likely
need a portfolio manager for each one. The exact range of responsibilities (and
authority) will vary from one organization to another, but the basics are as follows:

• One portfolio manager oversees one portfolio.

• The portfolio manager provides day-to-day oversight.
• The portfolio manager periodically reviews the performance of, and conformance
to expectations for, initiatives within the portfolio.
• The portfolio manager ensures that data is collected and analyzed about each of
the initiatives in the portfolio.
• The portfolio manager enables periodic decision making about the future
direction of individual initiatives.

4. Portfolio Reviews and Decision Making

As initiatives are executed, the organization should conduct periodic reviews of actual
(versus planned) performance and conformance to original expectations. Typically,
organization managers specify the frequency and contents for these periodic reviews,
and individual portfolio managers oversee their planning and execution. The reviews
should be multi-dimensional, including both tactical elements (e.g., adherence to plan,
budget, and resource allocation) and strategic elements (e.g., support for business
strategy goals and delivery of expected organizational benefits).

A significant aspect of oversight is setting multiple decision points for each initiative, so
that managers can periodically evaluate data and decide whether to continue the work.

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These "continue/change/discontinue" decisions should be driven by an understanding
(developed via the periodic reviews) of a given initiative's continuing value, expected
benefits, and strategic contribution, Making these decisions at multiple points in the
initiative's lifecycle helps to ensure that managers will continually examine and assess
changing internal and external circumstances, needs, and performance.

5. Governance
Implementing portfolio management practices in an organization is a transformation
effort that typically involves developing new capabilities to address new work efforts,
defining (and filling) new roles to identify portfolios (collections of work to be done), and
delineating boundaries among work efforts and collections. Implementing portfolio
management also requires creating a structure to provide planning, continuing direction,
and oversight and control for all portfolios and the initiatives they encompass. That is
where the notion of governance comes into play. The IBM view of governance is:

An abstract, collective term that defines and contains a framework for organization,
exercise of control and oversight, and decision-making authority, and within which
actions and activities are legitimately and properly executed; together with the definition
of the functions, the roles, and the responsibilities of those who exercise this oversight
and decision-making.
Portfolio management governance involves multiple dimensions, including:

• Defining and maintaining an enterprise business strategy.

• Defining and maintaining a portfolio structure containing all of the organization's
initiatives (programs, projects, etc.).
• Reviewing and approving business cases that propose the creation of new
initiatives.
• Providing oversight, control, and decision-making for all ongoing initiatives.
• Ownership of portfolios and their contents.

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Each of these dimensions requires an owner -- either an individual or a collective -- to
develop and approve plans, continuously adjust direction, and exercise control through
periodic assessment and review of conformance to expectations.
A good governance structure decomposes both the types of work and the authority to
plan and oversee work. It defines individual and collective roles, and links them to an
authority scheme. Policies that are collectively developed and agreed upon provide a
framework for the exercise of governance. The complexities of governance structures
extend well beyond the scope of this article. Many organizations turn to experts for help
in this area because it is so critical to the success of any business transformation effort
that encompasses portfolio management. For now, suffice it to say that it is worth
investing time and effort to create a sound and flexible governance structure before you
attempt to implement portfolio management practices.

6. Portfolio management essentials

Every practical discipline is based on a collection of fundamental concepts that people
have identified and proven (and sometimes refined or discarded) through continuous
application. These concepts are useful until they become obsolete, supplanted by
newer and more effective ideas.

For example, in Roman times, engineers discovered that if the upstream supports of a
bridge were shaped to offer little resistance to the current of a stream or river, they
would last longer. They applied this principle all across the Roman Empire. Then, in the
middle Ages, engineers discovered that such supports would last even longer if their
downstream side was also shaped to offer little resistance to the current. So that
became the new standard for bridge construction.

Portfolio management, like bridge-building, is a discipline, and a number of authors and

practitioners have documented fundamental ideas about its exercise. Recently, based
on our experiences with clients who have implemented portfolio management practices
and on our research into the discipline, we have started to shape an IBM view of
fundamental ideas around portfolio management. We are beginning to express this view

26
as a collection of "essentials" that are, in turn, grouped around a small collection of
portfolio management themes.

OBJECTIVES OF PORTFOLIO MANAGEMENT

The basic objective of Portfolio Management is to maximize yield and minimize risk.
The other objectives are as follows:

a) Stability of Income: An investor considers stability of income from his

investment. He also considers the stability of purchasing power of income.

b) Capital Growth: Capital appreciation has become an important

investment principle. Investors seek growth stocks which provide a very
large capital appreciation by way of rights, bonus and appreciation in the
market price of a share.

c) Liquidity: An investment is a liquid asset. It can be converted into cash

with the help of a stock exchange. Investment should be liquid as well as
marketable. The portfolio should contain a planned proportion of high-
grade and readily salable investment.

d) Safety: safety means protection for investment against loss under

reasonably variations. In order to provide safety, a careful review of
economic and industry trends is necessary. In other words, errors in
portfolio are unavoidable and it requires extensive diversification.

27
 e) Tax Incentives: Investors try to minimize their tax liabilities from the
investments. The portfolio manager has to keep a list of such investment
avenues along with the return risk, profile, tax implications, yields and
other returns

There are three goals of portfolio management:

1. Maximize the value of the portfolio

2. Seek balance in the portfolio

3. Keep portfolio projects strategically aligned

It provides a set of portfolio management tools to help achieve these goals. With
multiple business units, product lines or types of development, we recommend a
strategic allocation process based on the business plan. The Master Project
Schedule provides a summary of all-active as well as proposed projects and
classifies them by status (active, proposed, on-hold) and by business
unit/product line to align projects with the strategic allocation. The Master Project
Schedule also provides additional portfolio information to prioritize projects using
either a scorecard method or the development productivity index (DPI *). In
addition to this prioritization, PD-Trek provides a Risk-Reward Bubble Chart and
a Project Type Pie Chart to assure balance. A Product or Technology Roadmap

28
template is provided to help visualize platform and technology relationships to
assure critical project relationships are not overlooked with this prioritization. This
will allow management to develop a balanced approach to selecting and
continuing with the appropriate mix of projects to satisfy the three goals.

29
 FUNCTIONS OF PORTFOLIO MANAGEMENT

The basic purpose of portfolio management is to maximize yield and minimize risk.
Every investor is risk averse. In order to diversify the risk by investing into various
securities following functions are required to be performed.

The functions undertaken by the portfolio management are as follows:

1. To frame the investment strategy and select an investment mix to achieve the
desired investment objective;

2. To provide a balanced portfolio which not only can hedge against the inflation but
can also optimize returns with the associated degree of risk;

3. To make timely buying and selling of securities;

4. To maximize the after-tax return by investing in various taxes saving investment

instruments.

ELEMENTS OF PORTFOLIO MANAGEMENT:

Portfolio management is on-going process involving the following basic
tasks:
 Identification of the investor’s objectives, constraints and preferences.

 Strategies are to be developed and implemented in tune with
investment policy formulated.

 Review and monitoring of the performance of the portfolio.

30
 Finally the evaluation of the portfolio.

PROSPECTS OF POTFOLIO MANAGEMENT

⇒ At present, there are a very few agencies which render this type of services in
an organized and professional way.

⇒ However, their share in the total volume is very small.

⇒ There is no constraint on the demand for this type of financial service as

every entity would be saving and investing and interested in optimizing the
rate of return.

⇒ The size of capital market is increasing.

⇒ There is an increase in the number of stock exchanges.

⇒ New instruments are being introduced in the capital market.

⇒ The equity cult is spreading in the interiors and rural areas.

⇒ The percentage of investment of the household savings is bound to go up.

⇒ It is conservatively estimated that during the eighth plan resources to the tune
of over Rs.50000crore will be mobilized through the stock market.

⇒ India today has 20 million investors, as compared to 2 million in 1980.

31
 STEPS IN PORTFOLIO MANAGEMENT

Performance Portfolio
Evaluation Revision

Portfolio
Execution

STEPS
Selection of
Asset Mix

Identification Portfolio
Of Strategy
Objectives

1) IDENTIFICATION OF THE OBJECTIVES


The starting point in this process is to determine the characteristics of
the various investments and then matching them with the individuals need
and preferences.

All the personal investing is designed in order to achieve certain
objectives.

32
 
These objectives may be tangible such as buying a car, house etc. and
intangible objectives such as social status, security etc.

Similarly, these objectives may be classified as financial or personal
objectives.

Financial objectives are safety, profitability and liquidity.

Personal or individual objectives may be related to personal
characteristics of individuals such as family commitments, status,
depends, educational requirements, income, consumption and provision
for retirement etc.

2) FORMULATION OF PORTFOLIO STRATEGY


The aspect of Portfolio Management is the most important element of
proper portfolio investment and speculation.

While planning, a careful review should be conducted about the financial
situation and current capital market conditions.

This will suggest a set of investment and speculation policies to be followed.

The statement of investment policies includes the portfolio objectives,
strategies and constraints.

Portfolio strategy means plan or policy to be followed while investing in
different types of assets.

There are different investment strategies.

They require changes as time passes, investor’s wealth changes, security
price change, investor’s knowledge expands.

Therefore, the optional strategic asset allocation also changes.

The strategic asset allocation policy would call for broad diversification
through an indexed holding of virtually all securities in the asset class.

33
3) SELECTION OF ASSET MIX


The most important decision in portfolio management is selection of asset
mix.

It means spreading out portfolio investment into different asset classes
like bonds, stocks, mutual funds etc.

In other words selection of asset mix means investing in different kinds of
assets and reduces risk and volatility and maximizes returns in investment
portfolio.

Selection of asset mix refers to the percentage to the invested in various
security classes.

The security classes are simply the type of securities as under:

» money market instrument

» fixed income security
» equity shares
» real estate investment
» international securities


Once the objective of the portfolio is determined the securities to be
included in the portfolio must be selected.

Normally the portfolio is selected from a list of high-quality bonds that the
portfolio manager has at hand.

The portfolio manager has to decide the goals before selecting the
common stock.

The goal may be to achieve pure growth, growth with some income or
income only.

34
 Once the goal has been selected, the portfolio manager can select the
common stocks.

3) PORTFOLIO EXECUTION:


The process of portfolio management involves a logical set of steps
common to any decision, plan, implementation and monitor.

Applying this process to actual portfolios can be complex.

Therefore, in the execution stage, three decisions need to be made, if the
percentage holdings of various asset classes are currently different from
desired holdings.

The portfolio than, should be rebalanced. If the statement of investment
policy requires pure investment strategy, this is only thing, which is done
in the execution stage.

However, many portfolio managers engage in the speculative transactions
in the belief that such transactions will generate excess risk-adjusted
returns.

Such speculative transactions are usually classified as timing or selection
decisions.

Timing decisions over or under weight various asset classes, industries or
economic sectors from the strategic asset allocation.

Such timing decisions are known as tactical asset allocation and selection
decision deals with securities within a given asset class, industry group or
economic sector.

The investor has to begin with periodically adjusting the asset mix to the
desired mix, which is known as strategic asset allocation.

Then the investor or portfolio manager can make any tactical asset
allocation or security selection decision.

35
5) PORTFOLIO REVISION


Portfolio management would be an incomplete exercise without periodic
review.

The portfolio, which is once selected, has to be continuously reviewed
over a period of time and if necessary revised depending on the objectives
of investor.

Thus, portfolio revision means changing the asset allocation of a portfolio.

Investment portfolio management involves maintaining proper
combination of securities, which comprise the investor’s portfolio in a
manner that they give maximum return with minimum risk.

For this purpose, investor should have continuous review and scrutiny of
his investment portfolio.

Whenever adverse conditions develop, he can dispose of the securities,
which are not worth.

However, the frequency of review depends upon the size of the portfolio,
the sum involved, the kind of securities held and the time available to the
investor.

The review should include a careful examination of investment objectives,
targets for portfolio performance, actual results obtained and analysis of
reason for variations.

The review should be followed by suitable and timely action.

There are techniques of portfolio revision.

Investors buy stock according to their objectives and return-risk
framework.

These fluctuations may be related to economic activity or due to other
factors.

Ideally investors should buy when prices are low and sell when prices rise
to levels higher than their normal fluctuations.

36
 
The investor should decide how often the portfolio should be revised.

If revision occurs to often, transaction and analysis costs may be high.
6) PORTFOLIO PERFORMANCE EVALUATION:

 Portfolio management involves maintaining a proper combination of

securities, which comprise the investor’s portfolio in a manner that they
give maximum return with minimum risk.

The investor should have continues review and scrutiny of his investment
portfolio.

These rates of return should be based on the market value of the assets of the
fund.

Complete evaluation of the portfolio performance must include examining a
measure of the degree of risk taken by the fund.

A portfolio manager, by evaluating his own performance can identify sources of
strength or weakness.

It can be viewed as a feedback and control mechanism that can make the
investment management process more effective.

Good performance in the past might have resulted from good luck, in which
case such performance may not be expected to continue in the future.

On the other hand, poor performance in the past might have been result of bad
luck.

Therefore, the first task in performance evaluation is to determine whether
past performance was good or poor.

Then the second task is to determine whether such performance was due
to skill or luck.

Good performance in the past may have resulted from the actions of a
highly skilled portfolio manager.

The performance of portfolio should be measured periodically, preferably
once in a month or a quarter.

37
 
The performance of an individual stock should be compared with the
overall performance of the market.

CHAPTER6
TYPES OF PORTFOLIO MANAGEMENT:

The two types of portfolio management services are available o the investors:

Discretionary portfolio Non-discretionary

Management portfolio Management

The Discretionary portfolio management services (DPMS):

 In this type of services, the client parts with his money in favor of manager,
who in return, handles all the paper work, makes all the decisions and
gives a good return on the investment and for this he charges a certain
fees.
 In this discretionary PMS, to maximize the yield, almost all portfolio
managers parks the funds in the money market securities such as
overnight market, 182 days treasury bills and 90 days commercial bills.
 Normally, return on such investment varies from 14 to 18 per cent,
depending on the call money rates prevailing at the time of investment.

2. The Non-discretionary portfolio management services:

38
  The manager function as a counselor, but the investor is free to accept or
reject the manager’s advice; the manager for a services charge also
undertakes the paper work.
The manager concentrates on stock market instruments with a portfolio tailor
made to the risk taking ability of the investor.

EQUITY PORTFOLIO MANAGEMENT.

 It is logical that the expected return of a portfolio should depend on the

expected return of the security contained in it.

 There are two approaches to the selection of equity portfolio.

 One is technical analysis and the other is fundamental analysis.

 Technical analysis assumes that the price of a stock depends on supply and
demand in the stock market.

 All financial and market information of given security is already reflected in the
market price.

 Charts are drawn to identify price movements of a given security over a

period of time.

 These charts enable the investors to predict the future movement of the price
of security.

 Equity portfolio is a risky portfolio, but at the same time the return is also
higher.

 Equity portfolio provides highest returns.

39
  An efficient portfolio manager can obviously give more weight age to
fundamental analysis than the technical analysis.

 The fundamental analysis includes the study of ratio analysis, past and
present track record of the company, quality of management, government
policies etc.

 There may be several combinations of investment portfolio.

BONDS PORTFOLIO MANAGEMENT

 The individual investors can invest in bond portfolio.

 The portfolio can be spared over variety of securities.

 Investment in bond is less risky and safe as compared to equity

investment.

 However, the return on bond is very low.

 There are no much fluctuations in bond prices.

 Therefore, there is no capital appreciation in this case.

 Some bonds are tax saving which help the investor to reduce his tax
liability.

 There is no much liquidity in bonds, investment in bond portfolio is less

risky and safe but, return is reasonable, low liquidity and tax saving are some of the
more important features of bond portfolio investment.

40
 However, it is suitable for normal investors for getting average return over
their investment.

 Bond portfolio includes different types of bond, tax free bonds and taxable
bonds.

 Tax free bonds are issued by public sector undertaking or Government on

which interest s compounded half yearly and payable accordingly.

 They have a maturity of 7 to 10 years with the facility for buyback.

 The tax free bonds means the interest income on these bonds is not

 Therefore, the interest rates on these bonds are very low.

ADVANTAGES OF PORTFOLIO MANAGEMENT

Individuals will benefits immensely by taking portfolio management services for the
following reason: -

a) Whatever may be the status of the capital market; over the long period capital
markets have given an excellent return when compared to other forms of
investment. The return from bank deposits, units etc., is much less than from
stock market.

b) The Indian stock markets are very complicated. Though there are thousands of
companies that are listed only a few hundred, which have the necessary
liquidity. It is impossible for any individual whishing to invest and sit down and
analyses all these intricacies of the market unless he does nothing else.

41
c) Even if an investor is able to visualize the market, it is difficult to investor to trade
in all the major exchanges of India, look after his deliveries and payments.
This is further complicated by the volatile nature of our markets, which
demands constant reshuffling of port

42
 IMPORTANCE OF PORTFOLIO MANAGEMENT

⇒
In the past one-decade, significant changes have taken place in the investment
climate in India.

⇒
Portfolio management is becoming a rapidly growing area serving a broad array
of investors- both individual and institutional-with investment portfolios
ranging in asset size from thousands to cores of rupees.

⇒
It is becoming important because of:

i. Emergence of institutional investing on behalf of individuals. A number of

financial institutions, mutual funds, and other agencies are undertaking the
task of investing money of small investors, on their behalf.
ii. Growth in the number and the size of invisible funds–a large part of
household savings is being directed towards financial assets.
iii. Increased market volatility- risk and return parameters of financial assets
are continuously changing because of frequent changes in governments
industrial and fiscal policies, economic uncertainty and instability.
iv. Greater use of computers for processing mass of data.
v. Professionalization of the field and increase use of analytical methods
(e.g. quantitative techniques) in the investment decision-making, and

vi. Larger direct and indirect costs of errors or shortfalls in meeting portfolio
objectives- increased competition and greater scrutiny by investors.

43
 CHAPTER7

PERSONS INVOLVED IN PORTFOLIO MANAGEMENT

1) INVESTOR:

Are the people who are interested in investing their funds?

2) PORTFOLIO MANAGERS:

Is a person who is in the wake of a contract agreement with a client, advices or

directs or undertakes on behalf of the clients, the management or distribution or
management of the funds of the client as the case may be.
3) DISCRETIONARY PORTFOLIO MANAGER:

Means a manager who exercise under a contract relating to a portfolio

management exercise any degree of discretion as to the investment or
management of portfolio or securities or funds of clients as the case may be. The
relationship between an investor and portfolio manager is of a highly interactive
nature.
The portfolio manager carries out all the transactions pertaining to the
investor under the power of attorney during the last two decades, and increasing
complexity was witnessed in the capital market and its trading procedures in
this context a key (uninformed) investor formed ) investor found himself in a
tricky situation , to keep track of market movement ,update his knowledge, yet
stay in the capital market and make money , therefore in looked forward to
resuming help from portfolio manager to do the job for him . The portfolio
management seeks to strike a balance between risk’s and return.
The generally rule in that greater risk more of the profits but S.E.B.I. in its
guidelines prohibits portfolio managers to promise any return to investor.

44
 Portfolio management is not a substitute to the inherent risks associated with
equity investment.

QUALITIES OF PORTFOLIO MANAGER

1. Sound general knowledge:
 Portfolio management is an existing and challenging job.

 He has to work in an extremely uncertain and conflicting

environment.

 In the stock market every new piece of information affects the value
of the securities of different industries in a different way.

 He must be able to judge and predict the effects of the information

he gets.

 He must have sharp memory, alertness, fast intuition and self-

confidence to arrive at quick decisions.

2. Analytical Ability:
 He must have his own theory to arrive at the value of the security.

 An analysis of the security’s values, company, etc. is continues job

of the portfolio manager.

 A good analyst makes a good financial consultant.

45
 The analyst can know the strengths, weakness, opportunities of the
economy, industry and the company.

46
3. Marketing skills:

 He must be good salesman.

 He has to convince the clients about the particular security.

 He has to compete with the Stock brokers in the stock market.

 In this Marketing skills help him a lot.

4. Experience:

 In the cyclical behavior of the stock market history is often repeated,

therefore the experience of the different phases helps to make
rational decisions.

 The experience of different types of securities, clients, markets

trends etc. makes a perfect professional manager.

47
 FACTORS AFFECTING THE INVESTOR

There may be many reasons why the portfolio of an investor may have to be changed.
The portfolio manager always remains alert and sensitive to the changes in the
requirements of the investor. The following are the some factors affecting the investor,
which make it necessary to change the portfolio composition.

1) Change in Wealth

 According to the utility theory, the risk taking ability of the investor increases with
increase in wealth.

 It says that people can afford to take more risk as they grow rich and benefit from its
reward.

 But, in practice, while they can afford, they may not be willing.

 As people get rich, they become more concerned about losing the newly got riches
than getting richer.

 So they may become conservative and vary risk- averse.

 The fund manager should observe the changes in the attitude of the investor
towards risk and try to understand them in proper perspective.

 If the investor turns to be conservative after making huge gains, the portfolio
manager should modify the portfolio accordingly.

48
2) Change in the Time Horizon

 As time passes, some events take place that may have an impact on the
time horizon of the investor.

 Births, deaths, marriages, and divorces – all have their own impact on the
investment horizon.

 There are, of course, many other important events in the person’s life that
may force a change in the investment horizon.

 The happening or the non-happening of the events will naturally have its
effect.

 For example, a person may have planned for an early retirement,

considering his delicate health.

 But, after turning 55 years of age, if his health improves, he may not take
retirement.

3) Change in Liquidity Needs

 Investors very often ask the portfolio manager to keep enough scope in
the portfolio to get some cash as and they want.

 This forces portfolio manager to increase the weight of liquid investments

in the asset mix.

49
  Due to this, the amounts available for investment in the fixed income or
growth securities that actually help in achieving the goal of the investor get
reduced.
 That is, the money taken out today from the portfolio means that the
amount and the return that would have been earned on it are no longer
available for achievement of the investor’s goals.

4) Changes in Taxes

 It is said that there are only two things certain in this world- death and
taxes.

 The only uncertainties regarding them relate to the date, time, place and
mode.

 Portfolio manager have to constantly look out for changes in the tax
structure and make suitable changes in the portfolio composition.

 The rate of tax under long- term capital gains is usually lower than the rate
applicable for income. If there is a change in the minimum holding period
for long-term capital gains, it may lead to revision. The specifics of the
planning depend on the nature of the investments

5) Others

 There can be many of other reasons for which clients may ask for a
change in the asset mix in the portfolio.

 For example, there may be change in the return available on the

investments that have to be compulsorily made with the government say,
in the form of provident fund.

50
 This may call for a change in the return required from the other
investments.

51
 CHAPTER 8

RISK – RETURN ANALYSIS

RISK ON PORTFOLIO :

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

Following are the some of the types of Risk:

1) Interest Rate Risk: This arises due to the variability in the interest
rates from time to time. A change in the interest rate establishes an inverse
relationship in the price of the security i.e. price of the security tends to
move inversely with change in rate of interest, long term securities show
greater variability in the price with respect to interest rate changes than
short term securities.
Interest rate risk vulnerability for different securities is as under:
TYPES RISK EXTENT
Cash Equivalent Less vulnerable to interest rate
risk.
Long Term Bonds More vulnerable to interest rate
risk.

52
2) Purchasing Power Risk: It is also known as inflation risk also emanates
from the very fact that inflation affects the purchasing power adversely.
Nominal return contains both the real return component and an inflation
premium in a transaction involving risk of the above type to compensate for
inflation over an investment holding period. Inflation rates vary over time
and investors are caught unaware when rate of inflation changes
unexpectedly causing erosion in the value of realized rate of return and
expected return.

Purchasing power risk is more in inflationary conditions especially in

respect of bonds and fixed income securities. It is not desirable to invest in
such securities during inflationary periods. Purchasing power risk is
however, less in flexible income securities like equity shares or common
stock where rise in dividend income off-sets increase in the rate of inflation
and provides advantage of capital gains.

3) Business Risk: Business risk emanates from sale and purchase of

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

4) Financial Risk: It arises due to changes in the capital structure of the

company. It is also known as leveraged risk and expressed in terms of
debt-equity ratio. Excess of risk vis-à-vis equity in the capital structure
indicates that the company is highly geared. Although a leveraged

53
 company’s earnings per share are more but dependence on borrowings
exposes it to risk of winding up for its inability to honor its commitments
towards lender or creditors. The risk is known as leveraged or financial risk
of which investors should be aware and portfolio managers should be very
careful.

5) Systematic Risk or Market Related Risk: Systematic risks affected

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

6) Unsystematic Risks: The unsystematic risks are mismanagement,

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

RISK RETURN ANALYSIS:

All investment has some risk. Investment in shares of companies has its own
risk or uncertainty; these risks arise out of variability of yields and uncertainty of
appreciation or depreciation of share prices, losses of liquidity etc
The risk over time can be represented by the variance of the returns while the
return over time is capital appreciation plus payout, divided by the purchase
price of the share.

54
 Normally, the higher the risk that the investor takes, the higher is the return.
There is, however, a risk less return on capital of about 12% which is the bank,
rate charged by the R.B.I or long term, yielded on government securities at
around 13% to 14%. This risk less return refers to lack of variability of return and
no uncertainty in the repayment or capital. But other risks such as loss of liquidity
due to parting with money etc., may however remain, but are rewarded by the
total return on the capital.
Risk-return is subject to variation and the objectives of the portfolio manager
are to reduce that variability and thus reduce the risk by choosing an appropriate
portfolio.
Traditional approach advocates that one security holds the better, it is
according to the modern approach diversification should not be quantity that
should be related to the quality of scripts which leads to quality of portfolio.
Experience has shown that beyond the certain securities by adding more
securities expensive.
RETURNS ON PORTFOLIO:

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

in security. Thus the portfolio expected return is the weighted average of the
expected return, from each of the securities, with weights representing the
proportions share of the security in the total investment. Why does an investor
have so many securities in his portfolio? If the security ABC gives the maximum
return why not he invests in that security all his funds and thus maximize return?

55
The answer to this questions lie in the investor’s perception of risk attached to
investments, his objectives of income, safety, appreciation, liquidity and hedge
against loss of value of money etc. this pattern of investment in different asset
categories, types of investment, etc., would all be described under the caption of
diversification, which aims at the reduction or even elimination of non-systematic
risks and achieve the specific objectives of investors

CHAPTER9

ASSEST ALLOCATION

 INTRODUCTION
The portfolio manager has to invest in these securities that form the optimal
portfolio. Once a portfolio is selected the next step is the selection of the specific
assets to be included in the portfolio. Assets in this respect means group of
security or type of investment. While selecting the assets the portfolio manager
has to make asset allocation. It is the process of dividing the funds among
different asset class portfolios.

 ASSET ALLOCATION

The different asset class definitions are widely debated, but four common
divisions are stocks, bonds, real-estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within
each asset class) is what investment management firms are paid for.

56
 Asset classes exhibit different market dynamics, and different interaction
effects; thus, the allocation of monies among asset classes will have a significant
effect on the performance of the fund. Some research suggests that allocation
among asset classes has more predictive power than the choice of individual
holdings in determining portfolio return. Arguably, the skill of a successful
investment manager resides in constructing the asset allocation, and separately
the individual holdings, so as to outperform certain benchmarks (e.g., the peer
group of competing funds, bond and stock indices).

In order to achieve long term success, individual investors should concentrate

on the allocation of their money among stocks, bonds and cash. It means how
much to invest in stocks? How much to invest in bonds? And how much to keep
in cash reserves? Thus, the asset allocation decision is the most important
determinant of investment performance.

The basic long term objective of any investor should be to maximize his real
overall return on initial investment after investment. To achieve this objective, the
investor should look where the best bargains lie.

57
 Asset allocation means different things to different people. The portfolio
manager has to complete the following stages before making asset allocation.

(a) SECURITY SELECTION:

This means identifying groups of securities in each asset class and decides the
optimal portfolio. The following are the different asset classes:

(1) Equity shares-new issues (5) PSU bonds

(2) Equity shares-old issues (6) Government Securities
(3) Preference Shares (7) Company Fixed Deposits
(4) Debentures

Portfolio management is handling the fund on behalf of the company or institution

in order to determine the suitable combination of different assets so that the total
risk can be reduced to the minimum while the return can be achieved to the
maximum extent. This is a tricky job which needs efficiency of high caliber.
Therefore, the portfolio manager has to keep in mind the following factors while
making asset allocation and design an efficient portfolio.

a) Liquidity or marketability f) Capital appreciation or gain

b) Safety of investment g) Funds requirements

c) Tax Saving

d) Maximization of return

e) Minimization of return

58
(b) BASIS OF SELECTION OF EQUITY PORTFOLIO:

A portfolio is a collection of securities. It is essential that every security

be viewed in a portfolio context. It is logical that the expected return of a
portfolio should depend on the expected return of each of the security
contained in it. Moreover, the amounts invested in each security should
also be important.
There are two approaches to the selection of equity portfolio. One is
technical analysis and the other is fundamental analysis. Technical
analysis assumes that the price of a stock depends on supply and demand
in the capital market. All financial and market information of given security
is already reflected in the market price. Charts are drawn to identify price
movements of a given security over a period of time. These charts enable
us to predict the future movement of the security.
The fundamental analysis includes the study of ratio analysis, past and
present track record of the company, quality of management, government
policies etc… an efficient portfolio manager can obviously give more
weight to fundamental analysis than technical analysis.

 DIVERSIFICATION

Investing funds in a single security is advisable only if the security’s

performance is rewarding. To reduce risk of a portfolio investors resort to
diversification. Diversification means shifting form one security to another
security. The maximum benefits of risk reduction can be achieved by just
having of 10 to 15 carefully selected securities.
Portfolio risk can be divided into two groups- diversible risk and non-
diversible risk. Diversible risk arises from company’s specific factors.
Hence, such risk can be diversified by including stocks of other companies
in the portfolio.
Non-diversible risk arises from the influence of economy wide factors
which affect returns of all companies; investors cannot avoid the risk
arising from them. Often investors tend to buy or sell securities on casual
tips, prevailing mood in the market, sudden impulse, or to follow others. An
investor should investigate the following factors about the stock to be
included in his portfolio:

(a) Earnings per share (b) Growth potential (c) Dividend and bonus
records (d) Business, financial and market risks (e) Behavior of price-
earnings ratio (f) High and low prices of the stock (g) Trend of share prices
over the few months or weeks.

Y C
--------------------------------------- B HIGH RISK (SHARES)
A (DEBENT) MEDIUM
RISK

O X
Risk free (Bank Deposits)

We can observe from the above diagram that the strategy of an investor
should be at A, B or C respectively, depending upon his preferences and
income requirements. If he takes some risk at B or C, the risk can be
reduced if it is concerned with a specific company risk, but the market risk
is outside his control. The risk can be reduced by a proper diversification of
scripts in the portfolio. There may be a combination of A, B and C positions
in his portfolio so that he can have a diversified risk-return pattern. This
diversification can help to minimize risk and maximum the returns.
 CHAPTER10

PRIMARY SURVEY

Purpose of the study:

 To ascertain investor awareness about services provided by

portfolio management institutions and the interest shown by investor to invest in
portfolio management services.

 To know whether they are interested to hire such services in

future and if not, why?
 QUESTIONNAIRE

Survey on investor’s views about Portfolio Management

Name:
Age:
Occupation:

» Are you aware of services offered by portfolio manager?

Yes No

» If yes, what types of services you are aware of?

Management of Mutual fund investment

Management of Equities

Management of Money market investment

Advisory or consultancy services

Others

» Would you want to hire a portfolio manager at present or in future?

Yes No
» If yes, for what type of services?

Investments in Mutual Funds Investments in Equities

Investments in Money market Investments in other[s]

(If other please specify)
Advisory or consultancy service

» If No why?

» What is the Percentage of commission that you are ready to pay to

portfolio manager for services provided by him in?

Equities Money market investment

Mutual fund investment Advisory or consultancy services

Other investment
(If other please specify)
» Do you think there will be growth in portfolio management in future?

If Yes why?

If No, why?

» What type of services would you want from portfolio manager in future?

» Suggestions if any:

____________

Signature
 CHAPTER11
FINDINGS
This case study has been conducted on various age groups of individual
investors on portfolio management. These consist of age group ranging from 18-
30, 30-45, 45-60 and 60 & above. Following interpretation has been made on the
basis of the information collected from individual investor’s of various age groups
through questionnaire:

 Age group of 18-30 is more aware about services offered by portfolio

manager whereas age group of 60 & above is less aware of such
services.

 Management of mutual fund investment, management of equities,

management of money market investment, advisory and consultancy
services are the services provided by the portfolio management institution.
Amongst these, advisory and consultancy services are the services that
the individual investors are more aware of.

 Due to lack of experience and market knowledge, the age group of 45-60
is more interested to hire portfolio manager at present in order to manage
their portfolio. The age group ranging from 18-30 is more interested in
making investment in equities whereas group ranging from 60 & above are
more interested in making investment in mutual fund. On the other hand,
 age group of 30-45 and 45-60 are least interested in any of the services
provided by portfolio management institution. Reasons specified for the
presence of disinterest in any of these services were that the investors are
having good hold on their investment. Also they possess good knowledge
with regards to market fluctuations, investment portfolio’s and other factors
relating to portfolio management.

 All the age groups of individual investors in portfolio management believe

that there is a better scope for portfolio management in future.

CHAPTER12
CONCLUSION

From the above discussion it is clear that portfolio functioning is based on

market risk, so one can get the help from the professional portfolio
manager or the Merchant banker if required before investment because
applicability of practical knowledge through technical analysis can help an
investor to reduce risk. In other words Security prices are determined by
money manager and home managers, students and strikers, doctors and
dog catchers, lawyers and landscapers, the wealthy and the wanting. This
breadth of market participants guarantees an element of unpredictability
and excitement. If we were all totally logical and could separate our
emotions from our investment decisions then, the determination of price
based on future earnings would work magnificently. And since we would all
have the same completely logical expectations, price would only change
when quarterly reports or relevant news was released.

“I believe the future is only the past again, entered through another
gate” –Sir Arthur wing Pinero. 1893.
 If price are based on investors’ expectations, then knowing what a
security should sell for become less important than knowing what other
investors expect it to sell for. “There are two times of a man’s life when he
should not speculate; when he can’t afford it and when he can” – Mark
Twin, 1897.
A Casino make money on a roulette wheel, not by knowing what
number will come up next, but by slightly improving their odds with the
addition of a “0” and “00”. Yet many investors buy securities without
attempting to control the odds. If we believe that this dealings is not a
‘Gambling” we have to start up it with intelligent way.

CHAPTER13

BIBLIOGRAPHY

REFERENCE BOOKS:

Security Analysis and Portfolio Management - Dr. P.K.BANDGAR

Investment Analysis and Portfolio Management
Economic Times
NDTV Profit
Forbes India Magazine
DARE Magazine
Money control.com
Securities Analysis and Portfolio Management, sixth edition,
Donald E
Fisher, Ronald J. Jordan, Portfolio management 571-572,

WEBLIOGRAPHY

SOURCES:
www.google.com
www.yahoo.com
www.wikipedia.com
www.Kotaksecurities.com