Portfolio Management
Portfolio Management
Portfolio Management
Investing in equities requires time, knowledge and constant monitoring of the market.
For those who need an expert to help to manage their investments, Portfolio Management
Service (PMS) comes as an answer.
The business of portfolio management has never been an easy one. Juggling the
limited choices at hand with the twin requirements of adequate safety and sizeable returns
is a task fraught with complexities. Given the unpredictable nature of the market it requires
solid experience and strong research to make the right decision. In the end it boils down
to make the right move in the right direction at the right time. Thats where the expert
comes in.
The term Portfolio Management in common practice refers to selection of securities
and their continuous shifting in a way that the holder gets maximum returns at minimum
possible risk. PMS are merchant banking activities recognized by SEBI and these activities
can be rendered by SEBI authorized portfolio managers or discretionary portfolio managers.
A Portfolio Manager by the virtue of his knowledge, background and experience helps
his clients to make investment in profitable avenues. A portfolio manager has to comply
with the provisions of the SEBI (portfolio managers) rules and regulations, 1993.
This project also includes the different services rendered by the portfolio manager. It
includes the functions to be performed by the portfolio manager.
The project also shows the factors that one considers for making an investment
decision and briefs about the information related to asset allocation.
Research Methodology
Objective of taking the Project
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 investors 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 and Functions of Portfolio Manager.
Allocation.
1. Primary Source
2. Secondary Source
Primary are those which are collected afresh & for the first time & thus happen to
be original in character. Primary data is collected in the form of survey through the
market by asking some close and open ended questions which help in analysing the
changing trends and its effect on already existing ones.
Secondary data on the other hand are those which have been already been collected
by someone else & which have already been passed through the statistical process.
Secondary data is collected through the Internet and past data.
Primary:
Secondary: These are sources containing data which have been collected and
complied for another purpose. Secondary sources consist of not only published
records and reports, but also unpublished records.
It is collected with the help of following sources:
i.
INTERNET
ii.
JOURNALS
iii.
COMPANY MAGZINES
LIMITATIONS
The study was limited to a brief period of two months only. Most of
the time was spent in preparation of the questionnaire and pilot testing. Also
due to the busy schedule of the employees, responses were delayed and
subsequently less time was spent in analyzing the results. With limited
interaction with the C.E.O. and other senior employees the survey results are
presented in this report, however a more comprehensive interpretation of results
still rests with the Organization. The questionnaire included objective answers,
so
it
was
difficult
to
reflect
the
reasons
for
certain
patterns.
Since
Chapter 1
PORTFOLIO MANAGEMENT
Introduction
and
investors
with
the
expertise
of
professionals
in
investment
portfolio
management.
It involves construction of a portfolio based upon the investors objectives, constraints,
preferences for risk and returns and tax liability. The portfolio is reviewed and
from time to time in tune with the market conditions. The evaluation of
adjusted
portfolio is to be
10
constraints
Security/Safety of Principal:
Security not only involves keeping the principal sum intact but also keeping intact its
purchasing power intact.
Stability of Income:
So as to facilitate planning more accurately and systematically the reinvestment
consumption of income.
Capital Growth:
This can be attained by reinvesting in growth securities or through purchase of
growth securities.
Marketability:
The case with which a security can be bought or sold. This is essential for providing
flexibility to investment portfolio
11
Diversification:
The basic objective of building a portfolio is to reduce risk of loss
of capital and / or income by investing in various types of securities and over a wide range
of industries.
Effective
investment
planning
for
the
investment
in
securities
by
considering the following factorsa) Fiscal, financial and monetary policies of the Govt. of India and the
Reserve Bank of India.
b) Industrial and economic environment and its impact on industry. Prospect in terms of
prospective technological changes, competition in the market, capacity utilization with
industry and demand prospects etc.
12
b) To assess the financial and trend analysis of companies Balance Sheet and Profit and
Loss Accounts to identify the optimum capital structure and better performance for the
purpose of withholding the investment from poor companies.
CHAPTER 2
TYPES OF PORTFOLIO MANAGEMENT
There are various types of portfolio management:
Types of Portfolio
Management
Investment Management
IT Portfolio Management
Project Portfolio Management
INVESMENT MANAGEMENT:
Investment management is the professional management of various securities (Shares,
Bonds etc.) And assets (e.g., Real Estate), to meet specified investment goals for the benefit
of the Investors. Investors may be institutions (insurance companies, pension funds,
corporations etc.) Or private investors (both directly via investment contracts and more
commonly via collective Investment schemes e.g. mutual funds or Exchange Traded Funds).
The term Asset Management is often used to refer to the investment management of
13
Collective investments, (not necessarily) whilst the more generic fund management may refer
to All forms of institutional investment as well as investment management for private
investors.
Investment managers who specialize in advisory or discretionary management on
behalf of (Normally wealthy) private investors may often refer to their services as wealth
management or Portfolio Management often within the context of so-called "private banking".
Fund manager (or investment adviser in the U.S.) refers to both a firm that provides
Investment Management services and an individual who directs fund management decisions.
IT PORTFOLIO MANAGEMENT :
not sufficient. At its most mature, IT Portfolio management is accomplished through the
creation of two Portfolios:
Application Portfolio
Management of this portfolio focuses on comparing spending on established systems
based upon their relative value to the organization. The comparison can be based upon the
level of contribution in terms of IT investments profitability. Additionally, this comparison
can also be based upon the non-tangible factors such as organizations level of experience
with a certain technology, users familiarity with the applications and infrastructure, and
external forces such as emergence of new technologies and obsolesce of old ones.
Project Portfolio
This type of portfolio management specially address the issues with spending on the
development of innovative capabilities in terms of potential ROI and reducing investment
overlaps in situations where reorganization or acquisition occurs. The management issues with
the second type of portfolio management can be judged in terms of data cleanliness,
maintenance savings, and suitability of resulting solution and the relative value of new
investments to replace these projects.
15
Service.
CHAPTER 3
PORTFOLIO MANAGEMENT PROCESS
Process of Portfolio
Management.
PORTFOLIO
MANAGEMENT
WHICH
ARE
AS
FOLLOWS: Identification of assets or securities, allocation of investment and also identifying the
classes of assets for the purpose of investment.
They have to decide the major weights, proportion of different assets in the portfolio
by taking in to consideration the related risk factors.
Finally they select the security within the asset classes as identify.
The above activities are directed to achieve the sole purpose of maximizing return
and minimizing risk on investment.
It is well known fact that portfolio manager balances the risk and return in a
portfolio investment. With higher risk higher return may be expected and vice versa.
16
INVESTMENT DECISION
Objectives of Investment Portfolio:
This is a crucial point which a Finance Manager must consider. There can be many
objectives of making an investment. The manager of a provident fund portfolio has to look
for security and may be satisfied with none too high a return, where as an aggressive
investment company be willing to take high risk in order to have high capital appreciation.
How the objectives can affect in investment decision can be seen from the fact that
the Unit Trust of India has two major schemes: Its Capital Units are meant for those who
Wish to have a good capital appreciation and a moderate return, where as the Ordinary
Unit are meant to provide a steady return only.
The investment manager under both the scheme will invest the money of the Trust in
different kinds of shares and securities. So it is
obvious that the objectives must be clearly defined before an investment decision is taken.
Selection of Investment:
Having defined the objectives of the investment, the next decision is to decide the
kind of investment to be selected. The decision what to buy has to be seen in the context
of the following:a) There is a wide variety of investments available in market i.e. Equity shares,
preference Share, debentures, convertible bond, Govt. securities and bond, capital units
etc. Out of These what types of securities to be purchased.
b) What should be the proportion of investment in fixed interest dividend securities and
Variable dividend bearing securities? The fixed one ensures a definite return and thus
a Lower risk but the return is usually not as higher as that from the variable
dividend Bearing shares.
c) If the investment is decided in shares or debentures, then the industries showing a
Potential in growth should be taken in first line. Industry-wise-analysis is important
17
since Various industries are not at the same level from the investment point of view.
It is Important to recognize that at a particular point of time, a particular
industry may have a better growth potential than other industries. For example, there
was a time when jute Industry was in great favour because of its growth potential
and high profitability, the Industry is no longer at this point of time as a growth
oriented industry.
d) Once industries with high growth potential have been identified, the next step is to
select The particular companies, in whose shares or securities investments are to be
made.
FUNDAMENTAL ANALYSIS
FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED
COMPANIES:
One of the first decisions that an investment manager faces is to identify the
industries which have a high growth potential.
Two approaches are suggested in this regard. They are:
18
INDUSTRY ANALYSIS
First of all, an assessment will have to be made regarding all the conditions and
factors relating to demand of the particular product, cost structure of the industry and other
economic and Government constraints on the same. As we have discussed earlier, an
appraisal of the particular industrys prospect is essential and the basic profitability of any
company is dependent upon the economic prospect of the industry to which it belongs. The
following factors may particularly be kept in mind while assessing to factors relating to an
industry.
19
Demand and Supply Pattern for the Industries Products and Its
Growth Potential:
The main important aspect is to see the likely demand of the products of the industry
and The gap between demand and supply. This would reflect the future growth prospects of
the Industry. In order to know the future volume and the value of the output in the next ten
Years or so, the investment manager will have to rely on the various demand forecasts made
by various agencies like the planning commission, Chambers of Commerce and institutions
like NCAER, etc.
The management expert identifies fives stages in the life of an industry. These are
Introduction, Development, Rapid Growth, Maturity and Decline. If an industry has already
reached the maturity or decline stage, its future demand potential is not likely to be high.
Profitability:
It is a vital consideration for the investors as profit is the measure of performance
and a source of earning for him. So the cost structure of the industry as related to its sale
price is an important consideration. In India there are many industries which have a growth
potential on account of good demand position. The other point to be considered is the ratio
analysis, especially return on investment, gross profit and net profit ratio of the existing
companies in the industry. This would give him an idea about the profitability of the
industry as a whole.
20
COMPANY ANALYSIS
To select a company for investment purpose a number of qualitative factors have to
be seen. Before purchasing the shares of the company, relevant information must be collected
and properly analyzed. An illustrative list of factors which help the analyst in taking the
investment decision is given below. However, it must be emphasized that the past
performance and information is relevant only to the extent it indicates the future trends.
Hence, the investment manager has to visualize the performance of the company in future by
analyzing its past performance.
21
Growth Record
The growth in sales, net income, net capital employed and earnings per share of the
company in the past few years must be examined. The following three growth indicators
may be particularly looked in to: (a) Price earnings ratio, (b) Percentage growth rate of
earnings per annum and (c) Percentage growth rate of net block of the company. The price
earnings ratio is an important indicator for the investment manager since it shows the
number the times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar features. However,
this is not so in practice due to many factors. Hence, by a comparison of this ratio
pertaining to different companies the investment manager can have an idea About the image
of the company and can determine whether the share is under-priced or over-priced.
22
FINANCIAL ANALYSIS
An analysis of financial for the past few years would help the investment manager in
Understanding the financial solvency and liquidity, the efficiency with which the funds are
used, the profitability, the operating efficiency and operating leverages of the company. For
this purpose certain fundamental ratios have to be calculated. From the investment point of
view, the most important figures are earnings per share, price earnings ratios, yield, book
value and the intrinsic value of the share. The five elements may be calculated for the past
ten years or so and compared with similar ratios computed from the financial accounts of
other companies in the industry and with the average ratios of the industry as a whole.
The yield and the asset backing of a share are important considerations in a decision
regarding whether the particular market price of the share is proper or not. Various other
ratios to measure profitability, operating efficiency and turnover efficiency of the company
may also be calculated.
The return on owners investment, capital turnover ratio and the cost structure ratios
may also be worked out. To examine the financial solvency or liquidity of the company, the
investment manager may work out current ratio, liquidity ratio, debt equity ratio, etc. These
ratios will provide an overall view of the company to the investment analyst. He can
analyze its strengths and weakness and see whether it is worth the risk or not.
Quality of Management
This is an intangible factor. Yet it has a very important bearing on the value of the
shares. Every investment manager knows that the shares of certain business houses command
a higher premium than those of similar companies managed by other business houses. This
is because of the quality of management, the confidence that the investors have in a
particular business house, its policy vis--vis its relationship with the investors, dividend and
financial performance record of other companies in the same group, etc. This is perhaps the
reason that an investment manager always gives a close look to the management of the
company whose shares he is to invest.
23
Quality of management has to be seen with reference to the experience, skill and
integrity of the persons at the helm of the affairs of the company. The policy of the
management regarding relationship with the share holders is an important factor since certain
business houses believe in generous dividend and bonus distributions while others are rather
conservative.
24
TIMING OF PURCHASES
The timing of dealings in the securities, specially shares is of crucial importance,
because after correctly identifying the companies one may lose money if the timing is bad
due to wide fluctuation in the price of shares of that companies.
The decision regarding timing of purchases is particularly difficult because of certain
psychological factors. It is obvious that if a person wishes to make any gains, he should
buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when
they are at a higher price. But in practical it is a difficult task.
When the prices are rising in the market i.e. there is bull phase, everybody joins in
buying without any delay because every day the prices touch a new high. Later when the
bear face starts, prices tumble down every day and everybody starts counting the losses. The
ordinary investor regretted such situation by thinking why he did not sell his shares in
previous day and ultimately Sell at a lower price. This kind of investment decision is
entirely devoid of any sense of timing.
In short we can conclude by saying that Investment management is a complex activity
25
26
As of now the under noted technique of portfolio management are in vogue in our
country.
The various modes of Technique of Portfolio Management are as follows:
Equity Portfolio
It is influenced by internal and external factors. The internal factors affect the inner
working of the companys growth plans are analyzed with referenced to Balance sheet, profit
& loss a/c (account) of the company. Among the external factor are changes in the
government policies, Trade cycles, Political stability etc.
Industrial analysis :
Of prospective earnings, cash flows, working capital, dividends, etc.
Ratio analysis:
Ratios such as debt equity ratio, current ratio, net worth, profit earnings ratio, returns
on investment, are worked out to decide the portfolio. The wise principle of portfolio
management suggests that Buy when the market is low or BEARISH, and sell when the
market is rising or BULLISH.
27
CHAPTER 4
RISK RETURN ANALYSIS
RISK ON PORTFOLIO
28
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.
29
Financial Risk.
TYPES
RISK EXTENT
Cash Equivalent
component and an inflation premium in a transaction involving risk of the above type to
compensate for inflation over an investment holding period. Inflation rates vary over time
and investors are caught unaware when rate of inflation changes unexpectedly causing
erosion in the value of realized rate of return and expected return.
Purchasing power risk is more in inflationary conditions especially in respect of bonds
and fixed income securities. It is not desirable to invest in such securities during inflationary
periods. Purchasing power risk is however, less in flexible income securities like equity
shares or common stock where rise in dividend income off-sets increase in the rate of
inflation and provides advantage of capital gains.
Business Risk
Business risk emanates from sale and purchase of securities affected by business
cycles, technological changes etc. Business cycles affect all types of securities i.e. there is
cheerful movement in boom due to bullish trend in stock prices whereas bearish trend in
depression brings down fall in the prices of all types of securities during depression due to
decline in their market price.
Financial Risk
It arises due to changes in the capital structure of the company. It is also known as
leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis--vis equity in
the capital structure indicates that the company is highly geared. Although a leveraged
companys earnings per share are more but dependence on borrowings exposes it to risk of
winding up for its inability to honour its commitments towards lender or creditors. The risk
is known as leveraged or financial risk of which Investors should be aware and portfolio
managers should be very careful.
31
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.
All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc. The risk over time can be represented by
the variance of the returns while the return over time is capital appreciation plus payout,
divided by the purchase price of the share.
`Risk-return is subject to variation and the objectives of the portfolio manager are to
reduce That variability and thus reduce the risk by choosing an appropriate portfolio.
Traditional approach advocates that one security holds the better; it is according to the
Modern Approach diversification should not be quantity that should be related to the quality
of scripts this leads to quality of portfolio. Experience has shown that beyond the certain
securities by adding more securities expensive.
RETURNS ON PORTFOLIO
32
CHAPTER 5
33
PORTFOLIO THEORIES
CAPITAL ASSETS PRICING MODEL (CAPM)
CAPM provides a conceptual framework for evaluating any investment decision. It is
used to estimate the expected return of any portfolio with the following formula:
Rf
Bp
E(Rm)
[E(Rm)-Rf]
Uses of CAPM
Estimate the required rate of return to investors on companys common stock.
Evaluate risky investment projects involving real Assets.
Explain why the use of borrowed fund increases the risk and increases the rate of
return.
Reduce the risk of the firm by diversifying its project portfolio.
MOVING AVERAGE
It refers to the mean of the closing price which changes constantly and moves ahead
in time, there by encompasses the most recent days and deletes the old one.
34
MARKOWITZ THEORY
Markowitz has suggested a systematic search for optimal portfolio. According to him,
the portfolio manager has to make probabilistic estimates of the future performances of the
securities and analyse these estimates to determine an efficient set of portfolios. Then the
optimum set of portfolio can be selected in order to suit the needs of the investors.
35
SHARPES THEORY
William Sharpe has suggested a simplified method of diversification of portfolios. He
has made the estimates of the expected return and variance of indexes which are related to
economic activity. Sharpes Theory assumes that securities returns are related to each other
only through common relationships with basic underlying factor i.e. market return index.
36
CHAPTER 6
PERSONS INVOLVED IN PORTFOLIO MANAGEMENT
Discretionary Portfolio
Manager.
INVESTOR
Are the people who are interested in investing their funds.
37
PORTFOLIO MANAGERS
38
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 risks 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. Portfolio management is
not a substitute to the inherent risks associated with equity investment.
39
Financial analysis
He should evaluate the financial statement of company in order to understand, their
net worth future earnings, prospectus and strength.
Study of industry
He should study the industry to know its future prospects, technical changes etc,
required for investment proposal he should also see the problems of the industry.
manager with his background and expertise meets the needs of such Investors by
rendering service in helping them to invest their fund/s profitably.
CHAPTER 7
INVESTMENT ANALYSIS
42
MEANING OF INVESTMENT
Concepts of Investment
Economic Investment
The concept of economic investment means additions to the capital stock of the
society. The capital stock of society is the goods which are used in the production of other
goods. The term investment implies the formation of new and productive capital in the form
of new construction and producers durable instrument such as plant and machinery,
inventories and human capital are also included in this concept. Thus, an investment, in
economic terms, means an increase in building, equipment, and inventory.
Financial Investment
43
This is an allocation of monetary resources to assets that are expected to yield some
gain or return over a given period of time. It is a general or extended sense of the term. It
means an exchange of financial claims such as shares and bonds, real estate, etc. in their
view; investment is a commitment of funds to derive future income in the form of interest,
dividends, rent premiums, pension benefits and the appreciation of the value of their
principal capital.
The economic and financial concepts of investment are related to each other
because investment is a part of the savings of individuals which flow into the capital
market either directly or through institutions. Thus, investment decisions and financial
decisions interact with each other. Financial decisions are primarily concerned with the
sources of money where as investment decisions are traditionally concerned with uses or
budgeting of money.
MEANING OF SECURITY
A security means a document that gives its owners a specific claim of ownership of
a particular financial asset. Financial market provides facilities for buying and selling of
financial claims and services. Thus, securities are the financial instruments which are bought
and sold in the financial market for investment.
The important financial instruments are shares, debentures, bonds, etc. other financial
instruments are also known as Treasury bills, Mutual Fund Units, Fixed Deposits, Insurance
Policies, Post Office Savings like National Savings certificates, Kisan Vikas Patras, public
provident Funds etc. These securities are used by the investors for their investment. Some of
these securities are transferable while some of them are not transferable.
INVESTMENT AVENUES
44
The alternative investment avenues for the investor are to be considered first so as to
satisfy the above objectives of investors.
The following categories of investors are open to investors as avenues for savings to
flow in financial form:
Investment in Bank Deposits Savings And Fixed Deposits
This is the most common form of investment for an average Indian and nearly 40%
of funds in financial savings are used in this form these are least risky but the return is
also low.
A new entrant in the Stock Market should preferably invest in New Issues of existing
and
Instruments of Investment
Following are the instruments of investment:
Equity issues through prospectus or rights announced by existing shareholders.
Preference shares with a fixed dividend either convertible into equity or not.
Debentures of various categories convertible, fully convertible, partly convertible
and non- convertible debentures.
P.S.U. Bonds taxable or free-taxed with interest rates. Investment in gold, silver,
precious metals and antiques.
Investment in real estates.
Investment
in
gilt-edged
securities
and
securities
of
Government
and
Semi-
Government organizations (e.g. Relief bonds, bonds of port trusts, treasury bills,
etc.). The maturity period is varying generally upto10 to20 years. Gilt-edged
securities market constitutes the largest segment of the Indian capital market. These
are fully secured as they have government backing. Tax benefits are available to
these securities.
Investors would prefer debentures if they are interested in a fixed income. They may
go for Convertible debentures, if they want to have both fixed income and likely capital
appreciation in Future. If they are risk taking and aim only at capital gains, then they may
invest in equity shares. Of the new issues those of well established existing companies are
least risky while those of new companies floated by little known new entrepreneurs are most
risky.
In choosing the new issues for investment decision, the investor has to read a copy
of the prospectus and note the following:
Who are the promoters and their past record?
Products manufactured and demand for those products at home or abroad the
competitors and the share of each in the market.
Availability of inputs, raw materials and accessories and the dependence on imports.
Project location and its advantages.
Prospects through projected earnings, net profits and dividend paying capacity, waiting
period involved, etc.
If the new issues belong to a company promoted by well known Business Groups
like
Tatas, Birlas etc. they are less risky.
The company should belong to an industry which is expanding and has good potential
like drugs, chemicals; Telecom etc. the terms of offer should be attractive like
conversion or immediate prospects of dividend etc.
As far as the stock market is concerned, investment in shares is most risky as the
likelihood of fall or rise in prices is uncertain. But the returns may also be high
commensurate with risk. A host of imponderable factors operate in the stock market and a
genuine investor has to do the following things:
Study the Balance Sheet of the company and analyze the prospects of sales and
profits.
Analyze the market price in terms of book value and profit earning capacity (or P/E
Ratio) and use them to know whether the share is overvalued or undervalued.
Study the expansion plans or tax savings plans and analyze the companys financial
strength, bonus and dividend paying strength, through the mechanism of financial
ratios.
Study whether the management is professional and good, whether other accounting
practices are dependable and consistent. The company becomes attractive to buy if the
financial ratios support the view that the fundamentals are strong and the shares are
worth buying.
Lastly, if the price of the share is undervalued on the basis of the projected earnings
for the coming half year or one year and its P/E Ratio is below the industry average,
then it is worth buying. The same is worth selling if in his judgement it is
overhauled.
and
attempt
a forecast
48
for
the coming
half
to
year
equity
or
capital
one year.
The investor should also watch for low priced shares which are about to turn around
for more profitability in future. It means that if everyone is buying scrip, avoids that
scrip but if a scrip is deserted and your study has shown that is has potential; for
expanding earnings and profitability, then such scrips should be purchased by the
investor.
The investor should know how to analyze the security prices of companies and pick
up the undervalued shares. The valuation may be based on the net profits discounted
to the present by a proper discount rate or by the book value of share, estimated on
the basis of net worth of the company.
Timing of purchase and sale is also very important.
INVESTMENT STRATEGY
Portfolio management can be practiced by following either an active or passive
strategy.
Active strategy is based on the assumption that it is possible to beat the market. This
is done by selecting assets that are viewed as under priced or by changing the asset mix or
proportion of fixed income securities and shares.
The Characteristics of Active Strategy are:
The passive strategy does not aim at outperforming the market, unlike the active
strategy. On the other hand the stocks could be randomly selected on the assumption of a
perfectly efficient market. The objective is to include in the portfolio a large number of
securities so as to reduce risks specific to individual securities.
ELEMENTS OF INVESTMENTS
Return
Investors buy or sell financial instruments in order to earn return on them. The
return on investment is the reward to the investors. The return includes both current income
and capital gains or losses, which arises by the increase or decrease of the security price.
Risk
Risk is the chance of loss due to variability of returns on an investment. In case of
every investment, there is a chance of loss. It may be loss of interest, dividend or principal
amount of investment. However, risk and return are inseparable. Return is a precise statistical
term and it is measurable. But the risk is not precise statistical term. However, the risk can
be quantified: The investment process should be considered in terms of both risk and return.
Time
Time is an important factor in investment. It offers several different courses of
action. Time period depends on the attitude of the investor who follows a buy and hold
policy. As time moves on, analysts believe that conditions may change and investors may
revaluate expected return and risk for each investment.
CHAPTER 8
ASSEST ALLOCATION
50
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.
Asset classes exhibit different market dynamics, and different interaction effects; thus,
the allocation of moneys 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.
The skill of 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.
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. Asset allocation means different things to different
people.
SECURITY SELECTION
51
This means identifying groups of securities in each asset class and decides the
optimal portfolio.
Different Asset Class are as follows:
Equity shares-new issues.
Equity shares-old issues.
Preference Shares.
Debentures.
PSU bonds.
Government Securities.
Company Fixed Deposits.
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 calibre.
CHAPTER 9
MARKET RESEARCH AND ANALYSIS
What is the first thing that comes to your mind when you
think about Investment?
Modes
of Capital Market
Investment
Percentage
15%
Gold
FDs
Real Estate
35%
30%
20%
Life Coverage
25%
All above
40%
Investment
20%
Capital Market
15%
Gold
FDs
Real Estate
30%
35%
Tax benefits
15%
Return
20%
53
Objective of Investment
Tax Benefits
15%
Returns
40%
Life Coverage
20%
All above
25%
Yes
62%
No
38%
Financial Products
Yes
38%
No
62%
Only Insurance
Percentage
Yes
35%
No
65%
Insurance
0.35
Yes
No
3.2
High Risk
30%
Moderate Risk
55%
55
Low Risk
15%
Risk in Investment
15%
High Risk
30%
Moderate Risk
Low Risk
55%
Low
15%
Satisfactory
60%
56
High
25%
Return on Investment
25%
15%
Low Risk
Satisfactory Risk
High Risk
60%
CHAPTER 10
PRACTICAL SUMS
57
Calculate
Portfolio:
Securities
Probabilities
Return on Securities
A
B
C
D
E
0.2
0.3
0.1
0.3
0.1
30%
15%
25%
20%
10%
Sol:
Security
P x R
(R-ER)
A
B
C
D
E
TOTAL
0.2
0.3
0.1
0.3
0.1
30
15
25
20
10
6
4.5
2.5
6
1
(ER = 20)
10
(5)
5
0
(10)
(R-ER)
P.(R-ER)2
2
100
25
25
0
100
20
7.5
2.5
0
10
40
Where, P = Probabilities
R
= Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
Variance
=
40
= 6.32%
Conclusion - Therefore, the Expected Return on Portfolio is 20%
and the Risk on Portfolio is 6.32%.
Calculate the Expected Return and the Risk for the Following
Security under different conditions:
State of Economy
Probabilities
Return on Securities
Boom
Normal
Recession
0.3
0.5
0.2
40%
30%
20%
Sol:
58
Events
P x R
(R-ER)
(R-ER)
P.(R-ER)2
Boom
Normal
Recession
0.3
0.5
0.2
40
30
20
12
15
4
(ER=31)
TOTAL
9
(1)
(11)
81
1
121
24.3
0.5
24.2
49
Where, P = Probabilities
R = Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
Variance
=
49
=
7%
Conclusion - Therefore, the Expected Return on Portfolio is 31%
and the Risk on Portfolio is 7%.
The Rate of Return on Stock X and Y are given below.
Calculate the Expected Return and the Standard Deviation on
both the Securities. If you could invest in any one, which would
you prefer.
Particulars
Probability
Stock X
Stock Y
Boom
Normal
Recession
0.4
0.3
0.3
40%
30%
20%
30%
25%
15%
Sol:
For Stock X,
Events
P x R
(R-ER)
0.4
0.3
0.3
40
30
20
16
9
6
(ER=31)
9
(1)
(11)
(R-ER)
P.(R-ER)2
Boom
Normal
Recession
TOTAL
59
81
1
121
32.4
0.3
36.3
69
Where, P = Probabilities
R = Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
=
=
Variance
69
8.31%
For Stock Y,
Events
P x R
(R-ER)
(R-ER)
P.(R-ER)2
Boom
Normal
Recession
0.4
0.3
0.3
30
25
15
TOTAL
12
7.5
4.5
(ER=24)
6
1
(9)
36
1
81
14.4
0.3
24.3
39
Where, P = Probabilities
R = Returns on Securities
ER = Expected Return
SD = Standard Deviation or Risk.
Standard Deviation =
=
=
Summary:
Expected Return
Risk
Variance
39
6.24%
Stock X
Stock Y
31%
8.31%
24%
6.24%
Conclusion:
A Risk-Taker Investor would prefer Stock X as returns are high
i.e.31% even though the risk is high i.e.8.31%.
A Risk-Averse Investor would prefer Stock Y as returns are low
i.e.6.24% even though the risk is low i.e.24%.
60
Chapter 11
Portfolio Management Case Studies
Case Study 1
A multi-billion dollar hedge fund was continually investing in a very limited
Portfolio Monitoring tool that needed to be replaced
to the
firms inability to consolidate data and applications from disparate systems into a
single place. They needed an immediate, milestone-focused solution, along with a
measurable, well-managed approach to business systems development.
consulting approach.
Case
Study
to
optimise
development.
In
products
in
the
allocate
valuable
alignments
goals,
leadership
at
its
particular,
Fortune
around
the
wanted
team
fund
the
resources
to
high
tactical
wanted
100
processes
pipeline,
between
the client
projects
to
innovation
to
most
be
implement
to
Kalypso
to
product
prioritize
and
new
projects
achieve
objectives.
a portfolio
company
new
innovation
products,
strategic
be
and
able
important
value
and
telecommunications
To
better
meet
these
management practice.
company
turned
management
making.
portfolio
framework
Kalypso
management
that
assisted
process
assistance
with
could
be
used
client
in
developing
the
and
for
solution
to
based
designing
improve
on
strategic
comprehensive
the
client
stock
priorities.
the
client
Executives
have
now
projects
rank
is
increased
based
realizing
the
benefits
visibility
into
new
on
they
align
objectives.
The
client
is
decisions
related
to
project
how
able
to
funding
maximize
and
risk.
62
of
portfolio
products
with
being
the
firms
investments,
selection,
and
management.
developed
and
strategy
and
make
minimise
informed
project
Additional
Benefits
Increased
communication
A single
record
The
high
ability
to
of
truth
stop
priority, high
on
low
value
how
for
to
new
value
projects
projects.
Chapter 12
CONCLUSION
63
and
and
services
reallocate
portfolio.
in
pipeline.
resources
to
From the above discussion it is clear that portfolio functioning is based on market
risk, so one can get the help from the professional Portfolio Manager or the Merchant
banker if required before investment because applicability of practical knowledge through
technical analysis can help an investor to reduce risk.
In other words Security prices are determined by money manager and home
managers, students and strikers, doctors and dog catchers, lawyers and landscapers, the
wealthy and the wanting. This breadth of market participants guarantees an element of
unpredictability and excitement. If we were all totally logical and could separate our
emotions from our investment decisions then, the determination of price based on future
earnings would work magnificently. And since we would all have the same completely
logical expectations, price would only change when quarterly reports or relevant news was
released.
I can conclude from this project that portfolio management has become an important
service for the investors to identify the companies with growth potential. Portfolio managers
can provide the professional advice to the investors to make an intelligent and informed
investment.
Portfolio management role is still not identified in the recent time but due it
expansion of investors market and growing complexities of the investors the services of the
portfolio managers will be in great demand in the near future. Today the individual investors
do not show interest in taking professional help but surely with the growing importance and
awareness regarding portfolios managers people will definitely prefer to take professional
help.
CHAPTER 13
BIBLIOGRAPHY
64
Reference Books
No.
Book Name
Author Name
Published By
S. Kevin
PHL. Learning
Chandra
McGraw-Hill Education
Portfolio Management.
2
(India) Ltd.
Fischer
Pearson
Taxmann Publication
Frame Publication
Reference Websites
www.allbankingsolution.com/DATA.htm
www.portfoliomanagement.com
65