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INDEX
SRNO. TOPICS PAGE NO
5-14 15-17 18-29 3 -33

1.
2.

PORTFOLIO MANAGEMENT INTRODUCTION TYPES OF PORTFOLIO MANAGEMENT PORTFOLIO MANAGEMENT PROCESS RISK RETURN ANALYSIS PORTFOLIO T!EORIES PERSONS IN#OL#ED IN PORTFOLIO MANAGEMENT CONCLUSION $I$LOGRAP!Y

3. 4. 5. ".

34-41

42-45

4"-47 48

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C!APTER% 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. ven 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. !hey 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. !hat is why professional investment advice through portfolio management service can help the investors to make an intelligent and informed choice between alternative investments opportunities without the worry of post trading hassles.

MEANING OF PORTFOLIO MANAGEMENT

"ortfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize returns to suit the ob#ectives of an investor. !his however requires financial expertise in selecting the
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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. !he 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. "ortfolio management service is one of the merchant banking activities recognized by Securities and xchange %oard of India &S %I'. !he service can be rendered either by merchant bankers or portfolio managers or discretionary portfolio manager as define in clause &e' and &f' of (ule ) of Securities and xchange %oard of India&"ortfolio *anagers'(ules, +,,- and their functioning are guided by the S %I. .ccording 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. . merchant banker acting as a "ortfolio *anager shall also be bound by the rules and regulations as applicable to the portfolio manager. (ealizing the importance of portfolio management services, the S %I has laid down certain guidelines for the proper and professional conduct of portfolio management services. .s per guidelines only recognized merchant bankers registered with S %I are authorized to offer these services.

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"ortfolio management or investment helps investors in effective and efficient management of their investment to achieve this goal. !he rapid growth of capital markets in India has opened up new investment avenues for investors. !he stock markets have become attractive investment options for the common man. %ut the need is to be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk. /ence this is the study on 0PORTFOLIO MANAGEMENT 1 IN#ESTMENT DECISION2 so as to examine the role, process and merits of effective investment management and decision.

DEFINITIONS OF PORTFOLIO
1& I'()*+,-.*/,-0*.1,2 . 1,33)1+4,' of 4'()*+2)'+* &all' owned by the same 4'04(40563 or ,-76'486+4,'. !hese investments often include *+,19*, which are investments in individual :5*4')**)*3 :,'0*, which are investments in 0):+ that are designed to )6-' 4'+)-)*+3 and 25+563 ;5'0*, which are essentially <,,3* of 2,')= from many 4'()*+,-* that are invested by <-,;)**4,'63* or according to 4'041)*. 2& F4'6'1463 D41+4,'6-= 6'0 /494A'*>)-*.1,2 . collection of various company shares, fixed interest securities or money$ market instruments. "eople may talk grandly of 4running a portfolio4 when they own a couple of shares but the characteristic of a serious investment portfolio is diversity. It should show a spread of investments to minimize risk $ brokers and investment advisers warn against 4putting all your eggs in one basket4. 3& Y,5-D41+4,'6-=.1,2
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a' .ll the securities held for investment as by an individual, bank, investment company, etc. b' . list of such securities.

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DEFINITIONS OF PORTFOLIO MANAGEMENT

1& I'()*+,-.*>,-0*.1,2 !he process of managing the assets of a mutual fund, including choosing and monitoring appropriate investments and allocating funds accordingly. 2& I'()*+,- G3,**6-= 5etermining the mix of assets to hold in a portfolio is referred to as portfolio management. . fundamental aspect of portfolio management is choosing assets which are consistent with the portfolio holder4s investment ob#ectives and risk tolerance. !he ultimate goal of portfolio management is to achieve the optimum return for a given level of risk. Investors must balance risk and performance in making portfolio management decisions. "ortfolio management strategies may be either active or passive. .n investor who prefers passive portfolio management will likely choose to invest in low cost index funds with the goal of mirroring the market4s performance. .n investor who prefers active portfolio management will choose managed funds which have the potential to outperform the market. Investors are generally charged higher initial fees and annual management fees for active portfolio management. 3& F4'6'1463 D41+4,'6-= *anaging a large single portfolio or being employed by its owner to do so. "ortfolio managers have the knowledge and skill which encourage people to put their investment decisions in the hands of a professional &for a fee'.

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DEFINITION OF DISCRETIONARY PORTFOLIO MANAGEMENT

$5*4')**D41+4,'6-=.1,2 Investment account arrangement in which an 4'()*+2)'+ 26'67)- makes the buy$sell decisions without referring to the account owner &client' for every transaction. !he manager, however, must operate within the agreed upon limits to achieve the client4s stated investment ob#ectives.

DEFINITIONS OF PRO?ECT PORTFOLIO MANAGEMENT

1& I'+)-')+.1,2 /):,<)046 ""*, short for <-,@)1+ <,-+;,34, 26'67)2)'+, refers to a software package that enables corporate and business users to organize a series of pro#ects into a single portfolio that will provide reports based on the various pro#ect ob#ectives, costs, resources, risks and other pertinent associations. "ro#ect portfolio management software allows the user, usually management or executives within the company, to review the portfolio which will assist in making key financial and business decisions for the pro#ects.
2)

$4+<4<).1,2 "ro#ect portfolio management organizes a series of pro#ects into a single

portfolio consisting of reports that capture pro#ect ob#ectives, costs, timelines, accomplishments, resources, risks and other critical factors. xecutives can then regularly review entire portfolios, spread resources appropriately and ad#ust pro#ects to produce the highest departmental returns. .lso called as E'+)-<-4*) P-,@)1+ 26'67)2)'+ 6'0 PPM
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MEANING OF PORTFOLIO MANAGERS

"ortfolio manager means any person who enters into a contract or arrangement with a client. "ursuant to such arrangement he advises the client or undertakes on behalf of such client management or administration of portfolio of securities or invests or manages the client6s funds. . discretionary portfolio manager means a portfolio manager who exercises or may under a contract relating to portfolio management, exercise any degree of discretion in respect of the investment or management of portfolio of the portfolio securities or the funds of the client, as the case may be. /e shall independently or individually manage the funds of each client in accordance with the needs of the client in a manner which does not resemble the mutual fund. . non discretionary portfolio manager shall manage the funds in accordance with the directions of the client. . portfolio manager by virtue of his knowledge, background and experience is expected to study the various avenues available for profitable investment and advise his client to enable the latter to maximize the return on his investment and at the same time safeguard the funds invested.

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SCOPE OF PORTFOLIO MANAGEMENT%

"ortfolio management is an art of putting money in fairly safe, quite profitable and reasonably in liquid form. .n investor6s attempt to find the best combination of risk and return is the first and usually the foremost goal. In choosing among different investment opportunities the following aspects risk management should be considered7 6& !he selection of a level or risk and return that reflects the investor6s tolerance for risk and desire for return, i.e. personal preferences. :& !he management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. !he very risk$averse investor might choose to invest in mutual funds. !he more risk$tolerant investor might choose shares, if they offer higher returns. "ortfolio management in India is still in its infancy. .n investor has to choose a portfolio according to his preferences. !he first preference normally goes to the necessities and comforts like purchasing a house or domestic appliances. /is second preference goes to some contractual obligations such as life insurance or provident funds. !he third preference goes to make a provision for savings required for making day to day payments. !he next preference goes to short term investments such as 8!I units and post office deposits which provide easy liquidity. !he last choice goes to investment in company shares and debentures. !here are number of choices and decisions to be taken on the basis of the attributes of risk, return and tax benefits from these shares and debentures. !he final decision is taken on the basis of alternatives, attributes and investor preferences. For most investors it is not possible to choose between managing one6s own portfolio. !hey can hire a professional manager to do it. !he professional managers
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provide a variety of services including diversification, active portfolio management, liquid securities and performance of duties associated with keeping track of investor6s money.

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NEED FOR PORTFOLIO MANAGEMENT%

"ortfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, #udgment and action. !he ob#ective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investor6s ob#ectives, constraints, preferences for risk and returns and tax liability. !he portfolio is reviewed and ad#usted from time to time in tune with the market conditions. !he evaluation of portfolio is to be done in terms of targets set for risk and returns. !he changes in the portfolio are to be effected to meet the changing condition. "ortfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. "ortfolio theory concerns itself with the principles governing such allocation. !he modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. . combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. !he modern theory is the view that by diversification risk can be reduced. 5iversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. *odern theory believes in the perspective of combination of securities under constraints of risk and returns.

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O$?ECTI#ES OF PORTFOLIO MANAGEMENT%

TA) 26@,- ,:@)1+4()* ,; <,-+;,34, 26'67)2)'+ 6-) *5226-48)0 6* :)3,>%-

1& S)15-4+=BS6;)+= ,; P-4'41<63% Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact.

2& S+6:434+= ,; I'1,2)% So as to facilitate planning more accurately and systematically the reinvestment consumption of income.

3& C6<4+63 G-,>+A% !his can be attained by reinvesting in growth securities or through purchase of growth securities.

4& M6-9)+6:434+=% i.e. is the case with which a security can be bought or sold. !his is essential for providing flexibility to investment portfolio.

5& L4C5404+= 4.) N)6-')** T, M,')=% It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market.

"& D4()-*4;416+4,'% !he basic ob#ective of building a portfolio is to reduce risk of loss of capital and 9 or income by investing in various types of securities and over a wide range of industries.

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7& F6(,-6:3) T6D S+6+5*% !he effective yield an investor gets form his investment depends on tax to which it is sub#ect. %y minimizing the tax burden, yield can be effectively improved.

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$ASIC PRINCIPLES OF PORTFOLIO MANAGEMENT%

!here are two basic principles for effective portfolio management which are given below7$
I.

E;;)1+4() 4'()*+2)'+ <36''4'7 ;,- +A) 4'()*+2)'+ 4' *)15-4+4)* := 1,'*40)-4'7 +A) ;,33,>4'7 ;61+,-*-

a)

Fiscal, financial and monetary policies of the :ovt. of India and the (eserve %ank of India. Industrial and economic environment and its impact on industry. "rospect in terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects etc.

b)

II.

C,'*+6'+ R)(4)> ,; I'()*+2)'+% It requires to review the investment in securities and to continue the selling and purchasing of investment in more profitable manner. For this purpose they have to carry the following analysis7

a)

!o assess the quality of the management of the companies in which investment has been made or proposed to be made.

b)

!o assess the financial and trend analysis of companies %alance Sheet and "rofit and ;oss .ccounts to identify the optimum capital structure and better performance for the purpose of withholding the investment from poor companies.

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1& !o analyze the security market and its trend in continuous basis to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If so the timing for investment or dis$investment is also revealed.

CHAPTER 2
TYPES OF PORTFOLIO MANAGEMENT
TA)-) 6-) (6-4,5* +=<)* ,; <,-+;,34, 26'67)2)'+% I'()*+2)'+ M6'67)2)'+

I+ P,-+;,34, M6'67)2)'+

P-,@)1+ P,-+;,34, M6'67)2)'+

1. IN#ESMENT MANAGEMENT% I'()*+2)'+ 26'67)2)'+ 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,
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pension funds, corporations etc.' or private investors &both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or xchange !raded Funds'. !he term 6**)+ 26'67)2)'+ is often used to refer to the investment management of collective investments,&not necessarily' whilst the more generic ;5'0 26'67)2)'+ 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 >)63+A 26'67)2)'+ or <,-+;,34, 26'67)2)'+ often within the context of so$called <private banking<. F5'0 26'67)- &or 4'()*+2)'+ 60(4*)- in the 8.S.' refers to both a firm that provides investment management services and an individual who directs fund management decisions.

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2. IT PORTFOLIO MANAGEMENT% IT <,-+;,34, 26'67)2)'+ is the application of systematic management to large classes of items managed by enterprise Information !echnology &I!' capabilities. xamples of I! portfolios would be planned initiatives, pro#ects, and ongoing I! services &such as application support'. !he promise of I! portfolio management is the quantification of previously mysterious I! efforts, enabling measurement and ob#ective evaluation of investment scenarios. !he concept is analogous to financial portfolio management, but there are significant differences. I! investments are not liquid, like stocks and bonds &although investment portfolios may also include illiquid assets', and are measured using both financial and non$financial yardsticks &for example, a balanced scorecard approach'3 a purely financial view is not sufficient. .t its most mature, I! "ortfolio management is accomplished through the creation of two portfolios7 E4& A<<3416+4,' P,-+;,34, - *anagement of this portfolio focuses on comparing spending on established systems based upon their relative value to the organization. !he comparison can be based upon the level of contribution in terms of I! investment6s profitability. .dditionally, this comparison can also be based upon the non$tangible factors such as organizations6 level of experience with a certain technology, users6 familiarity with the applications and infrastructure, and external forces such as emergence of new technologies and obsolesce of old ones.

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E44& P-,@)1+ P,-+;,34, - !his type of portfolio management specially address the issues with spending on the development of innovative capabilities in terms of potential (=I and reducing investment overlaps in situations where reorganization or acquisition occurs. !he management issues with the second type of portfolio management can be #udged in terms of data cleanliness, maintenance savings, suitability of resulting solution and the relative value of new investments to replace these pro#ects.

3. PRO?ECT PORTFOLIO MANAGEMENT% "ro#ect portfolio management organizes a series of pro#ects into a single portfolio consisting of reports that capture pro#ect ob#ectives, costs, timelines, accomplishments, resources, risks and other critical factors. pro#ects to produce the highest departmental returns. "ro#ect management is the discipline of planning, organizing and managing resources to bring about the successful completion of specific pro#ect goals and ob#ectives. . pro#ect is a finite endeavor &having specific start and completion dates' undertaken to create a unique product or service which brings about beneficial change or added value. !his finite characteristic of pro#ects stands in contrast to processes, or operations, which are permanent or semi$permanent functional work to repetitively produce the same product or service. In practice, the management of these two systems is often found to be quite different, and as such requires the development of distinct technical skills and the adoption of separate management.
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xecutives can then

regularly review entire portfolios, spread resources appropriately and ad#ust

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CHAPTER: 3
PORTFOLIO MANAGEMENT PROCESS%
(A) T!ERE

ARE T!REE MA?OR ACTI#ITIES IN#OL#ED IN AN PORTFOLIO MANAGEMENT /!IC! ARE AS

EFFICIENT FOLLO/S%a)

Identification of assets or securities, allocation of investment and also identifying the classes of assets for the purpose of investment.

b)

!hey have to decide the ma#or weights, proportion of different assets in the portfolio by taking in to consideration the related risk factors.

c)

Finally they select the security within the asset classes as identify.

!he 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. >ith higher risk higher return may be expected and vice versa. E$& IN#ESTMENT DECISION%

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:iven a certain sum of funds, the investment decisions basically depend upon the following factors7$
I.

O:@)1+4()* ,; I'()*+2)'+ P,-+;,34,% !his is a crucial point which a Finance *anager must consider. !here can be many ob#ectives of making an investment. !he 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.

/ow the ob#ectives can affect in investment decision can be seen from the fact that the 8nit !rust of India has two ma#or schemes 7 Its 0capital units2 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. !he investment manager under both the scheme will invest the money of the !rust in different kinds of shares and securities. So it is obvious that the ob#ectives must be clearly defined before an investment decision is taken.
II.

S)3)1+4,' ,; I'()*+2)'+% /aving defined the ob#ectives of the investment, the next decision is to decide the kind of investment to be selected. !he decision what to buy has to be seen in the context of the following7$

a)

!here is a wide variety of investments available in market i.e. quity shares, preference share, debentures, convertible bond, :ovt. securities and bond, capital units etc. =ut of these what types of securities to be purchased.

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b)

>hat should be the proportion of investment in fixed interest dividend securities and variable dividend bearing securities? !he 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 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 #ute 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)

=nce 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.

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FUNDAMENTAL ANALYSIS%
EA& FUNDAMENTAL ANALYSIS OF GRO/T! ORIENTED COMPANIES%

=ne of the first decisions that an investment manager faces is to identify the industries which have a high growth potential. !wo approaches are suggested in this regard. !hey are7
a)

S+6+4*+4163 A'63=*4* ,; P6*+ P)-;,-26'1)%

. statistical analysis of the immediate past performance of the share price indices of various industries and changes there in related to the general price index of shares of all industries should be made. !he (eserve %ank of India index numbers of security prices published every month in its bulletin may be taken to represent the behaviour of share prices of various industries in the last few years. !he related changes in the price index of each industry as compared with the changes in the average price index of the shares of all industries would show those industries which are having a higher growth potential in the past few years. It may be noted that an Industry may not be remaining a growth Industry for all the time. So he shall now have to make an assessment of the various Industries keeping in view the present potentiality also to finalize the list of Industries in which he will try to spread his investment.
b)

A**)**4'7 +A) I'+-4'*41 #635) ,; 6' I'05*+-=BC,2<6'=%

.fter an investment manager has identified statistically the industries in the share of which the investors show interest, he would assess the various factors which influence the value of a particular share. !hese factors generally relate to the strengths and weaknesses of the company under consideration, @haracteristics of
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the industry within which the company fails and the national and international economic scene. It is the #ob of the investment manager to examine and weigh the various factors and #udge the quality of the share or the security under consideration. !his approach is known as the intrinsic value approach. !he ma#or ob#ective of the analysis is to determine the relative quality and the quantity of the security and to decide whether or not is security is good at current markets prices. In this, both qualitative and quantitative factors are to be considered. E$& 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 :overnment constraints on the same. .s we have discussed earlier, an appraisal of the particular industry6s prospect is essential and the basic profitability of any company is dependent upon the economic prospect of the industry to which it belongs. !he following factors may particularly be kept in mind while assessing to factors relating to an industry.

D)26'0 6'0 S5<<3= P6++)-' ;,- +A) I'05*+-4)* P-,051+* 6'0 I+* G-,>+A P,+)'+463% !he main important aspect is to see the likely demand of the products of the industry and the gap between demand and supply. !his 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

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agencies like the planning commission, @hambers of @ommerce and institutions like A@. (, etc. !he management expert identifies fives stages in the life of an industry. !hese are 0Introduction, development, rapid growth, maturity and decline2. If an industry has already reached the maturity or decline stage, its future demand potential is not likely to be high.

(i)

P-,;4+6:434+=% 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. !he 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. !his would give him an idea about the profitability of the industry as a whole. P6-+41536- CA6-61+)-4*+41* ,; +A) I'05*+-=% ach industry has its own

(ii)

characteristics, which must be studied in depth in order to understand their impact on the working of the industry. %ecause the industry having a fast changing technology become obsolete at a faster rate. Similarly, many industries are characterized by high rate of profits and losses in alternate years. Such fluctuations in earnings must be carefully examined. L6:,5- M6'67)2)'+ R)36+4,'* 4' +A) I'05*+-=% !he state of labour$ management relationship in the particular industry also has a great deal of
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(iii)

[Type text]

influence on the future profitability of the industry. !he investment manager should, therefore, see whether the industry under analysis has been maintaining a cordial relationship between labour and management. =nce the industry6s characteristics have been analyzed and certain industries with growth potential identified, the next stage would be to undertake and analyze all the factors which show the desirability of various companies within an industry group from investment point of view.

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EC&

COMPANY ANALYSIS%

!o select a company for investment purpose a number of qualitative factors have to be seen. %efore purchasing the shares of the company, relevant information must be collected and properly analyzed. A' 4335*+-6+4() 34*+ ,; ;61+,-* >A41A A)3< +A) 6'63=*+ 4' +694'7 +A) 4'()*+2)'+ 0)14*4,' 4* 74()' :)3,>. /owever, it must be emphasized that the past performance and information is relevant only to the extent it indicates the future trends. /ence, the investment manager has to visualize the performance of the company in future by analyzing its past performance.

1)

S48) 6'0 R6'94'7% . rough idea regarding the size and ranking of the company within the economy, in general, and the industry, in particular, would help the investment manager in assessing the risk associated with the company. In this regard the net capital employed, the net profits, the return on investment and the sales volume of the company under consideration may be compared with similar data of other company in the same industry group. It may also be useful to assess the position of the company in terms of technical knowhow, research and development activity and price leadership. G-,>+A R)1,-0% !he growth in sales, net income, net capital employed and earnings per share of the company in the past few years must be examined. !he following three growth indicators may be particularly looked in to &a' "rice earnings ratio, &b' "ercentage growth rate of earnings per annum and &c' "ercentage growth rate of net block of the company. !he 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
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2)

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share. !heoretically, this ratio should be same for two companies with similar features. /owever, this is not so in practice due to many factors. /ence, 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. .n evaluation of future growth prospects of the company should be carefully made. !his requires the analysis of the existing capacities and their utilization, proposed expansion and diversification plans and the nature of the company6s technology. !he existing capacity utilization levels can be known from the quantitative information given in the published profit and loss accounts of the company. !he plans of the company, in terms of expansion or diversification, can be known from the directors reports the chairman6s statements and from the future capital commitments as shown by way of notes in the balance sheets. !he nature of technology of a company should be seen with reference to technological developments in the concerned fields, the possibility of its product being superseded of the possibility of emergence of more effective method of manufacturing. :rowth is the single most important factor in company analysis for the purpose of investment management. . company may have a good record of profits and performance in the past3 but if it does not have growth potential, its shares cannot be rated high from the investment point of view. ED& FINANCIAL ANALYSIS%

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.n 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. !he 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. !he 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. Barious other ratios to measure profitability, operating efficiency and turnover efficiency of the company may also be calculated. !he return on owner6s investment, capital turnover ratio and the cost structure ratios may also be worked out. !o examine the financial solvency or liquidity of the company, the investment manager may work out current ratio, liquidity ratio, debt equity ratio, etc. !hese ratios will provide an overall view of the company to the investment analyst. /e can analyze its strengths and weakness and see whether it is worth the risk or not. E4& F5634+= ,; M6'67)2)'+% !his is an intangible factor. Cet it has a very important bearing on the value of the shares. very investment manager knows that the shares of certain business houses command a higher premium than those of similar companies managed by other business houses. !his is because of the quality of management, the confidence that the investors have in a particular business house, its policy vis$D$vis its relationship with the

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[Type text]

investors, dividend and financial performance record of other companies in the same group, etc. !his 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. Euality 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. !he 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.

E44& L,16+4,' 6'0 36:,5- 26'67)2)'+ -)36+4,'*% !he locations of the company6s manufacturing facilities determine its economic viability which depends on the availability of crucial inputs like power, skilled labour and raw materials etc. Aearness to market is also a factor to be considered. In the past few years, the investment manager has begun looking into the state of labour management relations in the company under consideration and the area where it is located. P6++)-' ,; ED4*+4'7 S+,19 !,304'7% .n analysis of the pattern of the existing stock holdings of the company would also be relevant. !his would show the stake of various parties associated with the company. .n interesting case in this regard is that of the "un#ab Aational %ank in which the ;.I.@. and other financial institutions had substantial holdings. >hen the bank was nationalized, the residual company proposed a scheme whereby those shareholders, who wish to opt out, could receive a certain amount as
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(iii)

[Type text]

compensation in cash. It was only at the instant and bargaining strength of institutional investors that the compensation offered to the shareholders, who wish to opt out of the company, was raised considerably. M6-9)+6:434+= ,; +A) SA6-)*% .nother important consideration for an investment manager is the marketability of the shares of the company. *ere listing of the share on the stock exchange does not automatically mean that the share can be sold or purchased at will. !here are many shares which remain inactive for long periods with no transactions being affected.

(iv)

!o purchase or sell such scripts is a difficult task. In this regard, dispersal of share holding with special reference to the extent of public holding should be seen. !he other relevant factors are the speculative interest in the particular scrip, the particular stock exchange where it is traded and the volume of trading. Fundamental analysis thus is basically an examination of the economics and financial aspects of a company with the aim of estimating future earnings and dividend prospect. It included an analysis of the macro economic and political factors which will have an impact on the performance of the firm. .fter having analyzed all the relevant information about the company and its relative strength vis$D$vis other firm in the industry, the investor is expected to decide whether he should buy or sell the securities.

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EC&

TIMING OF PURC!ASES%-

!he 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. !he 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. %ut in practical it is a difficult task. >hen the prices are rising in the market i.e. there is bull phase, everybody #oins in buying without any delay because every day the prices touch a new high. ;ater when the bear face starts, prices tumble down every day and everybody starts counting the losses. !he ordinary investor regretted such situation by thinking why he did not sell his shares in previous day and ultimately sell at a lower price. !his kind of investment decision is entirely devoid of any sense of timing. I' *A,-+ >) 16' 1,'1350) := *6=4'7 +A6+ I'()*+2)'+ 26'67)2)'+ 4* 6 1,2<3)D 61+4(4+= >A41A 26= :) :-,9)' 0,>' 4'+, +A) ;,33,>4'7 *+)<*%
1& S<)14;416+4,' O; I'()*+2)'+ O:@)1+4()* A'0 C,'*+-64'+*7

!he typical ob#ectives sought by investors are current income, capital appreciation, and safety of principle. !he relative importance of these ob#ectives should be specified further the constraints arising from liquidity, time horizon, tax and special circumstances must be identified.
2& CA,41) O; TA) A**)+ M4D %

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[Type text]

!he most important decision in portfolio management is the asset mix decision very broadly3 this is concerned with the proportions of Fstocks6 &equity shares and units9shares of equity$oriented mutual funds' and Fbonds6 in the portfolio. !he appropriate Fstock$bond6 mix depends mainly on the risk tolerance and investment horizon of the investor.

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ELEMENTS OF PORTFOLIO MANAGEMENT%

P,-+;,34, 26'67)2)'+ 4* ,'-7,4'7 <-,1)** 4'(,3(4'7 +A) ;,33,>4'7 :6*41 +6*9* 7 Identification of the investor6s ob#ectives, constraints and preferences. Strategies are to be developed and implemented in tune with investment policy formulated.

(eview and monitoring of the performance of the portfolio.

Finally the evaluation of the portfolio

T)1A'4C5).* O; P,-+;,34, M6'67)2)'+%

.s of now the under noted technique of portfolio management7 are in vogue in our country.
1& EC54+= P,-+;,34,% It is influenced by internal and external factors the internal

factors affect the inner working of the company6s growth plans are analyzed with referenced to %alance sheet, profit 1 loss a9c &account' of the company. .mong the external factor are changes in the government policies, !rade cycle6s, "olitical stability etc.
2& EC54+= S+,19 A'63=*4*7 8nder this method the probable future value of a

share of a company is determined it can be done by ratio6s of earning per share of the company and price earnings ratio

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[Type text]

EARNING PER S!ARE G H PROFIT AFTER TAXHH NO. OF EFUITY S!ARES PRICE EARNING RATIO G HMARKET PRICE EPER S!ARE&H EARNING PER S!ARE

=ne can estimate trend of earning by

"S, which reflects trends of earning

quality of company, dividend policy, and quality of management. "rice arnings ratio indicate a confidence of market about the company future, a high rating is preferable. TA) ;,33,>4'7 <,4'+* 25*+ :) 1,'*40)-)0 := <,-+;,34, 26'67)-* >A43) 6'63=84'7 +A) *)15-4+4)*.
1& N6+5-) ,; +A) 4'05*+-= 6'0 4+* <-,051+% ;ong term trends of industries,

competition within, and outside the industry, !echnical changes, labour relations, sensitivity, to !rade cycle.

2& I'05*+-463 6'63=*4* ,; <-,*<)1+4() )6-'4'7*I 16*A ;3,>*I >,-94'7 16<4+63I

04(40)'0*I )+1.

3& R6+4, 6'63=*4*% R6+4,* such as debt equity ratio, current ratio, net worth,

profit earnings ratio, returns on investment, are worked out to decide the portfolio.
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!he wise principle of portfolio management suggests that J$5= >A)' +A) 26-9)+ 4* 3,> ,- $EARIS!I 6'0 *)33 >A)' +A) 26-9)+ 4* -4*4'7 ,- $ULLIS!K. Stock market operation can be analyzed by7 a' F5'062)'+63 6<<-,61A% - %ased on intrinsic value of shares. b' T)1A'4163 6<<-,61A% !heory, etc. P-41)* 6-) :6*)0 5<,' 0)26'0 6'0 *5<<3= ,; +A) 26-9)+ . =b#ectives are maximization of wealth and minimization of risk. 5iversification reduces risk and volatility. Bariable returns, high illiquidity3 etc. %ased on 5ow Gone6s !heory, (andom >alk

CHAPTER - 4
RISK RETURN ANALYSIS
RISK ON PORTFOLIO % !he expected returns from individual securities carry some degree of risk. (isk on the portfolio is different from the risk on individual securities. !he risk is reflected in the variability of the returns from zero to infinity. (isk of the individual assets or a portfolio is measured by the variance of its return. !he expected return depends on the probability of the returns and their weighted contribution to the risk

35

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of the portfolio. !hese are two measures of risk in this context one is the absolute deviation and other standard deviation. *ost investors invest in a portfolio of assets, because as to spread risk by not putting all eggs in one basket. /ence, 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. (isk is mainly reduced by 5iversification.

F,33,>4'7 6-) +A) *,2) ,; +A) +=<)* ,; R4*9%

1& I'+)-)*+ R6+) R4*9% !his arises due to the variability in the interest rates

from time to time. . 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 under7
TYPES @ash quivalent ;ong !erm %onds RISK EXTENT ;ess vulnerable to interest rate risk. *ore vulnerable to interest rate risk.

2& P5-1A6*4'7 P,>)- R4*9% It is also known as inflation risk also emanates

from the very fact that inflation affects the purchasing power adversely. Aominal return contains both the real return component and an inflation premium in a transaction involving risk of the above type to compensate for
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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. "urchasing 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. "urchasing 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& $5*4')** R4*9% %usiness risk emanates from sale and purchase of securities

affected by business cycles, technological changes etc. %usiness 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& F4'6'1463 R4*9% 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. xcess of risk vis$D$vis equity in the capital structure indicates that the company is highly geared. .lthough a leveraged company6s 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

37

[Type text]

creditors. !he risk is known as leveraged or financial risk of which investors should be aware and portfolio managers should be very careful.
5& S=*+)26+41 R4*9 ,- M6-9)+ R)36+)0 R4*9% 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 %eta of different company shares.
"& U'*=*+)26+41 R4*9*%

!he 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. !he unsystematic risk stems from inefficiency magnitude of those factors different form one company to another.

RISK RETURN ANALYSIS%

.ll investment has some risk. Investment in shares of companies has its own risk or uncertainty3 these risks arise out of variability of yields and uncertainty of appreciation or depreciation of share prices, losses of liquidity etc !he -4*9 ,()- +42) can be represented by the variance of the returns while the -)+5-' ,()- +42) is capital appreciation plus payout, divided by the purchase price of the share. Aormally, the higher the risk that the investor takes, the higher is the return. !here is, however, a risk less return on capital of about +)H which is the bank, rate charged by the (.%.I or long term, yielded on government securities at around +-H to +IH. !his risk less return refers to lack of variability of return and no uncertainty
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in the repayment or capital. %ut 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. (isk$return is sub#ect to variation and the ob#ectives of the portfolio manager are to reduce that variability and thus reduce the risk by choosing an appropriate portfolio. !raditional 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. xperience has shown that beyond the certain securities by adding more securities expensive.

RETURNS ON PORTFOLIO7
ach security in a portfolio contributes return in the proportion of its investments in security. !hus 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. >hy does an investor have so many securities in his portfolio? If the security .%@ gives the maximum return why not he invests in that security all his funds and thus maximize return? !he answer to this questions lie in the investor6s perception of risk attached to investments, his ob#ectives 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 ob#ectives of investors.

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RULES TO $E FOLLO/ED $EFORE IN#ESTMENT IN PORTFOLIO.S

1& @ompile the financials of the companies in the immediate past - years such

as turnover, gross profit, net profit before tax, compare the profit earning of company with that of the industry average nature of product manufacture service render and it future demand ,know about the promoters and their back ground, dividend track record, bonus shares in the past - to J years ,reflects company6s commitment to share holders the relevant information can be accessed from the (5@ &(egistrant of @ompanies' published financial results financed quarters, #ournals and ledgers.

2& >atch out the highs and lows of the scripts for the past ) to - years and

their timing cyclical scripts have a tendency to repeat their performance, this hypothesis can be true of all other financial,

3& !he higher the trading volume higher is liquidity and still higher the chance

of speculation, it is futile to invest in such shares who6s daily movements cannot be kept track, if you want to reap rich returns keep investment over along horizon and it will offset the wild intraday trading fluctuation6s, the minor movement of scripts may be ignored, we must remember that share market moves in phases and the span of each phase is K months to J years.

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CHAPTER 6
PERSONS IN#OL#ED IN PORTFOLIO MANAGEMENT
1& IN#ESTOR%

.re 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%

*eans 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. !he relationship between an investor and portfolio manager is of a highly interactive nature. !he 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 #ob for him . !he portfolio management seeks to strike a balance between risk6s and return.

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!he generally rule in that greater risk more of the profits but S. .%.I. in its guidelines prohibits portfolio managers to promise any return to investor. "ortfolio management is not a substitute to the inherent risks associated with equity investment. /!O CAN $E A PORTFOLIO MANAGERL =nly those who are registered and pay the required license fee are eligible to operate as portfolio managers. .n applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of (s. JLlakh6s. !he certificate once granted is valid for three years. Fees payable for registration are (s ).Jlakh6s every for two years and (s.+lakh6s for the third year. From the fourth year onwards, renewal fees per annum are (s MJLLL. !hese are sub#ected to change by the S. .%.I. !he S. .%.I. has imposed a number of obligations and a code of conduct on them. !he portfolio manager should have a high standard of integrity, honesty and should not have been convicted of any economic offence or moral turpitude. /e should not resort to rigging up of prices, insider trading or creating false markets, etc. their books of accounts are sub#ect to inspection to inspection and audit by S. .%.I... !he observance of the code of conduct and guidelines given by the S. .%.I. are sub#ect to inspection and penalties for violation are imposed. !he manager has to submit periodical returns and documents as may be required by the S %I from time$to$ time.

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FUNCTIONS OF PORTFOLIO MANAGERS% A0(4*,-= -,3)% .dvice new investments, review the existing ones, identification of ob#ectives, recommending high yield securities etc. C,'051+4'7 26-9)+ 6'0 )1,',241 *)-(41)% !his is essential for recommending good yielding securities they have to study the current fiscal policy, budget proposal3 individual policies etc further portfolio manager should take in to account the credit policy, industrial growth, foreign exchange possible change in corporate law6s etc. F4'6'1463 6'63=*4*% /e should evaluate the financial statement of company in order to understand, their net worth future earnings, prospectus and strength. S+50= ,; *+,19 26-9)+ % /e should observe the trends at various stock exchange and analysis scripts so that he is able to identify the right securities for investment S+50= ,; 4'05*+-=% /e should study the industry to know its future prospects, technical changes etc, required for investment proposal he should also see the problem6s of the industry. D)140) +A) +=<) ,; <,-+ ;,34,% Neeping in mind the ob#ectives of portfolio a portfolio manager has to decide whether the portfolio should comprise equity preference shares, debentures, convertibles, non$convertibles or partly convertibles, money market, securities etc or a mix of more than one type of proper mix ensures higher safety, yield and liquidity coupled with balanced risk techniques of portfolio management.

43

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. portfolio manager in the Indian context has been %rokers &%ig brokers' who on the basis of their experience, market trends, Insider trader, helps the limited knowledge persons. !he one6s who use to manage the funds of portfolio, now being managed by the portfolio of *erchant %ank6s, professional6s like *%.6s @.6s .nd many financial institution6s have entered the market in a big way to manage portfolio for their clients. .ccording to S. .%.I. rules it is mandatory for portfolio managers to get them self6s registered. (egistered merchant bankers can act6s as portfolio managers. Investor6s must look forward, for qualification and performance and ability and research base of the portfolio managers. NEED AND ROLE OF PORTFOLIO MANAGER% >ith the development of Indian Securities market and with appreciation in market price of equity share of profit making companies, investment in the securities of such companies has become quite attractive. .t the same time, the stock market becoming volatile on account of various facts, a layman is puzzled as to how to make his investments without losing the same. /e has felt the need of an expert guidance in this respect. Similarly non resident Indians are eager to make their investments in Indian companies. !hey have also to comply with the conditions specified by the ( S (B %.AN =F IA5I. under various schemes for investment by the non residents. !he portfolio manager with his background and expertise meets the needs of such investors by rendering service in helping them to invest their fund9s profitably.

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PORTFOLIO MANAGER.S O$LIGATION% !he portfolio manager has number of obligations towards his clients, some of them are7 /e shall transact in securities within the limit placed by the client himself with regard to dealing in securities under the provisions of (eserve %ank of India .ct, +,-I. /e shall not derive any direct or indirect benefit out of the client6s funds or securities. /e shall not pledge or give on loan securities held on behalf of his client to a third person without obtaining a written permission from such clients. >hile dealing with his client6s funds, he shall not indulge in speculative transactions. /e may hold the securities in the portfolio account in his own name on behalf of his client6s only if the contract so provides. In such a case, his records and his report to his clients should clearly indicate that such securities are held by him on behalf of his client. /e shall deploy the money received from his client for an investment purpose as soon as possible for that purpose. /e shall pay the money due and payable to a client forthwith. /e shall not place his interest above those of his clients. /e shall not disclose to any person or any confidential information about his client, which has come to his knowledge.

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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 *erchant 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. !his 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. .nd since we would all have the same completely logical expectations, price would only change when quarterly reports or relevant news was released.

0I believe the future is only the past again, entered through another gate2 OSir .rthur wing "inero. +P,-.

If price are based on investors6 expectations, then knowing what a security should sell for become less important than knowing what other investors expect it to sell for. 0!here are two times of a man6s life when he should not speculate3 when he can6t afford it and when he can2 O *ark !win, +P,M.

. @asino 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 0L2 and 0LL2. Cet many investors buy securities without attempting to control the odds. If
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[Type text]

we believe that this dealings is not a F:ambling2 we have to start up it with intelligent way.

I can conclude from this pro#ect that portfolio management has become an important service for the investors to identify the companies with growth potential. "ortfolio managers can provide the professional advice to the investors to make an intelligent and informed investment.

"ortfolio 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.

!oday the individual investors do not show interest in taking professional help but surely with the growing importance and awareness regarding portfolio6s manager6s people will definitely prefer to take professional help.

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BIBLIOGRAPHY

REFERENCE $OOKS%
S)15-4+= A'63=*4* 6'0 P,-+;,34, M6'67)2)'+ - D-. P.K.$ANDGAR I'()*+2)'+ A'63=*4* 6'0 P,-+;,34, M6'67)2)'+

WEBLIOGRAPHY
SOURCES%
>>>.7,,73).1,2 >>>.=6A,,.1,2 >>>.>494<)046.1,2

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