INDEX

SR.NO

TOPIC

PAGE
NO.
2

1
INTRODUCTION
2

11
PORTFOLIO MANAGEMENT

19
RELEVANCE OF PORTFOLIO
MANAGEMENT

26
RISK

33
PORTFOLIO MANAGEMENT SERVICE

37
CONCLUSION

1. INTRODUCTION

Meaning of investment
Investment is the employment of funds with the aim of getting return on it.
Investing is a way to make money with your money. Generally, investment
is the application of money for earning more money. Investment also means
savings or savings made through delayed consumption . In its broadest sense,
an investment is sacrifice of current money or other resources for future
benefit. It is rare to find investor investing their entire savings in a single
security. Instead, they tend to invest in a group of securities. Such a group of
securities is called portfolio. Portfolio management deals with the analysis
of individual securities as well as theory and practice of optimally
combining securities into portfolios
Investment analysis, defined as the process of evaluating an investment for
profitability and risk. Ultimately has the purpose of measuring how the
given investment is a good fit for a portfolio. An investor considering
investment in securities is faced with problem of choosing from among a
large number of securities. His choice depends upon the risk return
characteristic of individual securities .the investor faces an infinite number
of possible portfolios or groups of securities. The risk and return
characteristic of portfolios differ from those of individual securities
combining to form a portfolio.

Definition of investment- an investment is the current commitment of

dollars for a period of time in order to derive future payments that will
compensate the investor for
1) The time the funds are committed
2) The expected rate of inflation and
3) The uncertainty of the future payments. The investor" can be an
individual, a government, a pension fund or a corporation

Why should invest?

There are two main reasons why you should invest:
Income-some people invest in order to provide or supplement their
income. investments provide income through the payment of
dividends or Interest

Appreciation- other individuals, especially those in their peak

working years, may be more interested in seeing the value of their
investments grow rather than in receiving any income from
investment. Appreciation is an increase in the value of an investment

 Excitement- investment is frequently someones hobby. Investing is

not inherently an end in itself; it is a means to an end. Ultimately, the
investment objective involves improved financial standing. if an
active investor makes frequent trades but only breaks even if the
process, only the stockbroker will benefit materially

When should invest?

The earlier you start investing, the sooner you can reach your financial
goals. Investing is like "planting" money. A small amount of money invested
will often grow to a larger sum over time.

Need for investment

To keep the value of your money from inflation:
The money you have today will not have the same value tomorrow. Yes,
inflation decreases the value of money you have. If you have rs 1000 today
and the rate of inflation is 8% the rs 1000 will be 920 next year. this will be
happened to your money if you are not investing in any investment
methods .but if you invest your money in any investment scheme which
gives you around 8% income your money will be grown up to rs 1851 in
9years and the money value when compared with the first year will be about
same as rs 1000 at least you can save your money from inflation.

To get a good return from your idle money

When you keep your money ideally in a saving account you wont get much
benefit if you invest your money with a little bit more of income then the
rate of inflation you can save your money and also can enjoy the growth of
money and money value. But you should consider the tax of the income
also. for this purpose, you can invest wisely in any investment scheme which
has no tax for income from such investments, or the investment with less
taxability or an investment with high return if you have some ideal money or
the money you should not in near future invest in any long term high return
investments and may grow your money
To satisfy your future financial goals
One has to accomplish so many financial goals such as marriage of self or
children, education of self or children, buying a residential accommodation,
good medical facility to you and your family members, good retirement
income etc. For satisfying these financial goals also you have to invest
money from your existing source of income. So, one must invest from his
counted bread, even if it is only enough for your daily needs. Then you
should grown an investing habit which is helpful for future financial needs.
Provide enough money for meeting uncertain future needs
Some financial needs cannot be predicted early such as medical treatment of
any critical illness or accident, and even life after retirement also uncertain
up to a certain extent. So you have to make enough provision for meeting
such uncertain needs. Insurance and retirement schemes will help you in this
case.

Objectives of investment

1) Short term high priority objectives-investors have high priority

towards achieving certain objectives in short time. For example a
young couple will give high priority to buy a house. Thus investors
will go for high priority objectives and invest money accordingly.
2) Long term high priority objectives-some investors look forward and
invest on the basis of objectives of long term needs. They want to
achieve financial independence in long period. For example investing
for post retirement period.
3) Low priority objectives-these objectives have low priority in
investing. These objectives are not painful. After investing in high
priority assets, investors can invest in these low priority asses. For
example provision for tour.
4) Money making objectives-investors put their surplus money in this
kind of investment. Their objective is to maximize wealth. Usually the
investors invest shares of companies which provides capital
appreciation apart from regulate income from dividend.

Elements of investments1) Return-investors buy or sell financial instruments in order to earn

return on them. He return on investment is the reward to the investors.
The return includes current income and capital gains.
2) Risk-risk is the chance of loss due to variability in 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 .risk and return
are inseparable. Risk can be quantified.
3) Time-time is an important factor in investment. Time offers several
different courses of action. Time period depends on the attitude of the
investor who follows buy and hold policy.

Investment avenues
Money market instruments:
Money market instrument is a segment of the financial market in which
financial instruments with high liquidity and very short maturities are traded.
(Less than one year)
It does not actually deal in cash or money but deals with substitute of cash
like trade bills, promissory notes etc which can be converted into cash
without any loss at low transaction cost.

Types of money market instruments:

Traditional instruments:
Treasury Bills
Money at call and short notice
Bankers acceptance
Modern Instruments:
Commercial Papers
Repo Instruments
Money Market Mutual Funds
Inter-Corporate Deposits
Euro Dollar
Money at Call & short notice:
Features:
1) Interest Rates are charged as per Market Condition.
2) Involves Transaction Cost: At the time of liquidation; the
investor has to pay a high amount as transaction cost.
3) Highly effective in banking transactions.
4) money at short notice is repayable within 14 days of serving a
notice

Modern Instruments:
Repo Instruments :
Repo instrument is a form of short-term borrowing for dealers in
securities. The dealer sells the securities to investors, usually on an
overnight basis, and buys them back on the agreed date. .
Features:
1) Helps in liquidity management and speculation
2) Involves bankers as middleman
3) Generally used by commercial banks.
Money Market Mutual Fund :
Money market mutual fund is an open-end mutual fund which invests
only in money markets. The main goal is the preservation of principal,
accompanied by modest dividends.
Miscellaneous Investment Options:
Real Estate Investments and Markets
1) The capital appreciation of the house can favorably be used in the
form of a mortgage loan for business purpose
2) The risk with real estate is that it can go down sharply too.

3) Real estate is probably the most illiquid of all common investment

avenues.
4) Real estate attracts capital gains tax. The capital gains can also be
invested in low interest yielding Capital Gains Bonds.
5) Real estate has a low level of convenience. It requires a large corpus

for investment leading most of the investors to take up loans..

Gold :
Of all the precious metals, gold is the most popular as an investment.
Investors generally buy gold as a hedge or safe haven against any economic,
political, social or currency-based crises. These crises include investment
market declines, burgeoning national debt, currency failure, inflation, war
and social unrest. Investors also buy gold early in a bull market and sell it
before a bear market begins, in an attempt to gain financially.
Commodities like gold are a hedge against inflation.

Provident Fund:
Types of Provident Fund:
Statutory provident fund
Recognized provident fund
Unrecognized provident fund
Public provident fund

10

Benefits:
It is a simple and sturdy investment. Many people use this money to
set up a life after retirement.
Decent return of 8 to 12% on.
It is backed by the government; hence the money invested is safe

Mutual Funds:
Diversification: There is an opportunity to invest in a number of blue
chip companies which would ensure a fairy good and dependable rate
of return.
Cost advantages: The risk is split between all. Hence it works out
advantageous for the investors.

Managerial expertise: The presence of expertise in deciding which

fund to invest in is another very useful aspect of the same as an
investment avenue..

Post Office Savings Account

This scheme helps individuals, house-wives, minors and others in
inculcating a habit of thrift in them. The salient features of Post Offices
Savings accounts are as under:
Any resident adult individual singly or jointly with one or two other adults
can open account. A minor, who has attained 10 years age, can also open the
account. Current Interest Rate for the Post Office Savings Bank Account is
3.5 per cent. There is nomination facility available .

11

Post Office Recurring Deposit Scheme

Post Office Recurring Deposit Scheme provides the facility of saving small
sums of money every month to meet future financial goals and earn
relatively higher risk free returns.
Who can open?
Any resident adult individual singly or jointly with one or two other adults.
Minimum amount: monthly Rs. 10/Maximum amount: any amount in multiples of Rs. 5/-

Interest Rate: The interest paid varies as declared by the Directorate, Small
Savings from time to time.
The interest received is taxable.
National Savings Certificate (NSC)
National Savings Certificates (NSCs) are popular as Tax Saving instruments.
NSCs are a long term tax saving option for investors.
Who can purchase
Any individual singly or jointly with other adult. A guardian on behalf of a
minor.

12

2. PORTFOLIO MANAGEMENT

Investing in securities such as shares, debentures, and bonds is profitable as

well as exciting. It is indeed rewarding, but involves a great deal of risk and
calls for scientific knowledge as well artistic skill. In such investments both
rationale and emotional responses are involved. Investing in financial
securities is now considered to be one of the best avenues for investing one
savings while it is acknowledged to be one of the best avenues for investing
one saving while it is acknowledged to be one of the most risky avenues of
investment.

It is rare to find investors investing their entire savings in a single security.

Instead, they tend to invest in a group of securities. Such a group of
securities is called portfolio. Creation of a portfolio helps to reduce risk,
without sacrificing returns. Portfolio management deals with the analysis of
individual securities as well as with the theory and practice of optimally
combining securities into portfolios. An investor who understands the
fundamental principles and analytical aspects of portfolio management has a
better chance of success

Portfolio Management: An investor considering investment in

securities is faced with the problem of choosing from among a large number
of securities and how to allocate his funds over this group of securities.
Again he is faced with problem of deciding which securities to hold and how
much to invest in each. The risk and return characteristics of portfolios. The

13

investor tries to choose the optimal portfolio taking into consideration the
risk return characteristics of all possible portfolios.
An investor invests his funds in a portfolio expecting to get good returns
consistent with the risk that he has to bear. The return realized from the
portfolio has to be measured and the performance of the portfolio has to be
evaluated. It is evident that rational investment activity involves creation of
an investment portfolio. Portfolio management comprises all the processes
involved in the creation and maintenance of an investment portfolio. It deals
specifically with the security analysis, portfolio analysis, portfolio selection,
portfolio revision & portfolio evaluation.
Portfolio management makes use of analytical techniques of analysis and
conceptual theories regarding rational allocation of funds. Portfolio
management is a complex process which tries to make investment activity
more rewarding and less risky

Activities in portfolio management

There are three major activities involved in an efficient portfolio
management which are as follows
a) Identification of assets or securities, allocation of investment and also
identifying the classes of assets for the purpose of investment.
b) They have to decide the major weights, proportion of different assets in
the portfolio by taking into consideration the related return and risk factors.
c) Finally they select the security within the asset classes as identify.

14

Selection of Portfolio
The selection of portfolio depends upon the objectives of the investor. The
selection of portfolio under different objectives are dealt subsequently
Objectives and asset mix If the main objective is getting adequate amount
of current income, sixty percent of the investment is made in debt
instruments and remaining in equity. Proportion varies according to
individual preference.
Growth of income and asset mix Here the investor requires a certain
percentage of growth as the income from the capital he has invested. The
proportion of equity varies from 60 to 100 % and that of debt from 0 to 40
%. The debt may be included to minimize risk and to get tax exemption.
Capital appreciation and Asset Mix It means that value of the investment
made increases over the year. Investment in real estate can give faster capital
appreciation but the problem is of liquidity. In the capital market, the value
of the shares is much higher than the original issue price.
Safety of principle and asset mix Usually, the risk adverse investors are
very particular about the stability of principal. Generally old people are more
sensitive towards safety.
Risk and return analysis The traditional approach of portfolio building has
some basic assumptions. An investor wants higher returns at the lower risk.
But the rule of the game is that more risk, more return. So while making a
portfolio the investor must judge the risk taking capability and the returns
desired. Diversification Once the asset mix is determined and risk return
15

relationship is analyzed the next step is to diversify the portfolio. The main
advantage of diversification is that the unsystematic risk is minimized.

Role of Portfolio Management

There was a time when portfolio management was an exotic term. A practice
which is beyond the reach of the small investor, but the time has changed
now. Portfolio management is now a common term and is widely practiced
in INDIA. The theories and concepts relating to portfolio management now
find there way in the front pages of the financial newspapers and magazines.
In early 90s India embarked on a program of economic liberalization and
globalization, with high participation of private players. This reform process
has made the Indian industry efficient, with rapid computerization, increased
market transparency, better infrastructure and customer services, closer
integration and higher volume. The markets are dominated by large
institutional investors with their diversified portfolios. A large number of
mutual funds have come up in the market since 1987.
With this development investment in securities has gained considerable
momentum Along with the spread of the securities investment way among
Indian investors have changed due to the development of the quantitative
techniques. Professional portfolio management, backed by research is now
being adopted by mutual funds, investment consultants, individual investors
and big brokers. The Securities Exchange Board of India (SEBI) is a
regulatory body in INDIA. It ensures that the stock market is free from

16

fraud, and of course the main objective is to ensure that the investors money
is safe.
With the advent of computers the whole process of portfolio management
has become quite easy. The computer can absorb large volumes of data,
perform the computations accurately and quickly give out the results in any
desired form. Moreover simulation, artificial intelligence etc provides means
of testing alternative solutions. The trend towards liberalization and
globalization of the economy has promoted free flow of capital across
international borders. Portfolio not only now include domestic securities but
foreign too. So financial investments cant be reaped without proper
management. Another significant development in the field of investment
management is the introduction to Derivatives with the availability of
Options and Futures. This has broadened the scope of investment
management. Investment is no longer a simple process. It requires a
scientific knowledge, a systematic approach and also professional expertise.
Portfolio management is the only way through which an investor can get
good returns, while minimizing risk at the same time.

The process of portfolio management

Though portfolio management has been in existence for a very long time, its
treatment in various works of literature on the subject has not been
systematic. The focus has been on matching the characteristics of the assts
with the needs of the investors on an ad hoc basis. Ignoring the fact that
portfolio management is continuous process and not a set of discrete events.
Portfolio management can be described as a systematic continuous dynamic
and a flexible process which involves
17

A) Identifying and specifying an investors objectives, preferences, and

constraints to develop clear investment policies
b) Developing strategies by choosing optimal combinations of financial and
real as seats available in the market and implementing the strategies.
c) Monitoring the market conditions relative asset values, and the investors
circumstances
d) Making adjustment in the portfolio to reflect significant changes in one or
more relevant variables

Objectives of portfolio management:

1) Stability of income
An investor considers stability income from his investment. He also
considers stability of purchasing power of income.

2) Capital growth
Capital appreciation has become an important investment principle.
Investors seek growth stocks which provide a very large capital
appreciation by way of rights bonus and appreciation in the price of share

18

3) Liquidity
An investment is a liquid asset. It can be converted into cash with the
help of a stock exchange. Investment should be liquid as well as
marketable. The portfolio should contain a planned proportion of high
grade readily salable investment
4) Safety
Safety means protection for investment against loss under reasonably
variations .in order to provide safety careful review of economic and
industry trends is necessary
5) Tax incentives
The portfolio manager has to keep a list of such investment avenues
along with the return risk, profile, tax implications, yields and other
returns

Construction of portfolio
Portfolio construction means determining the actual composition of
portfolio. it refers to the allocation of funds among a variety of financial
assets open for investment .the portfolio manager has to set out all the
alternative investments along with their projected re turn and risk and choose
investments which satisfy the requirements of the investor
Portfolio construction requires knowledge of the different aspects of
securities. The components of portfolio construction are asset allocation,
security selection, portfolio structure .asset allocation means setting the asset
mix. Security selection involves choosing the appropriate security to meet
19

the portfolio targets and portfolio structure involves setting the amount of
each security to be included in the portfolio. Investing in securities
presupposes risk. A common way of reducing risk s to follow the principle
of diversification

Principles of portfolio construction

These principles are as follows
1. Safety principle
The safety principle means that the portfolio must maintain its principal
value in the event forced liquidation. There are two important
considerations involved in determining the need for safety principaltenure of ownership and the effect of inflation. If the tenure of ownership
is weak, the portfolio may be liquidated to meet some contingencies.
Another consideration is the effect of rising price level on the principal
invested initially in the portfolio. For this purpose many portfolio
managers attempt against inflation
2. Need for income
In formulating the objective for a portfolio the starting point is usually to
establish an amount of income the portfolio must generate. This involves
2 stages .in the first stage it is necessary to determine the amount of
income that the portfolio must provide based on current conditions. The
second stage is to determine how much income must be provided by the
portfolio of securities. As inflation is a fact of life.

20

3. Taxation
There may be strong incentive for many investors in the high tax brackets
to invest in tax exempt securities rather than common stock. it offers
investors to combine a high effective yield with relatively low risk
4. Temperament
A higher return may be expected from a well diversified portfolio. Some
investors may not be willing to accept the greater risk associated with the
common stock. Thus temperament is the most important principle on the
formulation of portfolio objectives. It indicates the investors willingness
to accept risk. Some investors are able to accept risk

Formulating the portfolio objectives

The following are the six possible portfolio constructions which are
evaluated to determine the appropriate objectives;
Need for current income to meet the living expenses.
Need for constant income to face inflation.
Need for safety principal to liquidate the investment on a short notice.
Need for safety principal to reduce the effect purchasing power.
Need for tax exemption.
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Need for designing an investment portfolio

The riskiness of portfolios depends not only on the attributes of individual
securities but also on the interrelationships among securities. Therefore it is
primarily for this reason that portfolio management is desirable.
Another reason for need for portfolio management is that it depends upon
the preferences of individual investors.it is possible to estimate expected
returns for individual securities without regard to any investor but it is
impossible to construct on optimal portfolio for investor without taking
personal preferences into account

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3. RELEVANCE OF PORTFOLIO MANAGEMENT

The relevance of portfolio management in different sectors of the financial
markets can be considered in the following ways
Individual portfolios: there are individual investors who invest in the
financial markets. They are employees, businessmen and professionals.
They also want to construct their portfolio. However they do not have time
and proper knowledge to take analysis and take investment decisions.
Therefore portfolio management is very much desirable for them
Corporate portfolio: investment by corporate may be in physical assets and
financial assets. If it is investment in financial assets the risk return analysis
of markowitz holds good. But if it is in physical assets as part of the business
operations it is necessary to consider project risk and revenue sensitivity.

Portfolio diversification
Diversification is a technique of reducing the risk involved in a portfolio. It
is also a process conscious selection of assets i.e. securities in a manner that
a total risk is brought down. This helps to reduce the unsystematic risk and
promotes the optimization of returns for a given level of risks in a portfolio.
Here are two types of risk in a portfolio, systematic and unsystematic risk.
Systematic risk is the fluctuation in an investment return attributable to
change sin broad economic, social, political sectors which influence the
returns on an investment on portfolio. Therefore, systematic risk is
undiversifiable risk because the investors cannot avoid or reduce the risk

23

arising form the above factors. On the other hand, unsystematic risk is the
variation in returns on an investment due to factors related to the individual
company or security.
The diversification of portfolio risk can be made in the following manner
1) Changing the type of asset
2) Changing the type of instrument
3) Changing the industry line
4) Changing the companies

Portfolio evaluation
A portfolio manager by evaluating his own performance can identify sources
of strength or weakness .good performance in the past might have resulted
from good luck, in which case such performance may not be expected to
continue in the future. On the other hand poor performance in the past might
have been the result of bad luck. Therefore the first takes in performance in
performance evaluation is to determine whether past performance was good
or poor. Then the second task is to determine whether such performance was
due to skill or luck. Good performance in the past may have resulted from
the actions of a highly skilled portfolio manager .the performance of a
portfolio should be measured periodical, preferably once in a month or a
quarter. The performance of an individual stock should be compared with
the overall performance of the market as indicated by a market index like the
BSE Sensex
The evaluation of a portfolio performance during the scheduled time horizon
is very important from the point of view of both the investor and the
portfolio manager. Therefore portfolio performance is adjudged at the end of
time period. Investment analysts and portfolio managers have to monitor and
24

evaluate the results of their performance. The ability of managers to

outperform the market depends on their expertise and experience. The basic
features of good portfolio managers are their ability of perceive the market
trends correctly and make correct estimates regarding the risk returns, ability
to make proper diversification. The performance also depends on the timing
of investment and superior and superior investment analysis and security
selection
The principles involved in the diversification of portfolio are
a) Single investment company is more risky than 2 companies.
b) A single industry investment is more risky than two or more industries.
c) Two companies or industries which are similar in nature of demand or
make are more risky than two in dissimilar companies or industries.
d) The diversification is proper which involves two or more industries or
companies whose fortune fluctuates independent of one another or in
different directions.
Diversification involves not putting all eggs into basket. Thus, it is good to
have as many companies or avenues as possible in ones portfolio

A better path to portfolio success

To truly become the most successful investor you must understand and
consistently implement the very best strategies of the top of the investment
minds. Most investors as well as investment advisor do not manage money
the way the financial institution does. The biggest problem is that they lack a

25

disciplined approach that keep on track. Instead, they get caught up in their
own emotional responses to market fluctuations
Six steps process guided by seven key principles:
1) Emphasize a disciplined process to eliminate an emotional response
to short term market volatility: the fact show that investor left out their
own devices. Will let their emotions make their decision for them and that
these emotion based decision are often the primary cause of erratic returns.
The ability to invest dispassionately by focusing on what is rational enables
investors to avoid making mistakes that cost them dearly
2) Deliver great capabilities to all investments management decision
making:
Good intentions you are own or those of any investment professionals you
many work with are not enough to maximize your chances of success. Good
intention must be supplemented with the types of world class capabilities
and resources that are found only amount the best investment institutions
3) Align your investment strategy with your long term objectives and
tolerance for risk
Rational investor must accurately assess where they are today and where to
go in order to determine the appropriate path they will take towards
achieving their goals. This requires identifying crucial but often overlooked
issues such as your objectives, the amount of financial resources you can
commit, your time horizon, how much money you are comfortable losing

26

without altering your investment plan, and an understanding of various types

of investment risk.
4) Emphasize the importance of asset allocation:
The worlds best institutional investors recognized a fact that may surprise
you; the decision about with specific stocks, bonds, or either investment you
select your portfolio has little bearing of your returns. A much more
important factor is how the dollars your invest are divided up amount
various types of broad asset categories such as stock, bonds, international
investments, cash and so on. Yet, despite its importance, few investors fully
grasp the concept of asset allocation
5) Implement a plan using the appropriate investment vehicles:
Investors face aide variety of choices when it comes to selecting the specific
investment vehicle for their portfolios. However, we dont believe that
building portfolio of individual stocks on your own provides you with great
capabilities you need to succeed. Nor do we think that one type of
investment is appropriate for all investors. A belief that flies in the face of
many brokerage firms today that sells certain approaches, such as annuities
or private money manager to their clients regardless of their objectives of the
amount of objectives they can invest
6) Monitor and adjust your portfolio on an ongoing basis
Managing money intelligently requires you to take a dynamic approach to
your portfolio. Unfortunately, investor often makes the mistake of
constructing their portfolios once they failing to reinvest them regularly to
make necessary adjustment. They systematically balance the exposure to
27

asset classes such as stocks and bonds as market condition change in order
to maintain their design balance between potential and risk. Many also seek
to enhance returns using tactical asset allocation strategies, in which
manager opportunistically make subtle shifts to their portfolios when they
identify areas of the market that their research indicates are over or
undervalued. These firms also regularly monitor investment managers in
order to hold them accountable, asking such question: is the manager with
whom they investor asserts still at the firm? Are the decisions making
process and capabilities still in place? And are they adding value by
delivering competitive performance?
7) Assess your progress regularly
When your investment account statement arrives each month, do we read it?
More important do we understand what we read? As a result many of us
dont understand what investment we are holding, and even more of us dont
know how to gauge your performance relative to an appropriate benchmark.
Such confusion is to often cause investor to make the wrong moves at the
wrong time. This process will reveal the technique that top institutional
investors use to assess how they are progressing towards their goal and
answer the question on every investors mind: how am I doing

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The portfolio strategist

Portfolio strategists are teams of analysts, academics, and other investment
experts that typically are part of large institutional investment management
operations
Portfolio strategists have 3 main responsibilities that they undertake on
behalf of investors
1) selecting asset classes in which to invest
2) determining and maintaining optimal target mixes of those asset
classes
3) Selecting and monitoring investment managers
Portfolio strategists address the key factors that are responsible for portfolio
performance. They make the full range of asset allocation decisions. They
also decide on the most appropriate money manager for each asset classes by
rigorously evaluating hundreds of mutual funds and individual managers.
All their efforts are focused on determining optimal asset allocation
strategies and identifying and monitoring superior investment managers
Portfolio strategists offer expertise and capabilities in 3 main areas:
1) Substantial research across global capital markets:
Many portfolio strategists have offices and research professionals
throughout the world, giving them unique insights into local markets that
would be difficult for most investors to posses.
2) Asset allocation and portfolio strategy as a core competency:
The asset allocation decision making process requires great care and
consideration. portfolio strategist acutely understand that asset allocation
drives performance, and therefore devote enormous resources to studying
29

the asset classes and how they interact with each other to make the most
accurate constraint and capital market assumptions
3) Investment policy committees composed of senior investment
professionals who engage in a disciplined investment process:
Advanced technology alone is not sufficient to perform superior asset
allocation. Portfolio strategists understand this fact and use investment
policy

committees(IPCs)to

scrutinize

and

evaluate

their

recommendations. IPCs are made up of investment firms most senior

professionals, who typically have several decades of experience
managing assets.

Portfolio strategist selection: it is imperative to find a portfolio strategist

whose approach and methods match investors belief about investment
management and risk. The important thing to remember is that investor want
to work with a strategist whose approach is philosophically and practically
in line with his/her own investment profile. This means that investor want to
decide on factors such as
Strategic versus tactical
One strategist versus multiple strategists

Return-investors buy or sell financial instruments in order to earn return on

them. He return on investment is the reward to the investors. The return
includes current income and capital gains.

30

4. RISK
Low levels of uncertainty (low risk) are associated with low potential
returns, whereas high levels of uncertainty (high risk) are associated with
high potential returns. According to the risk-return tradeoff, invested money
can render higher profits only if it is subject to the possibility of being lost.
Because of the risk-return tradeoff, you must be aware of your personal risk
tolerance when choosing investments for your portfolio. Taking on some
risk is the price of achieving returns; therefore, if you want to make
money, you can't cut out all risk. The goal instead is to find an
appropriate balance - one that generates some profit, but still allows you
Deciding what amount of risk you can take while remaining comfortable.
In the investing world, the dictionary definition of risk is the chance that an
investment's actual return will be different than expected. Technically, this is
measured in statistics by standard deviation. Risk means you have the
possibility of losing some, or even all, of our original investment.
Low levels of uncertainty (low risk) are associated with low potential
returns. High levels of uncertainty (high risk) are associated with high
potential returns. The risk return tradeoff is the balance between the desire
for the lowest possible risk and the highest possible return. This is
demonstrated graphically in the chart below. A higher standard deviation
means a higher risk and higher possible return.
A common misconception is that higher risk equals greater return. The
risk/return tradeoff tells us that the higher risk gives us the possibility of

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higher returns. There are no guarantees. Just as risk means higher potential
returns.
The relationship between risk and return is a fundamental financial
relationship that affects expected rates of return on every existing asset
investment. The Risk-Return relationship is characterized as being a
"positive" or "direct" relationship meaning that if there are expectations of
higher levels of risk associated with a particular investment then greater
returns are required as compensation for that higher expected risk.
Alternatively, if an investment has relatively lower levels of expected risk
then investors are satisfied with relatively lower returns.

Types of risk
Market Risk - This is the most familiar of all risks. Also referred to as
volatility, market risk is the day-to-day fluctuation in a stock's price. Market
risk applies mainly to stocks and options. As a whole, stocks tend to perform
well during a bull market and poorly during a bear market - volatility is not
so much a cause but an effect of certain market forces. Volatility is a
measure of risk because it refers to the behavior, or "temperament", of your
investment rather than the reason for this behavior. Because market
movement is the reason why people can make money from stocks, volatility
is essential for returns, and the more unstable the investment the more
chance there is that it will experience a dramatic change in either direction.
Interest Rate Risk change in interest rate will impact price of bonds (or
NCDs). There is negative relation between price of bond & interest rates if
interest rate will increase price of bond will go down & vice versa. This risk
can be reduced if you hold bonds till maturity. Interest rate risk also affects
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Bank Fixed Deposit investor he was having Rs 5 Lakh & he invests at a

prevailing rate of 9%. What will happen if interest rate increase to 10% he
will be losing 1% interest
Default risk
It is the risk of issuer of investment getting bankrupt. An investor who
purchases shares will have to face the possibility of bankruptcy of the
company. In case of fixed income securities such as debenture, the investor
may take the care to see the credit rating given to the company so that the
risk can be minimized
Business risk
Business risk means the risk of a particular business failing and thereby your
investment is lost. It is identifiable as the variation in the earnings due to its
business or product line. The principal determinants of a firms business risk
are the variability of sales and its operating leverage.
Financial risk
Financial risk is a function of the companys capital structure of financial
leverage. The company may fall on financial grounds. If its capital structure
tends to make earnings unstable. Financial leverage is the percent change in
net earnings for a given results from the use of debt financing in the capital
structure .the like hood of a company defaulting on its debt servicing
obligations is known as financial risk

Purchasing power risk

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Purchasing power risk of a security is the variation of real returns on the

security caused by inflation. Inflation reduces the purchasing power of
money over time. as price rise, the purchasing power of money falls and the
real return on an investment may fall even though the nominal return in
current rupee rise .the impact of inflation is felt greater in case of fixed
income investments. The returns on your investments after adjusting for
inflation is known as real rate of return
Liquidity risk
Liquidity risk arises from the inability to convert an investment quickly into
cash it refers to the ease with which a stock may be sold. if a stock is highly
liquid, it can be sold very quickly at a price which is more or less equal to its
previous market price .in a security market, liquidity risk is a function of the
marketability of the security
When an investor wants to sell a stock he is concerned with its liquidity. On
the other hand when an investor wants to buy a stock he is interested in its
availability. Lower marketability of stock gives a degree of liquidity risk that
makes the price of stock a bit more uncertain
Systematic and unsystematic risk
The fluctuation in an investments return to changes in broad economic
social or political factors which influence the return on investment is a
systematic risk .it is a portion of total risk of security which is caused by
influence of certain economic wide factor like money supply, inflation, level
of government spending. Systematic risk is undiversifiable risk and investors
cannot avoid the risk arising from the above factors

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Unsystematic risk is the variation in the returns due to factors related to the
individual firm or security. That portion of total risk which arises from
factors that are specific to a particular firm such as plant breakdown, labors
strikes, sources of materials unsystematic risk is referred as diversified risk,
the sum of systematic risk and unsystematic risk is the total risk of a security

How to measure risk

Range: the simplest measure of dispersion of distribution is the range of
returns .the range is equal to the higher value that the variable can be less the
lowest possible value. Thus, the higher the range of returns, the riskier the
security. The advantage of the range as a measure of risk lies in simplicity.
However there are drawbacks to using the range to measure risk .the range
tells us only the difference between two extreme values and nothing about
the values of the middle or their probability of occurring.
Variance: variance is the better measure of risk than the range. It takes into
account the derivations of all possible re turns from their mean or expected
value .the statistical measure that accomp0lishes this purpose is the variance
of returns. The greater the variance of a security the higher the securitys
total risk
Standard deviation: computation of the variance of returns makes use of
the squared deviations of returns from the mean and therefore the resulting
variance is called in squared terms the standard deviation of a set of number
is the average variability around the mean. The standard deviation has
statistical properties that are useful for computing probabilities. If we could
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estimate the standard deviation of expected future return distribution .we

could then estimate the probability of any particular level of return
occurring.
PORTFOLIO RISK
Modern port folio theory believes in the maximization of returns through a
combination of securities. Although the expected returns for a portfolio is an
average of the individual securities returns, a portfolio risk can be less than
the average of the risk of its component securities. This fact yields the riskreducing benefits of diversifying. The key to the amount of risk reduction
that diversification can be achieved is the degree of correlation between the
returns on the security and the returns on the existing portfolio. Correlation
is the strength of the relationship between two variables.
It is positive when the two variables move together a majority of the time
and negative when they move primarily in opposite directions. if the action
of one variable is completely independent of the other variable, then the two
variables have no correlation. the measure of degree of correlation is the
correlation coefficient which always takes a value between -1 and +1.a
correlation coefficient of 0 indicates no correlation .when the correlation co
efficient is greater then zero it is positive correlation and when the
coefficient is less than 0 it is negative correlation. Modern portfolio theory
states that by combining a security of a low risk with another security of
high risk, success can be achieved by an investor.

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Factors affecting performance measures

1) Return:
The basic objective of any investment is to get return. This return should
be reasonable. It should be higher than the risk free return. Higher the
return the better will be the performance of the portfolio. The return may
be post tax return, real return and yield. The tax benefits are also adjusted
while calculating the return.
2) Risk
The performance of the portfolio depends upon risk undertaken by the
portfolio manager. However, higher the risk higher the return is the
general rule of investment. The performance will depend upon how much
risk is undertaken by the managers .the risk undertaken by the portfolio
manager to generate the return is the most important factor in the
performance evaluation of portfolio. Technical measures of the highest
degree are also employed to affect a sharper analysis. Superior
performance attached to a portfolio can also be due to the fund managers
efficiency and his ability in timing the market
3) Marketability
Proper asset allocation is of utmost importance for the success of overall
portfolio strategy. There are various investment alternatives available in
the financial market and investors can choose an appropriate one
depending on their needs. some of the most common investment
alternatives are bonds, stocks ,convertibles, mutual funds ,real estates and

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commodities futures and options .however these investment should have

marketability. That means, whenever the portfolio manager wants to sell
or buy the investment it should have marketability
4) Liquidity
Liquidity is the ability of an investment to be converted into cash easily.
The portfolio manager meets funds from time to time and also needs to
invest fund from time to time. The portfolio has to be reviewed and
revised from time to time. Liquidity of an investor is an important factor
to be considered while investing the portfolio funds
5) Diversification
In recent years, there is a vast increase in the investment of alternative
assets. The most important determinant of the alternative investment is to
understand the nature and the risks involved in these investments .the
benefits of investing in alternative investment give potential ways to
reach lucrative market and different asset classes. It also provides
diversification benefits and good returns. The diversification includes
selling certain assets and invests these proceeds in other new investment

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5. PORTFOLIO MANAGEMENT SERVICE.

Portfolio management service is a professional service rendered by the
experts for management of portfolio of others. It may be an individual
portfolio or an institutional portfolio. The portfolio management service is
an advisory service which involves the advice regarding the worthwhileness
of any particular securities. It also involves continuing relationship with
client to manage investments with or without discretion for the client as per
his requirements.
Portfolios are built to suit the return expectations and the risk appetite of the
investor. It is a combination of assets or securities which meet the level of
return expected provided the investor is willing to meet the associated risk
thus building a portfolio which meets both the return expectations and the
Risk taking ability of the investor is not possible.
Design in portfolio to suit investor requirements often involves making
several projections regarding the future based on the current information.
When the actual situation is different from the projections, the portfolio
composition needs to be changed. One of the key inputs in portfolio building
is the risk bearing ability of the investor. Change in the risk bearing ability
calls for a change in the portfolio composition to match the current risk
bearing ability.
Portfolio managers are the persons who in pursuance of a contract with
clients, advise or direct the management or administration of portfolio of
securities of clients. The portfolio management can be discretionary or non
discretionary. The discretionary portfolio management permits the exercise
of discretion with regard to investment of portfolio of the securities or funds.

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A non discretionary portfolio manager manages funds in accordance with

the directions of the clients. In order to carry out portfolio management
service a certificate of registration from the SEBI is mandatory.

The portfolio management service providers in India

Portfolio management service providers are those persons or organizations
who are registered and paid the required registration fee. They are eligible to
operate as portfolio managers. An applicant t should have necessary
infrastructure and professionally qualified persons with a minimum net
worth of rs 50 lakhs. There should be minimum two persons with adequate
experience in this business line. In order to carry out portfolio management
service, a certificate of registration from SEBI is necessary. They have to
carry on the portfolio management activity within the framework of SEBI
regulations, applicable to portfolio managers. The portfolio manager has
also to give an undertaking to take adequate steps for the redressal of
grievances of clients within one month of the receipt of the complaint and
keep the SEBI informed about the number, nature and other participants of
the complaints and abide by its rules and regulations
The SEBI has imposed a number of obligations and code of conduct on the
portfolio managers. They should have a high standard of integrity, honesty
and should not have been convicted of any economic offence. They should
not resort to rigging up of security prices, use insider trading and speculation
in the market. The portfolio managers have to submit periodical returns and
documents as required by SEBI from time to time. Thus, the portfolio
managers play an important role in the investment market

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Procedure for setting up portfolio management services:

While considering the application for registration made in the prescribed
form, the SEBI takes into account all matters relevant to the activities related
to the portfolio manager. It has to consider the following important matters:
1) Necessary infrastructure like adequate office staff, equipment and
manpower to discharge the day to day activities.
2) To employ minimum two persons with experience to conduct portfolio
management business
3) Any person who is directly or indirectly connected with the applicant has
not been granted registration
4) The capital adequacy is not less than a net worth of rs. 50 lakhs in terms
of capital plus free reserves
5) The applicant or his partner or director or principal officer is not involved
in any litigation connected with the securities market
6) The applicant has professional qualification in finance or low or
accounting and business management
7) The grant of certificate is in the interest of the investors

Regulation of portfolio management services:

Portfolio management is a dynamic process which involves:
1. Identification of objectives constraints and preferences of investors for
formulation of investment policy
2. Develop and implement strategies in tune with investment policy
formulated. It helps the selection of asset classes and securities in each
class depending upon their risk return attributes

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3. Review and monitoring of the performance of the portfolio by

continuous overview of the market conditions and performance of the
companies
4. Evaluation of the portfolio for the results to compare with targets and
make some adjustments for the future
The securities market has grown tremendously. The number of financial
institutions has been growing. The FIIs have entered in the Indian stock
exchanges. The number of investors has also been growing day by day.
therefore the portfolio management ash become a complex and responsible
job which requires an in depth training and expertise .therefore the
government of India set up securities and exchange board of India on 12 th
April, 1988. it deals with all matters relating development and regulation of
securities market and investor protection and to advise the government to all
these matters. SEBI was given statutory power through an ordinance
promulgated on 30th January, 1992
The highly infringed portfolio management services were placed under this
regulation of SEBI since January 11, 1993. This is the fourth financial
activity brought under SEBIs control after stock brokers, merchant banking
and insider trading. The violations of the PMS scheme and similar schemes
offered by various banks and merchant banking subsidiaries had come to
light during the securities market scam. It is noticed that the role of SEBI as
supervisory had been highly inefficient in regard to portfolio management
services. SEBI has now been entrusted with the job of policing the portfolio
managers and provide adequate protection to the investors.

SEBI norms for portfolio management service(PMS).

SEBI has laid down certain norms for PMS.SEBI has prohibited the
portfolio managers to assume any risk on behalf of their clients. The
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portfolio managers cannot assure any fixed return to their clients. The
investments made by them are subject to risk which the client has to bear.
The investment consultancy and management have to be charged at rates
which are fixed at the time of entering into a contract. The clients are not
permitted to share the profits or discounts or any other incentives from the
portfolio managers. The portfolio managers are also prohibited to lend their
clients, badla financing and bill discounting as per SEBI norms. The
portfolio manager cannot put the clients fund in any investment.
Investments are allowed both in capital and money market.
The norms also provide that the clients money should be kept in a separate
account with the public sector bank. These funds cannot be mixed with his
own funds. All the deals done for a clients account should be entered in his
name. A separate ledged account is maintained for all purchases or sales on
clients behalf, which should be done at the market price. Final settlement
and termination of contract should also be completed as per the terms of
contract. Portfolio managers act only on a contractual basis and also on a
fiduciary basis. No contract for less than a year is permitted by the SEBI as
per the norms

CONCLUSION.
Investment is the employment of funds with the aim of getting return on it.
Investing is a way to make money with your money. Generally, investment
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is the application of money for earning more money. Investment also means
savings or savings made through delayed consumption an investment is the
current commitment of dollars for a period of time in order to derive future
payments that will compensate the investor for the time the funds are
committed The expected rate of inflation To keep the value of your money
from inflation: The money you have today will not have the same value
tomorrow. Yes, inflation decreases the value of money you have.
Short term high priority objectives-investors have high priority towards
achieving certain objectives in short time. For example a young couple will
give high priority to buy a house. Thus investors will go for high priority
objectives and invest money accordingly
Long term high priority objectives-some investors look forward and invest
on the basis of objectives of long term needs. They want to achieve financial
independence in long period. For example investing for post retirement
period

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