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From The Rational Edge: The first in a new series of articles on

portfolio management, this introduction expresses IBM’s viewpoint
about the foundations and essentials of portfolio management, and
discusses ideas and assets that support and enable effective portfolio
management practices.

A good way to begin understanding what portfolio management is

(and is not) may be to define the term portfolio. In a business context,
we can look to the mutual fund industry to explain the term's origins.
Morgan Stanley's Dictionary of Financial Terms offers the following
If you own more than one security, you have an investment portfolio.
You build the portfolio by buying additional stocks, bonds, mutual
funds, or other investments. Your goal is to increase the portfolio's
value by selecting investments that you believe will go up in price.

According to modern portfolio theory, you can reduce your investment

risk by creating a diversified portfolio that includes enough different
types, or classes, of securities so that at least some of them may
produce strong returns in any economic climate.
Note that this explanation contains a number of important ideas:

• A portfolio contains many investment vehicles.

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

Over time, other industry sectors have adapted and applied these
ideas to other types of "investments," including the following:

Application portfolio management: This refers to the practice of

managing an entire group or major subset of software applications
within a portfolio. Organizations regard these applications as
investments because they require development (or acquisition) costs
and incur continuing maintenance costs. Also, organizations must
constantly make financial decisions about new and existing software
applications, including whether to invest in modifying them, whether
to buy additional applications, and when to "sell" -- that is, retire -- an
obsolete software application.
Product portfolio management: Businesses group major products
that they develop and sell into (logical) portfolios, organized by major
line-of-business or business segment. Such portfolios require
ongoing management decisions about what new products to develop
(to diversify investments and investment risk) and what existing
products to transform or retire (i.e., spin off or divest). Project or
initiative portfolio management, an initiative, in the simplest sense, is
a body of work with:

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

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

Managers can group a number of initiatives into a portfolio that

supports a business segment, product, or product line. These efforts
are goal-driven; that is, they support major goals and/or components
of the enterprise's business strategy. Managers must continually
choose among competing initiatives (i.e., manage the organization's
investments), selecting those that best support and enable diverse
business goals (i.e., they diversify investment risk). They must also
manage their investments by providing continuing oversight and
decision-making about which initiatives to undertake, which to
continue, and which to reject or discontinue.

A premier bank owned by the Government of India

• Established on 15th August 1907 as part of

the Swadeshi movement
• Serving the nation with a team of over 22000
dedicated staff
• Total Business crossed Rs. 76000 Crores as
on 31.03.2007
• Operating Profit increased to Rs.1358.59
Crores as on 31.03.2007
• Net Profit increased to Rs.759.77 Crores as
on 31.03.2007
• Net worth improved to Rs.3621 Crores as on 31.03.2007
• 1476 Branches spread all over India

International Presence

• Overseas branches in Singapore and Colombo including a

Foreign Currency Banking Unit at Colombo
• 229 Overseas Correspondent banks in 69 countries

Diversified banking activities - 3 Subsidiary companies

• Indbank Merchant Banking Services Ltd

• IndBank Housing Ltd.
• IndFund Management Ltd

A front runner in specialized banking

• 88 Forex Authorized branches inclusive of 3 Specialized

Overseas Branches at Chennai , Bangalore and Mumbai
exclusively for handling forex transactions arising out of Export,
Import, Remittances and Non Resident Indian business
• 5 specialized NRI Branches exclusively for servicing Non-
Resident Indians
• 1 Small Scale Industries Branch extending finance exclusively
to SSI units
Leadership in Rural Development

• Loan products like Artisan Card, Kisan Card, Kisan Bike

Scheme, Yuva Kisan Vidya Nidhi Yojana to meet diverse credit
needs of farmers.
• Provision of technical assistance and project reports in
Agriculture to entrepreneurs through Agricultural Consultancy &
Technical Services (ACTS)
• 2 Specialised Agricultural Finance branches to finance High
Tech Agricultural Projects.

A pioneer in introducing the latest technology in Banking

• 100% Business Computerisation

• 168 Centres throughout the country covered under 'Anywhere
• Core Banking Solution(CBS) in 1204 branches and 77
extension counters.
• 429 connected Automated Teller Machines(ATM) in 99
• 24 x 7 Service through 8500 ATMs under shared network
• Internet and Tele Banking services to all Core Banking
• e-payment facility for Corporate customers
• Cash Management Services
• Depository Services
• Reuter Screen, Telerate, Reuter Monitors, Dealing System
provided at all Overseas Branches
• I B Credit Card Launched
• I B Gold Coin
Indian Bank enters into a Strategic Alliance with Pnb

Chennai, January 25, 2006: Indian Bank is enlarging its activities to

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

Indian Bank today announced a strategic alliance with Pnb Principal

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

As per the scope of the alliance with Pnb Principal Insurance

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

As per Indian Bank’s strategic alliance with Pnb Principal Financial

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

Announcing the partnership with Indian Bank, Sanjay Sachdev,

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

Dr. K.C. Chakrabarty, Chairman and Managing Director, Indian

Bank said,” The alliance with Pnb Principal in the areas of Risk
Management, Insurance and Investment will help in providing a
One-stop solution to the 15 million strong customers of Indian
Bank throughout the country. The Tie-up will help realize our
cherished goal of making our Bank, “the best people to bank

Elaborating, Mr. B Sambamurthy, Executive Director has said

that this is a part of Bank’s mission to provide all financial
products under one roof. This tie-up brings a paradigm shift from
being an agent of Insurance Company to one of being a
customer agent.

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

• Maximize the profitability or value of the portfolio

• Provide balance
• Support the strategy of the enterprise

Portfolio Management is the responsibility of the senior management team

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

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

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

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

Several types of techniques have been used to support the portfolio

management process:

• Heuristic models
• Scoring techniques
• Visual or mapping techniques

The earliest Portfolio Management techniques optimized projects'

profitability or financial returns using heuristic or mathematical models.
However, this approach paid little attention to balance or aligning the
portfolio to the organization's strategy. Scoring techniques weight and score
criteria to take into account investment requirements, profitability, risk and
strategic alignment. The shortcoming with this approach can be an over
emphasis on financial measures and an inability to optimize the mix of
projects. Mapping techniques use graphical presentation to visualize a
portfolio's balance. These are typically presented in the form of a two-
dimensional graph that shows the trade-off's or balance between two factors
such as risks vs. profitability, marketplace fit vs. product line coverage,
financial return vs. probability of success, etc.
The chart shown above provides a graphical view of the project portfolio
risk-reward balance. It is used to assure balance in the portfolio of projects -
neither too risky nor conservative and appropriate levels of reward for the
risk involved. The horizontal axis is Net Present Value; the vertical axis is
Probability of Success. The size of the bubble is proportional to the total
revenue generated over the lifetime sales of the product.

While this visual presentation is useful, it can't prioritize projects.

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

Once this is done, then a portfolio listing can be developed including the
relevant portfolio data. We favor use of the development productivity index
(DPI) or scores from the scoring method. The development productivity
index is calculated as follows: (Net Present Value x Probability of Success) /
Development Cost Remaining. It factors the NPV by the probability of both
technical and commercial success. By dividing this result by the
development cost remaining, it places more weight on projects nearer
completion and with lower uncommitted costs. The scoring method uses a
set of criteria (potentially different for each stage of the project) as a basis
for scoring or evaluating each project. An example of this scoring method is
shown with the worksheet below.
Weighting factors can be set for each criterion. The evaluators on a Product
Committee score projects (1 to 10, where 10 are best). The worksheet
computes the average scores and applies the weighting factors to compute
the overall score. The maximum weighted score for a project is 100.

This portfolio list can then be ranked by either the development

priority index or the score. An example of the portfolio list is shown
below and the second illustration shows the category summary for
the scoring method.
Once the organization has its prioritized list of projects, it then needs to
determine where the cutoff is based on the business plan and the planned
level of investment of the resources avaialable. This subset of the high
priority projects then needs to be further analyzed and checked. The first
step is to check that the prioritized list reflects the planned breakdown of
projects based on the strategic allocation of the business plan. Pie charts
such as the one below can be used for this purpose.

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

Finally, this balanced portfolio that has been developed is checked

against the business plan as shown below to see if the plan goals
have been achieved - projects within the planned R&D investment
and resource levels and sales that have met the goals.

With the significant investments required to develop new products

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

 Portfolio is a collection of asset.

 The asset may be physical or financial like Shares Bonds,
Debentures, and Preference Shares etc.
 The individual investor or a fund manager would not like to
put all his money in the shares of one company, for that
would amount to great risk.
 Main objective is to maximize portfolio return and at the
same time minimizing the portfolio risk by diversification.
 Portfolio management is the management of various
financial assets, which comprise the portfolio.
 According to Securities and Exchange Board of India
(Portfolio manager) Rules, 1993; “ portfolio” means the total
holding of securities belonging to any person;
 Designing portfolios to suit investor requirement often
involves making several projections regarding the future,
based on the current information.
 When the actual situation is at variance from the projections
portfolio composition needs to be changed.
 One of the key inputs in portfolio building is the risk bearing
ability of the investor.
 Portfolio management can be having institutional, for
example, Unit Trust, Mutual Funds, Pension Provident and
Insurance Funds, Investment Companies and non-
Investment Companies.
 Institutional e.g. individual, Hindu undivided families, Non-
investment Company’s etc.
 The large institutional investors avail services of
 A professional, who manages other people’s or institution’s
investment portfolio with the object of profitability, growth and
risk minimization, is known as a portfolio manager.
 The portfolio manager performs the job of security analyst.
 In case of medium and large sized organization, job function
of portfolio manager and security analyst are separate.
 Portfolios are built to suit the return expectations and the risk
appetite of the investor.

Portfolio theory is an investment approach developed by University of

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

Markowitz described how to combine assets into efficiently diversified

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

There are two types of Portfolio Strategies:

A. Passive Portfolio Strategy

A strategy that involves minimal expectation input, and instead relies

on diversification to match the performance of some market index.

B. Active Portfolio Strategy

A strategy that uses available information and forecasting techniques

to seek a better performance than a portfolio that is simply diversified

Now that we understand some of the basic dynamics and inherent

challenges organizations face in executing a business strategy via
supporting initiatives, let's look at some basic concepts and
components of portfolio management practices.

1.The Portfolio

First, we can now introduce a definition of portfolio that relates more

directly to the context of our preceding discussion. In the IBM view, a
portfolio is: One of a number of mechanisms, constructed to actualize
significant elements in the Enterprise Business Strategy.

It contains a selected, approved, and continuously evolving, collection

of Initiatives which are aligned with the organizing element of the
Portfolio, and, which contribute to the achievement of goals or goal
components identified in the Enterprise Business Strategy. The basis
for constructing a portfolio should reflect the enterprise's particular
needs. For example, you might choose to build a portfolio around
initiatives for a specific product, business segment, or separate
business unit within a multinational organization.
2.The Portfolio Structure

As we noted earlier, a portfolio structure identifies and contains a

number of portfolios. This structure, like the portfolios within it, should
align with significant planning and results boundaries, and with
business components. If you have a product-oriented portfolio
structure, for example, then you would have a separate portfolio for
each major product or product group. Each portfolio would contain all
the initiatives that help that particular product or product group
contribute to the success of the enterprise business strategy.

3.The Portfolio Manager

This is a new role for organizations that embrace a portfolio

management approach. A portfolio manager is responsible for
continuing oversight of the contents within a portfolio. If you have
several portfolios within your portfolio structure, then you will likely
need a portfolio manager for each one. The exact range of
responsibilities (and authority) will vary from one organization to
another,1 but the basics are as follows:

• One portfolio manager oversees one portfolio.

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

4. Portfolio Reviews and Decision Making

As initiatives are executed, the organization should conduct periodic

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

A significant aspect of oversight is setting multiple decision points for

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

Implementing portfolio management practices in an organization is a

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

An abstract, collective term that defines and contains a framework for

organization, exercise of control and oversight, and decision-making
authority, and within which actions and activities are legitimately and
properly executed; together with the definition of the functions, the
roles, and the responsibilities of those who exercise this oversight
and decision-making.

Portfolio management governance involves multiple dimensions,


• Defining and maintaining an enterprise business strategy.

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

Each of these dimensions requires an owner -- either an individual or

a collective -- to develop and approve plans, continuously adjust
direction, and exercise control through periodic assessment and
review of conformance to expectations.

A good governance structure decomposes both the types of work and

the authority to plan and oversee work. It defines individual and
collective roles, and links them to an authority scheme. Policies that
are collectively developed and agreed upon provide a framework for
the exercise of governance. The complexities of governance
structures extend well beyond the scope of this article. Many
organizations turn to experts for help in this area because it is so
critical to the success of any business transformation effort that
encompasses portfolio management. For now, suffice it to say that it
is worth investing time and effort to create a sound and flexible
governance structure before you attempt to implement portfolio
management practices.
6.Portfolio management essentials

Every practical discipline is based on a collection of fundamental

concepts that people have identified and proven (and sometimes
refined or discarded) through continuous application. These concepts
are useful until they become obsolete, supplanted by newer and more
effective ideas.

For example, in Roman times, engineers discovered that if the

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

Portfolio management, like bridge-building, is a discipline, and a

number of authors and practitioners have documented fundamental
ideas about its exercise. Recently, based on our experiences with
clients who have implemented portfolio management practices and
on our research into the discipline, we have started to shape an IBM
view of fundamental ideas around portfolio management. We are
beginning to express this view as a collection of "essentials" that are,
in turn, grouped around a small collection of portfolio management
For example, one of these themes is initiative value contribution. It
suggests that the value of an initiative (i.e., a program or project)
should be estimated and approved in order to start work, and then
assessed periodically on the basis of the initiative's contribution to the
goals and goal components in the enterprise business strategy.
These assessments determine (in part) whether the initiative warrants
continued support.

The basic objective of Portfolio Management is to maximize yield

and minimize risk. The other objectives are as follows:

a) Stability of Income: An investor considers stability of

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

b) Capital Growth: Capital appreciation has become an

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

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

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

d) Safety: safety means protection for investment against loss

under reasonably variations. In order to provide safety, a

careful review of economic and industry trends is necessary.
In other words, errors in portfolio are unavoidable and it
requires extensive diversification.
e) Tax Incentives: Investors try to minimize their tax liabilities
from the investments. The portfolio manager has to keep a
list of such investment avenues along with the return risk,
profile, tax implications, yields and other returns.

There are three goals of portfolio management:

1. Maximize the value of the portfolio
2. Seek balance in the portfolio
3. Keep portfolio projects strategically aligned

It provides a set of portfolio management tools to help achieve these goals.

With multiple business units, product lines or types of development, we
recommend a strategic allocation process based on the business plan. The
Master Project Schedule provides a summary of all-active as well as
proposed projects and classifies them by status (active, proposed, on-hold)
and by business unit/product line to align projects with the strategic
allocation. The Master Project Schedule also provides additional portfolio
information to prioritize projects using either a scorecard method or the
development productivity index (DPI *). In addition to this prioritization,
PD-Trek provides a Risk-Reward Bubble Chart and a Project Type Pie Chart
to assure balance. A Product or Technology Roadmap template is provided to
help visualize platform and technology relationships to assure critical project
relationships are not overlooked with this prioritization. This will allow
management to develop a balanced approach to selecting and continuing
with the appropriate mix of projects to satisfy the three goals.

The basic purpose of portfolio management is to maximize yield and

minimize risk. Every investor is risk averse. In order to diversify the
risk by investing into various securities following functions are
required to be performed.

The functions undertaken by the portfolio management are as


1. To frame the investment strategy and select an investment mix

to achieve the desired investment objective;

2. To provide a balanced portfolio which not only can hedge

against the inflation but can also optimize returns with the
associated degree of risk;

3. To make timely buying and selling of securities;

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

saving investment instruments.

Performance Portfolio
Evaluation Revision



Selection of
Asset Mix

Identification Portfolio
Of Strategy

The starting point in this process is to determine the
characteristics of the various investments and then
matching them with the individuals need and preferences.

All the personal investing is designed in order to achieve
certain objectives.

These objectives may be tangible such as buying a car,
house etc. and intangible objectives such as social status,
security etc.

Similarly, these objectives may be classified as financial or
personal objectives.

Financial objectives are safety, profitability and liquidity.

Personal or individual objectives may be related to
personal characteristics of individuals such as family
commitments, status, depends, educational requirements,
income, consumption and provision for retirement etc.


The aspect of Portfolio Management is the most important
element of proper portfolio investment and speculation.

While planning, a careful review should be conducted
about the financial situation and current capital market

This will suggest a set of investment and speculation
policies to be followed.

The statement of investment policies includes the portfolio
objectives, strategies and constraints.

Portfolio strategy means plan or policy to be followed while
investing in different types of assets.

There are different investment strategies.

They require changes as time passes, investor’s wealth
changes, security price change, investor’s knowledge

Therefore, the optional strategic asset allocation also

The strategic asset allocation policy would call for broad
diversification through an indexed holding of virtually all
securities in the asset class.


The most important decision in portfolio management is
selection of asset mix.

It means spreading out portfolio investment into different
asset classes like bonds, stocks, mutual funds etc.

In other words selection of asset mix means investing in
different kinds of assets and reduces risk and volatility and
maximizes returns in investment portfolio.

Selection of asset mix refers to the percentage to the
invested in various security classes.

The security classes are simply the type of securities as
» money market instrument
» fixed income security
» equity shares
» real estate investment
» international securities

Once the objective of the portfolio is determined the
securities to be included in the portfolio must be selected.

Normally the portfolio is selected from a list of high-quality
bonds that the portfolio manager has at hand.

The portfolio manager has to decide the goals before
selecting the common stock.

The goal may be to achieve pure growth, growth with some
income or income only.
Once the goal has been selected, the portfolio manager
can select the common stocks.


The process of portfolio management involves a logical set
of steps common to any decision, plan, implementation
and monitor.

Applying this process to actual portfolios can be complex.

Therefore, in the execution stage, three decisions need to
be made, if the percentage holdings of various asset
classes are currently different from desired holdings.

The portfolio than, should be rebalanced. If the statement
of investment policy requires pure investment strategy, this
is only thing, which is done in the execution stage.

However, many portfolio managers engage in the
speculative transactions in the belief that such transactions
will generate excess risk-adjusted returns.

Such speculative transactions are usually classified as
timing or selection decisions.

Timing decisions over or under weight various asset
classes, industries or economic sectors from the strategic
asset allocation.

Such timing decisions are known as tactical asset
allocation and selection decision deals with securities
within a given asset class, industry group or economic

The investor has to begin with periodically adjusting the
asset mix to the desired mix, which is known as strategic
asset allocation.

Then the investor or portfolio manager can make any
tactical asset allocation or security selection decision.


Portfolio management would be an incomplete exercise
without periodic review.

The portfolio, which is once selected, has to be
continuously reviewed over a period of time and if
necessary revised depending on the objectives of investor.

Thus, portfolio revision means changing the asset
allocation of a portfolio.

Investment portfolio management involves maintaining
proper combination of securities, which comprise the
investor’s portfolio in a manner that they give maximum
return with minimum risk.

For this purpose, investor should have continuous review
and scrutiny of his investment portfolio.

Whenever adverse conditions develop, he can dispose of
the securities, which are not worth.

However, the frequency of review depends upon the size
of the portfolio, the sum involved, the kind of securities
held and the time available to the investor.

The review should include a careful examination of
investment objectives, targets for portfolio performance,
actual results obtained and analysis of reason for

The review should be followed by suitable and timely

There are techniques of portfolio revision.

Investors buy stock according to their objectives and
return-risk framework.

These fluctuations may be related to economic activity or
due to other factors.

Ideally investors should buy when prices are low and sell
when prices rise to levels higher than their normal

The investor should decide how often the portfolio should
be revised.

If revision occurs to often, transaction and analysis costs
may be high.

If revision is attempted too infrequently the benefits of
timing may be foregone.

The important factor to take into consideration is, thus,
timing for revision of portfolio.


 Portfolio management involves maintaining a proper
combination of securities, which comprise the investor’s
portfolio in a manner that they give maximum return with
minimum risk.

The investor should have continues review and scrutiny of
his investment portfolio.

These rates of return should be based on the market value
of the assets of the fund.

Complete evaluation of the portfolio performance must
include examining a measure of the degree of risk taken by
the fund.

A portfolio manager, by evaluating his own performance
can identify sources of strength or weakness.

It can be viewed as a feedback and control mechanism
that can make the investment management process more

Good performance in the past might have resulted from
good luck, in which case such performance may not be
expected to continue in the future.

On the other hand, poor performance in the past might
have been result of bad luck.

Therefore, the first task in performance evaluation is to
determine whether past performance was good or poor.

Then the second task is to determine whether such
performance was due to skill or luck.

Good performance in the past may have resulted from the
actions of a highly skilled portfolio manager.

The performance of portfolio should be measured
periodically, preferably once in a month or a quarter.

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

The two types of portfolio management services are available o the


Discretionary portfolio Non-discretionary

Management portfolio Management

1. The Discretionary portfolio management services (DPMS):

 In this type of services, the client parts with his money in

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

 The manager function as a counselor, but the investor is free

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

It is logical that the expected return of a portfolio should

depend on the expected return of the security contained in it.

There are two approaches to the selection of equity portfolio.

One is technical analysis and the other is fundamental


Technical analysis assumes that the price of a stock depends

on supply and demand in the stock market.

All financial and market information of given security is

already reflected in the market price.

Charts are drawn to identify price movements of a given

security over a period of time.

These charts enable the investors to predict the future

movement of the price of security.

Equity portfolio is a risky portfolio, but at the same time the

return is also higher.

Equity portfolio provides highest returns.

An efficient portfolio manager can obviously give more weight

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

There may be several combinations of investment portfolio.

Allocation of funds for equity portfolio is a question of top most

importance to any portfolio manager.

Among all risky investments, selection of the best possible

combination and allocation of funds among these selected
investment groups are of great importance.

The individual investors can invest in bond portfolio.

The portfolio can be spared over variety of securities.

Investment in bond is less risky and safe as compared to

equity investment.

However, the return on bond is very low.

There are no much fluctuations in bond prices.

Therefore, there is no capital appreciation in this case.

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

There is no much liquidity in bonds, investment in bond

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

However, it is suitable for normal investors for getting average

return over their investment.

Bond portfolio includes different types of bond, tax free bonds

and taxable bonds.
Tax free bonds are issued by public sector undertaking or
Government on which interest s compounded half yearly and
payable accordingly.

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


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

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

However, taxable bonds yield higher interest compounded

half yearly and also payable half yearly.

They also have buy back facilities similar to taxable bonds.


Individuals will benefits immensely by taking portfolio management

services for the following reason: -

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

b) The Indian stock markets are very complicated. Though there

are thousands of companies that are listed only a few hundred,
which have the necessary liquidity. It is impossible for any
individual whishing to invest and sit down and analyses all
these intricacies of the market unless he does nothing else.

c) Even if an investor is able to visualize the market, it is difficult to

investor to trade in all the major exchanges of India, look after
his deliveries and payments. This is further complicated by the
volatile nature of our markets, which demands constant
reshuffling of port

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

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

It is becoming important because of:

i. Emergence of institutional investing on behalf of

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

vi. Larger direct and indirect costs of errors or shortfalls in

meeting portfolio objectives- increased competition and
greater scrutiny by investors.
1. Sound general knowledge:
 Portfolio management is an existing and challenging job.
 He has to work in an extremely uncertain and conflicting
 In the stock market every new piece of information affects
the value of the securities of different industries in a different
 He must be able to judge and predict the effects of the
information he gets.
 He must have sharp memory, alertness, fast intuition and
self-confidence to arrive at quick decisions.

2. Analytical Ability:
 He must have his own theory to arrive at the value of the
 An analysis of the security’s values, company, etc. is
continues job of the portfolio manager.
 A good analyst makes a good financial consultant.
 The analyst can know the strengths, weakness,
opportunities of the economy, industry and the company.
3. Marketing skills:
 He must be good salesman.
 He has to convince the clients about the particular security.
 He has to compete with the Stock brokers in the stock
 In this Marketing skills help him a lot.

4. Experience:
 In the cyclical behavior of the stock market history is often
repeated, therefore the experience of the different phases
helps to make rational decisions.
 The experience of different types of securities, clients,
markets trends etc. makes a perfect professional manager.


1. A portfolio manager shall, in the conduct of his business,
observe high standards of integrity and fairness in all his
dealings with his clients and other portfolio managers.

2. The money received by a portfolio manager from a client for an

investment purpose should be deployed by the portfolio
manager as soon as possible for that purpose and money due
and payable to a client should be paid forthwith.

3. A portfolio manager shall render at all time high standards of

services exercise due diligence, ensure proper care and
exercise independent professional judgment. The portfolio
manager shall either avoid any conflict of interest in his
investment or disinvestments decision, or where any conflict of
interest arises; ensure fair treatment to all his customers. He
shall disclose to the clients, possible sources of conflict of
duties and interest, while providing unbiased services. A
portfolio manager shall not place his interest above those of his

4. A portfolio manager shall not make any statement or become

privy to any act, practice or unfair competition, which is likely to
be harmful to the interests of other portfolio managers or it likely
to place such other portfolio managers in a disadvantageous
position in relation to the portfolio manager himself, while
competing for or executing any assignment.
5. A portfolio manager shall not make any exaggerated statement,
whether oral or written, to the client either about the
qualification or the capability to render certain services or his
achievements in regard to services rendered to other clients.

6. At the time of entering into a contract, the portfolio manager

shall obtain in writing from the client, his interest in various
corporate bodies, which enables him to obtain unpublished
price-sensitive information of the body corporate.

7. A portfolio manager shall not disclose to any clients or press

any confidential information about his clients, which has come
to his knowledge.

8. The portfolio manager shall where necessary and in the interest

of the client take adequate steps for registration of the transfer
of the client’s securities and for claiming and receiving dividend,
interest payment and other rights accruing to the client. He shall
also take necessary action for conversion of securities and
subscription of/or rights in accordance with the client’s

9. Portfolio manager shall ensure that the investors are provided

with true and adequate information without making any
misguiding or exaggerated claims and are made aware of
attendant risks before they take any investment decision.
10.He should render the best possible advice to the client having
regard to the client’s needs and the environment, and his own
professional skills.

11.Ensure that all professional dealings are affected in a prompt,

efficient and cost effective manner.


There may be many reasons why the portfolio of an investor may

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

1. Change in Wealth
 According to the utility theory, the risk taking ability of the
investor increases with increase in wealth.
 It says that people can afford to take more risk as they grow
rich and benefit from its reward.
 But, in practice, while they can afford, they may not be
 As people get rich, they become more concerned about
losing the newly got riches than getting richer.
 So they may become conservative and vary risk- averse.
 The fund manager should observe the changes in the
attitude of the investor towards risk and try to understand
them in proper perspective.
 If the investor turns to be conservative after making huge
gains, the portfolio manager should modify the portfolio

2. Change in the Time Horizon

 As time passes, some events take place that may have an
impact on the time horizon of the investor.
 Births, deaths, marriages, and divorces – all have their own
impact on the investment horizon.
 There are, of course, many other important events in the
person’s life that may force a change in the investment
 The happening or the non-happening of the events will
naturally have its effect.
 For example, a person may have planned for an early
retirement, considering his delicate health.
 But, after turning 55 years of age, if his health improves, he
may not take retirement.

3. Change in Liquidity Needs

 Investors very often ask the portfolio manager to keep
enough scope in the portfolio to get some cash as and they
 This forces portfolio manager to increase the weight of liquid
investments in the asset mix.
 Due to this, the amounts available for investment in the
fixed income or growth securities that actually help in
achieving the goal of the investor get reduced.
 That is, the money taken out today from the portfolio means
that the amount and the return that would have been earned
on it are no longer available for achievement of the investor’s

4. Changes in Taxes
 It is said that there are only two things certain in this world-
death and taxes.
 The only uncertainties regarding them relate to the date,
time, place and mode.
 Portfolio manager have to constantly look out for changes in
the tax structure and make suitable changes in the portfolio
 The rate of tax under long- term capital gains is usually lower
than the rate applicable for income. If there is a change in
the minimum holding period for long-term capital gains, it
may lead to revision. The specifics of the planning depend
on the nature of the investments.

5. Others
 There can be many of other reasons for which clients may
ask for a change in the asset mix in the portfolio.
 For example, there may be change in the return available
on the investments that have to be compulsorily made with
the government say, in the form of provident fund.
 This may call for a change in the return required from the
other investments.

 “The regulatory environment has totally changed now and

with SEBI fixing strict norms for companies launching PMS,
only the serious players are going to enter his business.”

 The PMS members today have full transparency: managers

are required to maintain individual accounts showing all
dealings in a client’s portfolio.

 They must also advise him on all transactions.

 Secondly, all PMS Managers have to send their clients at

least a quarterly report giving the status of their portfolio and
the transactions that have taken place.

 The client-PMS manager contract is as per SEBI ground


 It has several checks to protect investor’s interest like laying

the custodial responsibility on the manager and preventing
any alterations in the scheme without the client’s consent.

 Finally, managers have to send half-yearly reports to SEBI on

their portfolio management activities.

 Experienced handling of cash and money power apart, PMS

also takes care of a number of the headaches endemic with
investing in the markets.

 The biggest one is custodial services.

 All PMS Managers act as custodians of shares and are
responsible for the load of paper work related to the share
transfer, documentation work, postal work and even ensuring
that dividends are credited to clients account.

 SEBI directives also put the onus on the PMS promoters to take
follow-up action in case shares are lost or damaged.

 Difficulties such as late transfer and postal theft are reduced in

case of brokers, because they not only have direct access to
registrars but also have branch offices to ensure quicker

 All these services come for a fee, of course.

 While the actual PMS charges vary from a high of 7% of the

amount invested to a low of around 3.5%, follow-up services
charges extra.

 As in all schemes, there is a downside to putting cash into

portfolio management as well.

 The most important is the fact that despite all the SEBI checks.

 PMS Managers are not allowed to assured any fixed returns.

 This really discharges the managers for any responsibility if the

scheme does badly.

 So investors have to be very careful in choosing the promoters.

 Problem inherent in most schemes on offer will be
misused of investor’s funds to some extent.

 Funds collected from investors will aid the brokers

concerned in their own games in the market.

⇒ At present, there are a very few agencies which render this

type of services in an organized and professional way.

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

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

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

⇒ The size of capital market is increasing.

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

⇒ New instruments are being introduced in the capital market.

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

⇒ The percentage of investment of the household savings is

bound to go up.

⇒ It is conservatively estimated that during the eighth plan

resources to the tune of over Rs.50000crore will be mobilized
through the stock market.

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

in 1980.

No person to act as portfolio manager without certificate.

» No person shall carry on any activity as a portfolio

manager unless he holds a certificate granted by the Board
under this regulation.
» Provided that such person, who was engaged as portfolio
manager prior to the coming into force of the Act, may
continue to carry on activity as portfolio manager, if he has
made an application for such registration, till the disposal
of such application.
» Provided further that nothing contained in this rule shall
apply in case of merchant banker holding a certificate
granted by the board of India Regulations, 1992 as
category I or category II merchant banker, as the case may
» Provided also that a merchant banker acting as a portfolio
manager under the second provision to this rule shall also
be bound by the rules and regulations applicable to a
portfolio manager.
Conditions for grant or renewal of certificate to portfolio
» The board may grant or renew certificate to portfolio
manager subject to the following conditions namely:
a) The portfolio manager in case of any change in its status
and constitution, shall obtain prior permission of the board to
carry on its activities;
b) He shall pay the amount of fees for registration or renewal,
as the case may be, in the manner provided in the
c) He shall make adequate steps for redressed of grievances of
the clients within one month of the date of receipt of the
complaint and keep the board informed about the number,
nature and other particulars of the complaints received;
d) He shall abide by the rules and regulations made under the
Act in respect of the activities carried on by the portfolio

Period of validity of the certificate.

» The certificate of registration on its renewal, as the case

may be, shall be valid for a period of here years from the
date of its issue to the portfolio manager.

Registration of Portfolio Managers:

1. Application for grant of certificate

 An application by a portfolio manager for grant of a

certificate shall be made to the board on Form A.
 Notwithstanding anything contained in sub regulation (1),
any application made by a portfolio manager prior to coming
into force of these regulations containing such particulars or
as near thereto as mentioned in form A shall be treated as
an application made in pursuance of sub-regulation and
dealt with accordingly.

2. Application of confirm to the requirements

 Subject to the provisions of sub-regulation (2) of regulation

3, any application, which is not complete in all
respects and does not confirm to the instructions
specified in the form, shall be rejected:
 Provided that, before rejecting any such application, the
applicant shall be given an opportunity to remove within the
time specified such objections as may be indicated by the

3. Furnishing of further information, clarification and personal


 The Board may require the applicant to furnish further

information or clarification regarding matters relevant to his
activity of a portfolio manager for the purposes of disposal of
the application.
 The applicant or, its principal officer shall, if so required,
appear before the Board for personal representation.

4. Consideration of application.

 The Board shall take into account for considering the grant
of certificate, all matters which are relevant to the activities
relating to portfolio manager and in particular whether the
applicant complies with the following requirements namely:
 The applicant has the necessary infrastructure like to
adequate office space, equipments and manpower to
effectively discharge his activities;

 The applicant has his employment minimum of two persons

who have the experience to conduct the business of portfolio
 A person, directly or indirectly connected with the applicant
has not been granted registration by the Board in case of the
applicant being a body corporate;
 The applicant, fulfils the capital adequacy requirements
specified in regulation 7
 The applicant, his partner, director or principal officer is not
involved in any litigation connected with the securities
market and which has an adverse bearing on the business of
the applicant;
 The applicant, his director, partner or principal officer has not
at any time been convinced for any offence involving moral
turpitude or has been found guilty of any economic offences;
 The applicant has the professional qualification from an
institution recognized by the government in finance, law, and
accountancy or business management.


Purpose of the study:

To ascertain investor awareness about services provided by
portfolio management institutions and the interest shown by
investor to invest in portfolio management services.

To know whether they are interested to hire such services in

future and if not, why?


Survey on investor’s views about Portfolio Management


» Are you aware of services offered by portfolio manager?

Yes No

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

Management of Mutual fund investment

Management of Equities

Management of Money market investment

Advisory or consultancy services


(If other please specify)

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


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

Investments in Mutual Funds Investments in Equities

Investments in Money market Investments in other[s]

(If other please specify)
Advisory or consultancy service
» If No, why?

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

pay to portfolio manager for services provided by him in ?

Equities Money market investment

Mutual fund investment Advisory or consultancy


Other investment
(If other please specify)

» Do you think there will be growth in portfolio management in

If Yes why?

If No, why?

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



» Suggestions if any:



This case study has been conducted on various age groups of

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

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

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

 Management of mutual fund investment, management of

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

 Due to lack of experience and market knowledge, the age

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

 All the age groups of individual investors in portfolio

management believe that there is a better scope for portfolio
management in future. Investors would prefer the introduction
of services like advisory and consultancy services, investment
in mutual funds in the near future.

With the help of given project I got an in-depth knowledge about the
working of portfolio management. Also I got an insight as too how to
invest in portfolio management, which scheme provide better return
as compared to other and who are the portfolio management players
in the Indian market.

It can be concluded from the project that future of portfolio

management is bright provided proper regulations prevail and
investor’s needs are satisfied by providing variety of schemes. The
interest of investors is protected by SEBI. Portfolio management is
governed by SEBI Act.

Due to the benefits available to the individual’s such as reduction in

risk, expert professional management, diversified portfolios, tax
benefits etc. young generation (i.e. age group bet. 18-30) is willing to
invest in different investment avenues through portfolio manager or
through mutual funds which are again managed by portfolio
managers. On the other hand, age group of 60 & above are least
interested in making investment in different avenues through portfolio
managers. They believe in investing and managing their portfolio on
their own.

However, it can be said that the future of portfolio management is

bright in years to come.