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PORTFOLIO MANAGEMENT
INTRODUCTION
Stock exchange operations are peculiar in nature and most of the Investors feel
insecure in managing their investment on the stock market because it is difficult for an
individual to identify companies which have growth prospects for investment. Further
due to volatile nature of the markets, it requires constant reshuffling of portfolios to
capitalize on the growth opportunities. Even after identifying the growth oriented
companies and their securities, the trading practices are also complicated, making it a
difficult task for investors to trade in all the exchange and follow up on post trading
formalities.
Investors choose to hold groups of securities rather than single security that
offer the greater expected returns. They believe that a combination of securities held
together will give a beneficial result if they are grouped in a manner to secure higher
return after taking into consideration the risk element. That is why professional
investment advice through portfolio management service can help the investors to
make an intelligent and informed choice between alternative investments
opportunities without the worry of post trading hassles.
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Realizing the importance of portfolio management services, the SEBI has laid
down certain guidelines for the proper and professional conduct of portfolio
management services. As per guidelines only recognized merchant bankers registered
with SEBI are authorized to offer these services.
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The stock markets have become attractive investment options for the common
man. But the need is to be able to effectively and efficiently manage investments in
order to keep maximum returns with minimum risk.
DEFINITIONS OF PORTFOLIO
1) Investor’sWords.com
A collection of investments (all) owned by the same individual or
organization. These investments often include stocks, which are investments
in individual businesses; bonds, which are investments in debt that are
designed to earn interest; and mutual funds, which are essentially pools of
money from many investors that are invested by professionals or according
to indices.
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1) Investor’swords.com
The process of managing the assets of a mutual fund, including choosing and
monitoring appropriate investments and allocating funds accordingly.
2) Investor Glossary
Determining the mix of assets to hold in a portfolio is referred to as portfolio
management. A fundamental aspect of portfolio management is choosing
assets which are consistent with the portfolio holder's investment objectives
and risk tolerance. The ultimate goal of portfolio management is to achieve the
optimum return for a given level of risk. Investors must balance risk and
performance in making portfolio management decisions. Portfolio
management strategies may be either active or passive. An investor who
prefers passive portfolio management will likely choose to invest in low cost
index funds with the goal of mirroring the market's performance. An investor
who prefers active portfolio management will choose managed funds which
have the potential to outperform the market. Investors are generally charged
higher initial fees and annual management fees for active portfolio
management.
3) Financial Dictionary
Managing a large single portfolio or being employed by its owner to do so.
Portfolio managers have the knowledge and skill which encourage people to
put their investment decisions in the hands of a professional (for a fee).
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BusinessDictionary.com
Investment account arrangement in which an investment manager makes the
buy-sell decisions without referring to the account owner (client) for every
transaction. The manager, however, must operate within the agreed upon limits
to achieve the client's stated investment objectives.
1) Internet.com – Webopedia
PPM, short for project portfolio management, refers to a software package
that enables corporate and business users to organize a series of projects into a
single portfolio that will provide reports based on the various project
objectives, costs, resources, risks and other pertinent associations. Project
portfolio management software allows the user, usually management or
executives within the company, to review the portfolio which will assist in
making key financial and business decisions for the projects.
2) Bitpipe.com
Project portfolio management organizes a series of projects into a single
portfolio consisting of reports that capture project objectives, costs, timelines,
accomplishments, resources, risks and other critical factors. Executives can
then regularly review entire portfolios, spread resources appropriately and
adjust projects to produce the highest departmental returns. Also called as
Enterprise Project management and PPM
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Portfolio manager means any person who enters into a contract or arrangement
with a client. Pursuant to such arrangement he advises the client or undertakes on
behalf of such client management or administration of portfolio of securities or invests
or manages the client’s funds.
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a) The selection of a level or risk and return that reflects the investor’s tolerance
for risk and desire for return, i.e. personal preferences.
b) The management of investment alternatives to expand the set of opportunities
available at the investors acceptable risk level.
The very risk-averse investor might choose to invest in mutual funds. The more
risk-tolerant investor might choose shares, if they offer higher returns. Portfolio
management in India is still in its infancy. An investor has to choose a portfolio
according to his preferences. The first preference normally goes to the necessities and
comforts like purchasing a house or domestic appliances. His second preference goes
to some contractual obligations such as life insurance or provident funds. The third
preference goes to make a provision for savings required for making day to day
payments. The next preference goes to short term investments such as UTI units and
post office deposits which provide easy liquidity. The last choice goes to investment in
company shares and debentures. There are number of choices and decisions to be taken
on the basis of the attributes of risk, return and tax benefits from these shares and
debentures. The final decision is taken on the basis of alternatives, attributes and
investor preferences.
For most investors it is not possible to choose between managing one’s own
portfolio. They can hire a professional manager to do it. The professional managers
provide a variety of services including diversification, active portfolio management,
liquid securities and performance of duties associated with keeping track of investor’s
money.
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The modern theory is the view that by diversification risk can be reduced.
Diversification can be made by the investor either by having a large number of shares
of companies in different regions, in different industries or those producing different
types of product lines. Modern theory believes in the perspective of combination of
securities under constraints of risk and returns.
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4) Marketability: i.e. is the case with which a security can be bought or sold.
This is essential for providing flexibility to investment portfolio.
7) Favorable Tax Status: The effective yield an investor gets form his investment
depends on tax to which it is subject. By minimizing the tax burden, yield can
be effectively improved.
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There are two basic principles for effective portfolio management which are
given below:-
a) Fiscal, financial and monetary policies of the Govt. of India and the
Reserve Bank of India.
b) Industrial and economic environment and its impact on industry.
Prospect in terms of prospective technological changes, competition in the
market, capacity utilization with industry and demand prospects etc.
b) To assess the financial and trend analysis of companies Balance Sheet and
Profit and Loss Accounts to identify the optimum capital structure and better
performance for the purpose of withholding the investment from poor
companies.
c) To analyze the security market and its trend in continuous basis to arrive at a
conclusion as to whether the securities already in possession should be
disinvested and new securities be purchased. If so the timing for investment or
dis-investment is also revealed.
CHAPTER – 2
TYPES OF PORTFOLIO MANAGEMENT
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Investment Management
It Portfolio Management
1. INVESMENT MANAGEMENT
Investment management is the professional management of various securities
(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment
goals for the benefit of the investors. Investors may be institutions (insurance
companies, pension funds, corporations etc.) or private investors (both directly via
investment contracts and more commonly via collective investment schemes e.g.
mutual funds or Exchange Traded Funds).
The term asset management is often used to refer to the investment management
of collective investments,(not necessarily) whilst the more generic fund
management may refer to all forms of institutional investment as well as
investment management for private investors. Investment managers who
specialize in advisory or discretionary management on behalf of (normally
wealthy) private investors may often refer to their services as wealth
management or portfolio management often within the context of so-called
"private banking".
Fund manager (or investment adviser in the U.S.) refers to both a firm that
provides investment management services and an individual who directs fund
management decisions.
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2. IT PORTFOLIO MANAGEMENT
IT portfolio management is the application of systematic management to large
classes of items managed by enterprise Information Technology (IT) capabilities.
Examples of IT portfolios would be planned initiatives, projects, and ongoing IT
services (such as application support). The promise of IT portfolio management is
the quantification of previously mysterious IT efforts, enabling measurement and
objective evaluation of investment scenarios.
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(ii) Project Portfolio - This type of portfolio management specially address the
issues with spending on the development of innovative capabilities in terms of
potential ROI and reducing investment overlaps in situations where
reorganization or acquisition occurs. The management issues with the second
type of portfolio management can be judged in terms of data cleanliness,
maintenance savings, suitability of resulting solution and the relative value of
new investments to replace these projects.
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CHAPTER: 3
PORTFOLIO MANAGEMENT PROCESS:
b) They have to decide the major weights, proportion of different assets in the
portfolio by taking in to consideration the related risk factors.
c) Finally they select the security within the asset classes as identify.
The above activities are directed to achieve the sole purpose of maximizing
return and minimizing risk on investment.
It is well known fact that portfolio manager balances the risk and return in a
portfolio investment. With higher risk higher return may be expected and vice versa.
How the objectives can affect in investment decision can be seen from the fact
that the Unit Trust of India has two major schemes : Its “capital units” are
meant for those who wish to have a good capital appreciation and a moderate
return, where as the ordinary unit are meant to provide a steady return only.
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The investment manager under both the scheme will invest the money of the
Trust in different kinds of shares and securities. So it is obvious that the
objectives must be clearly defined before an investment decision is taken.
II. Selection of Investment: Having defined the objectives of the investment, the
next decision is to decide the kind of investment to be selected. The decision
what to buy has to be seen in the context of the following:-
d) Once industries with high growth potential have been identified, the next step
is to select the particular companies, in whose shares or securities investments
are to be made.
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FUNDAMENTAL ANALYSIS:
One of the first decisions that an investment manager faces is to identify the
industries which have a high growth potential. Two approaches are suggested in
this regard. They are:
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The major objective of the analysis is to determine the relative quality and the
quantity of the security and to decide whether or not is security is good at current
markets prices. In this, both qualitative and quantitative factors are to be considered.
(i) Demand and Supply Pattern for the Industries Products and Its Growth
Potential: The main important aspect is to see the likely demand of the products
of the industry and the gap between demand and supply. This would reflect the
future growth prospects of the industry. In order to know the future volume and
the value of the output in the next ten years or so, the investment manager will
have to rely on the various demand forecasts made by various agencies like the
planning commission, Chambers of Commerce and institutions like NCAER,
etc. The management expert identifies fives stages in the life of an industry.
These are “Introduction, development, rapid growth, maturity and decline”. If an
industry has already reached the maturity or decline stage, its future demand
potential is not likely to be high.
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(ii) Profitability: It is a vital consideration for the investors as profit is the measure
of performance and a source of earning for him. So the cost structure of the
industry as related to its sale price is an important consideration. In India there
are many industries which have a growth potential on account of good demand
position. The other point to be considered is the ratio analysis, especially return
on investment, gross profit and net profit ratio of the existing companies in the
industry. This would give him an idea about the profitability of the industry as a
whole.
(iii) Particular Characteristics of the Industry: Each industry has its own
characteristics, which must be studied in depth in order to understand their
impact on the working of the industry. Because the industry having a fast
changing technology become obsolete at a faster rate. Similarly, many industries
are characterized by high rate of profits and losses in alternate years. Such
fluctuations in earnings must be carefully examined.
Once the industry’s characteristics have been analyzed and certain industries
with growth potential identified, the next stage would be to undertake and analyze all
the factors which show the desirability of various companies within an industry group
from investment point of view.
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1) Size and Ranking: A rough idea regarding the size and ranking of the
company within the economy, in general, and the industry, in particular, would
help the investment manager in assessing the risk associated with the
company. In this regard the net capital employed, the net profits, the return on
investment and the sales volume of the company under consideration may be
compared with similar data of other company in the same industry group. It
may also be useful to assess the position of the company in terms of technical
knowhow, research and development activity and price leadership.
2) Growth Record: The growth in sales, net income, net capital employed and
earnings per share of the company in the past few years must be examined.
The following three growth indicators may be particularly looked in to (a)
Price earnings ratio, (b) Percentage growth rate of earnings per annum and (c)
Percentage growth rate of net block of the company. The price earnings ratio is
an important indicator for the investment manager since it shows the number
the times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar
features. However, this is not so in practice due to many factors. Hence, by a
comparison of this ratio pertaining to different companies the investment
manager can have an idea about the image of the company and can determine
whether the share is under-priced or over-priced. An evaluation of future
growth prospects of the company should be carefully made. This requires the
analysis of the existing capacities and their utilization, proposed expansion
and diversification plans and the nature of the company’s technology.
The existing capacity utilization levels can be known from the quantitative
information given in the published profit and loss accounts of the company.
The plans of the company, in terms of expansion or diversification, can be
known from the directors reports the chairman’s statements and from the
future capital commitments as shown by way of notes in the balance sheets.
The nature of technology of a company should be seen with reference to
technological developments in the concerned fields, the possibility of its
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Growth is the single most important factor in company analysis for the
purpose of investment management. A company may have a good record of
profits and performance in the past; but if it does not have growth potential, its
shares cannot be rated high from the investment point of view.
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This is perhaps the reason that an investment manager always gives a close look
to the management of the company whose shares he is to invest. Quality of
management has to be seen with reference to the experience, skill and integrity
of the persons at the helm of the affairs of the company. The policy of the
management regarding relationship with the share holders is an important factor
since certain business houses believe in generous dividend and bonus
distributions while others are rather conservative.
(ii) Location and labour management relations: The locations of the company’s
manufacturing facilities determine its economic viability which depends on the
availability of crucial inputs like power, skilled labour and raw materials etc.
Nearness to market is also a factor to be considered.
In the past few years, the investment manager has begun looking into the state of
labour management relations in the company under consideration and the area
where it is located.
(iii) Pattern of Existing Stock Holding: An analysis of the pattern of the existing
stock holdings of the company would also be relevant. This would show the
stake of various parties associated with the company. An interesting case in this
regard is that of the Punjab National Bank in which the L.I.C. and other
financial institutions had substantial holdings. When the bank was nationalized,
the residual company proposed a scheme whereby those shareholders, who wish
to opt out, could receive a certain amount as compensation in cash. It was only
at the instant and bargaining strength of institutional investors that the
compensation offered to the shareholders, who wish to opt out of the company,
was raised considerably.
(iv) Marketability of the Shares: Another important consideration for an
investment manager is the marketability of the shares of the company. Mere
listing of the share on the stock exchange does not automatically mean that the
share can be sold or purchased at will. There are many shares which remain
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inactive for long periods with no transactions being affected. To purchase or sell
such scrips is a difficult task. In this regard, dispersal of share holding with
special reference to the extent of public holding should be seen. The other
relevant factors are the speculative interest in the particular scrip, the particular
stock exchange where it is traded and the volume of trading.
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2) Equity Stock Analysis: Under this method the probable future value of a share
of a company is determined it can be done by ratio’s of earning per share of the
company and price earnings ratio
One can estimate trend of earning by EPS, which reflects trends of earning
quality of company, dividend policy, and quality of management.
Price Earnings ratio indicate a confidence of market about the company future,
a high rating is preferable.
1) Nature of the industry and its product: Long term trends of industries,
competition within, and outside the industry, Technical changes, labour
relations, sensitivity, to Trade cycle.
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3) Ratio analysis: Ratios such as debt equity ratio, current ratio, net worth, profit
earnings ratio, returns on investment, are worked out to decide the portfolio.
The wise principle of portfolio management suggests that “Buy when the
market is low or BEARISH, and sell when the market is rising or BULLISH”.
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CHAPTER - 4
RISK – RETURN ANALYSIS
RISK ON PORTFOLIO :
The expected returns from individual securities carry some degree of risk. Risk
on the portfolio is different from the risk on individual securities. The risk is reflected
in the variability of the returns from zero to infinity. Risk of the individual assets or a
portfolio is measured by the variance of its return. The expected return depends on the
probability of the returns and their weighted contribution to the risk of the portfolio.
These are two measures of risk in this context one is the absolute deviation and other
standard deviation.
1) Interest Rate Risk: This arises due to the variability in the interest rates from
time to time. A change in the interest rate establishes an inverse relationship in
the price of the security i.e. price of the security tends to move inversely with
change in rate of interest, long term securities show greater variability in the
price with respect to interest rate changes than short term securities.
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2) Purchasing Power Risk: It is also known as inflation risk also emanates from
the very fact that inflation affects the purchasing power adversely. Nominal
return contains both the real return component and an inflation premium in a
transaction involving risk of the above type to compensate for inflation over
an investment holding period. Inflation rates vary over time and investors are
caught unaware when rate of inflation changes unexpectedly causing erosion
in the value of realized rate of return and expected return.
3) Business Risk: Business risk emanates from sale and purchase of securities
affected by business cycles, technological changes etc. Business cycles affect
all types of securities i.e. there is cheerful movement in boom due to bullish
trend in stock prices whereas bearish trend in depression brings down fall in
the prices of all types of securities during depression due to decline in their
market price.
4) Financial Risk: It arises due to changes in the capital structure of the company.
It is also known as leveraged risk and expressed in terms of debt-equity ratio.
Excess of risk vis-à-vis equity in the capital structure indicates that the
company is highly geared. Although a leveraged company’s earnings per share
are more but dependence on borrowings exposes it to risk of winding up for its
inability to honor its commitments towards lender or creditors. The risk is
known as leveraged or financial risk of which investors should be aware and
portfolio managers should be very careful.
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5) Systematic Risk or Market Related Risk: Systematic risks affected from the
entire market are (the problems, raw material availability, tax policy or
government policy, inflation risk, interest risk and financial risk). It is managed
by the use of Beta of different company shares.
All investment has some risk. Investment in shares of companies has its own
risk or uncertainty; these risks arise out of variability of yields and uncertainty of
appreciation or depreciation of share prices, losses of liquidity etc
The risk over time can be represented by the variance of the returns while the
return over time is capital appreciation plus payout, divided by the purchase price of
the share.
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Normally, the higher the risk that the investor takes, the higher is the return.
There is, however, a risk less return on capital of about 12% which is the bank, rate
charged by the R.B.I or long term, yielded on government securities at around 13% to
14%. This risk less return refers to lack of variability of return and no uncertainty in
the repayment or capital. But other risks such as loss of liquidity due to parting with
money etc., may however remain, but are rewarded by the total return on the capital.
Traditional approach advocates that one security holds the better, it is according
to the modern approach diversification should not be quantity that should be related to
the quality of scripts which leads to quality of portfolio.
Experience has shown that beyond the certain securities by adding more
securities expensive.
RETURNS ON PORTFOLIO
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CHAPTER: 5
PORTFOLIO THEORIES
The DOW JONES THEORY is probably the most popular theory regarding
the behavior of stock market prices. The theory derives its name from Charles H.
Dow, who established the Dow Jones & Co. and was the first editor of the Wall Street
Journal – a leading publication on financial and economic matters in the U.S.A.
Although Dow never gave a proper shape to the theory, ideas have been expanded and
articulated by many of his successors.
The Dow Jones theory classifies the movement of the prices on the share
market into three major categories:
1. Primary Movements,
2. Secondary Movements and
3. Daily Fluctuations.
1) Primary Movements: They reflect the trend of the stock market and last from
one year to three years, or sometimes even more. If the long range behavior of
market prices is seen, it will be observed that the share markets go through
definite phases where the prices are consistently rising or falling. These phases
are known as bull and bear phases.
P3
P2
P1 T3
T2
T1
Graph 1
During a bull phase, the basic trend is that of rise in prices. Graph 1 above
shows the behavior of stock market prices in bull phase.
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You would notice from the graph that although the prices fall after each rise,
the basic trend is that of rising prices. As can be seen from the graph that each
trough prices reach, is at a higher level than the earlier one. Similarly, each
peak that the prices reach is on a higher level than the earlier one. Thus P2 is
higher than P1 and T2 is higher than T1. This means that prices do not rise
consistently even in a bull phase. They rise for some time and after each rise,
they fall. However, the falls are of a lower magnitude then earlier. As a result,
prices reach higher levels with each rise.
Once the prices have risen very high, the bear phase in bound to start i.e., price
will start falling. Graph 2 shows the typical behavior of prices on the stock
exchange in the case of a
P3
P2
T1 P1
T2
T3
Graph 2
Bear phase. It would be seen that prices are not falling consistently and, after
each fall, there is a rise in prices. However, the rise is not much as to take the
prices higher than the previous peak. It means that each peak and trough is
now lower than the previous peak and trough.
The theory argues that primary movements indicate basic trends in the market.
It states that if cyclical swings of stock market prices indices are successively
higher, the market trend is up and there is a bull market. On the contrary, if
successive highs and low are successively lower, the market is on a downward
trend and we are in bear market. This theory thus relies upon a behavior of the
indices of share market prices in perceiving the trend in the market.
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2) Secondary Movements: We have seen that even when the primary trend is
upward, there are also downward movements of prices. Similarly, even where
the primary trend is downward, there is upward movement of prices also.
These movements are known as secondary movements and are shorter in
duration and are opposite in direction to the primary movements. These
movements normally last from three weeks to three months and retrace 1/3 to
2/3 of the previous advance in a bull market of previous fall in the bear
market.
3) Daily Movements: There are irregular fluctuations which occur every day in
the market. These fluctuations are without any definite trend. Thus is the daily
share market price index for a few months are plotted on the graph it will
show both upward and downward fluctuations. These fluctuations are the
result of speculative factor. An investment manger really is not interested in
the short run fluctuations in share prices since he is not a speculator. It may be
reiterated that anyone who tries to gain from short run fluctuations in the stock
market, can make money only be sheer chance. The investment manager
should scrupulously keep away from the daily fluctuations of the market. He is
not a speculator and should always resist the temptation of speculating. Such a
temptation is always very attractive but must always be resisted. Speculation is
beyond the scope of the job of an investment manager.
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According to the Random Walk Theory, the changes in prices of stock show
independent behavior and are dependent on the new pieces of information that are
received but within themselves are independent of each other. Whenever a new price of
information is received in the stock market, the market independently receives this
information and it is independent and separate from all the other prices of information.
For example, a stock is selling at Rs. 40 based on existing information known to all
investors. Afterwards, the news of a strike in that company will bring down the stock
price to Rs. 30 the next day. The stock price further goes down to Rs. 25. Thus, the first
fall in stock price from Rs. 40 to Rs. 30 is caused because of some information about
the strike. But the second fall in the price of a stock from Rs. 30 to Rs. 25 is due to
additional information on the type of strike. Therefore, each price change is
independent of the other because each information has been taken in, by the stock
market and separately disseminated. However, independent pieces of information,
when they come together immediately after each other show that the price is falling but
each price fall is independent of the other price fall.
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The basic essential fact of the Random Walk Theory is that the information on
stock prices is immediately and fully spread over that other investors have full
knowledge of the information. The response makes the movement of prices
independent of each other. Thus, it may be said that the prices have an independent
nature and therefore, the price of each day is different. The theory further states that the
financial markets are so competitive that there is immediate price adjustment. It is due
to the effective communication system through which information can be disturbed
almost anywhere in the country. This speed of information determines the efficiency of
the market.
Explain why the use of borrowed fund increases the risk and increases the rate
of return.
IV. MOVING AVERAGE: It refers to the mean of the closing price which
changes constantly and moves ahead in time, there by encompasses the most
recent days and deletes the old one.
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random factors and on its relationship to this underlying factor with the
following formula:
Ri = ai + Bi I + ei
Where, Ri refers to expected return on security
ai = the intercept of a straight line or alpha coefficient
Bi = slope of straight-line or beta coefficient
I = level of market return index
ei = error, i.e. residual risk of the company.
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1) Compile the financials of the companies in the immediate past 3 years such
as turnover, gross profit, net profit before tax, compare the profit earning of
company with that of the industry average nature of product manufacture
service render and it future demand ,know about the promoters and their back
ground, dividend track record, bonus shares in the past 3 to 5 years ,reflects
company’s commitment to share holders the relevant information can be
accessed from the RDC (Registrant of Companies) published financial results
financed quarters, journals and ledgers.
2) Watch out the highs and lows of the scripts for the past 2 to 3 years and their
timing cyclical scripts have a tendency to repeat their performance, this
hypothesis can be true of all other financial,
3) The higher the trading volume higher is liquidity and still higher the chance
of speculation, it is futile to invest in such shares who’s daily movements
cannot be kept track, if you want to reap rich returns keep investment over
along horizon and it will offset the wild intraday trading fluctuation’s, the
minor movement of scripts may be ignored, we must remember that share
market moves in phases and the span of each phase is 6 months to 5 years.
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CHAPTER – 6
PERSONS INVOLVED IN PORTFOLIO MANAGEMENT
1) INVESTOR:
Are the people who are interested in investing their funds?
2) PORTFOLIO MANAGERS:
Is a person who is in the wake of a contract agreement with a client, advices or
directs or undertakes on behalf of the clients, the management or distribution or
management of the funds of the client as the case may be.
The portfolio manager carries out all the transactions pertaining to the
investor under the power of attorney during the last two decades, and
increasing complexity was witnessed in the capital market and its trading
procedures in this context a key (uninformed) investor formed ) investor
found himself in a tricky situation , to keep track of market movement
,update his knowledge, yet stay in the capital market and make money ,
therefore in looked forward to resuming help from portfolio manager to do
the job for him The portfolio management seeks to strike a balance between
risk’s and return.
The generally rule in that greater risk more of the profits but S.E.B.I. in its
guidelines prohibits portfolio managers to promise any return to investor.
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Only those who are registered and pay the required license fee are eligible to
operate as portfolio managers. An applicant for this purpose should have necessary
infrastructure with professionally qualified persons and with a minimum of two
persons with experience in this business and a minimum net worth of Rs. 50lakh’s. The
certificate once granted is valid for three years. Fees payable for registration are Rs
2.5lakh’s every for two years and Rs.1lakh’s for the third year. From the fourth year
onwards, renewal fees per annum are Rs 75000. These are subjected to change by the
S.E.B.I.
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Advisory role: Advice new investments, review the existing ones, identification
of objectives, recommending high yield securities etc.
Conducting market and economic service: This is essential for
recommending good yielding securities they have to study the current fiscal
policy, budget proposal; individual policies etc further portfolio manager should
take in to account the credit policy, industrial growth, foreign exchange possible
change in corporate law’s etc.
Financial analysis: He should evaluate the financial statement of company in
order to understand, their net worth future earnings, prospectus and strength.
Study of stock market : He should observe the trends at various stock
exchange and analysis scripts so that he is able to identify the right securities
for investment
Study of industry: He should study the industry to know its future prospects,
technical changes etc, required for investment proposal he should also see the
problem’s of the industry.
Decide the type of port folio: Keeping in mind the objectives of portfolio a
portfolio manager has to decide whether the portfolio should comprise equity
preference shares, debentures, convertibles, non-convertibles or partly
convertibles, money market, securities etc or a mix of more than one type of
proper mix ensures higher safety, yield and liquidity coupled with balanced risk
techniques of portfolio management.
A portfolio manager in the Indian context has been Brokers (Big brokers) who
on the basis of their experience, market trends, Insider trader, helps the limited
knowledge persons. The one’s who use to manage the funds of portfolio, now being
managed by the portfolio of Merchant Bank’s, professional’s like MBA’s CA’s And
many financial institution’s have entered the market in a big way to manage portfolio
for their clients.
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The portfolio manager has number of obligations towards his clients, some of
them are:
He shall transact in securities within the limit placed by the client himself with
regard to dealing in securities under the provisions of Reserve Bank of India
Act, 1934.
He shall not derive any direct or indirect benefit out of the client’s funds or
securities.
He shall not pledge or give on loan securities held on behalf of his client to a
third person without obtaining a written permission from such clients.
While dealing with his client’s funds, he shall not indulge in speculative
transactions.
He may hold the securities in the portfolio account in his own name on behalf
of his client’s only if the contract so provides. In such a case, his records and
his report to his clients should clearly indicate that such securities are held by
him on behalf of his client.
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He shall deploy the money received from his client for an investment purpose
as soon as possible for that purpose.
He shall pay the money due and payable to a client forthwith.
He shall not place his interest above those of his clients.
He shall not disclose to any person or any confidential information about his
client, which has come to his knowledge.
o Ensure that the investors are provided with true and adequate information
without making any misguiding or exaggerated claims.
o Ensure that the investors are made aware of the attendant risks before any
investment decision is made by them.
o Render the best possible advice to his clients relating to his needs and the
environment and his own professional skills.
o Ensure that all professional dealings are affected in a prompt, efficient and cost
effective manner.
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CHAPTER - 7
INVESTMENT ANALYSIS
MEANING OF INVESTMENT
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MEANING OF SECURITY
The important financial instruments are shares, debentures, bonds, etc. other
financial instruments are also known as Treasury bills, Mutual Fund Units, Fixed
Deposits, Insurance Policies, Post Office Savings like National Savings certificates,
Kisan Vikas Patras, public provident Funds etc. These securities are used by the
investors for their investment. Some of these securities are transferable while some of
them are not transferable.
INVESTMENT AVENUES
The alternative investment avenues for the investor are to be considered first
so as to satisfy the above objectives of investors. The following categories of
investors are open to investors as avenues for savings to flow in financial form:
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(a) Investment in Bank Deposits – Savings And Fixed Deposits: This is the
most common form of investment for an average Indian and nearly 40% of
funds in financial savings are used in this form these are least risky but the
return is also low.
(c) Insurance Schemes of LIC/GIC etc. and Provident and Pension Funds:
About 20-25% of financial savings of the household sector are put in these
forms and P.F., Pension and other forms of contractual savings.
(e) Investment in New Issues Market: A new entrant in the Stock Market should
preferably invest in New Issues of existing and well reputed companies either
in equity or debentures. Incidentally the instruments in which investment can
be made in the new issues market are:
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2. Products manufactured and demand for those products at home or abroad – the
competitors and the share of each in the market.
5. Prospects through projected earnings, net profits and dividend paying capacity,
waiting period involved, etc.
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1. Study the Balance Sheet of the company and analyze the prospects of sales
and profits.
2. Analyze the market price in terms of book value and profit earning capacity
(or P/E Ratio) and use them to know whether the share is overvalued or
undervalued.
3. Study the expansion plans or tax savings plans and analyze the company’s
financial strength, bonus and dividend paying strength, through the
mechanism of financial ratios.
4. Study whether the management is professional and good, whether other
accounting practices are dependable and consistent. The company becomes
attractive to buy if the financial ratios support the view that the fundamentals
are strong and the shares are worth buying.
5. Lastly, if the price of the share is undervalued on the basis of the projected
earnings for the coming half year or one year and its P/E Ratio is below the
industry average, then it is worth buying. The same is worth selling if in his
judgement it is overhauled. For assessing the under valuation and over
valuation, the analyst and his analytical power count for this purpose.
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4. Study the sales, gross profit, net profit in relation to equity capital employed
and attempt a forecast for the coming half year or one year.
5. A declaration of bonus or low P/E ratio, along with strong fundamentals shows
that the company should be a good buy.
6. The investor should also watch for low priced shares which are about to turn
around for more profitability in future.
7. Investors should buy on declines and follow the principle of contrariness. This
means that if everyone is buying scrip, avoid that scrip but if a scrip is
deserted and your study has shown that is has potential; for expanding
earnings and profitability, then such scrip’s should be purchased by the
investor.
8. Avoid both fear and greed on the stock market. If investor is not afraid of the
market, he generally studies the market and buys at lows and sells at highs.
9. The investor should know how to analyze the security prices of companies and
pick up the undervalued shares. The valuation may be based on the net profits
discounted to the present by a proper discount rate or by the book value of
share, estimated on the basis of net worth of the company.
10. Timing of purchase and sale is also very important. If technical analysis and
the use of charts is not familiar to the investor he should follow the principle
“buy low and sell high”. He should see whether there is a bull market or bear
market in a share by a study of the share price over a period of 15 to 30 days.
In a bull phase one can sell at one of the peaks and in a bear phase one can buy
at one of troughs. If the investor is greedy to wait on to see the maximum
peak, and then he may be disappointed if the price shows a down trend.
Similarly, it is difficult to foresee the lowest price for a scrip for the buy. The
investor has to use his discretion.
1) He should not put all his eggs in one basket which means that he should not
put all his funds in one or two companies.
2) Do not go by heresy or rumours to buy or sell a scrip as that might be a dupe.
3) Do not speculate involving the buying and selling in the same day or during
the same settlement period. A long – term investor gains more than speculator.
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4) Avoid taking undue risks or beyond the capacity of your net worth. That
means if capital base is Rs. 2 lakhs, put a stop loss order at Rs. 20,000/- (or 1/8th or
1/10th of the capital base).
5) Do not get panicky if the scrips in which you have invested go down in price.
Once the investment is made after a study of fundamentals, a temporary fall in its
price should not cause worry. What the investor needs is patience, which is
possible if he is a long – term investor.
6) Do not be too greedy or ambitious. Put limits to your operations and buy and
sell orders in a price range and your minimum profit limit is 20%.
INVESTMENT STRATEGY
Active strategy is based on the assumption that it is possible to beat the market.
This is done by selecting assets that are viewed as under priced or by changing the
asset mix or proportion of fixed income securities and shares. Active strategy is
carried out as follows:
The passive strategy does not aim at outperforming the market. Unlike the
active strategy. On the other hand the stocks could be randomly selected on the
assumption of a perfectly efficient market. The objective is to include in the portfolio
a large number of securities so as to reduce risks specific to individual securities. The
characteristics of positive strategy are:
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The truth is that any investment is a speculation if the investor uses his
judgement and forecast the probable course of events in order to reap the returns on
his investment.
ELEMENTS OF INVESTMENTS
(a) Return: Investors buy or sell financial instruments in order to earn return on
them. The return on investment is the reward to the investors. The return
includes both current income and capital gains or losses, which arises by the
increase or decrease of the security price.
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(b) Risk: Risk is the chance of loss due to variability of returns on an investment.
In case of every investment, there is a chance of loss. It may be loss of
interest, dividend or principal amount of investment. However, risk and return
are inseparable. Return is a precise statistical term and it is measurable. But
the risk is not precise statistical term. However, the risk can be quantified: The
investment process should be considered in terms of both risk and return.
(c) Time: Time is an important factor in investment. It offers several different
courses of action. Time period depends on the attitude of the investor who
follows a ‘buy and hold’ policy. As time moves on, analysts believe that
conditions may change and investors may revaluate expected return and risk
for each investment.
FINANCIAL ANALYSIS
An analysis of financial for the past few years would help the investment
manager in understanding the financial solvency and liquidity, the efficiency with
which the funds are used, the profitability, the operating efficiency and operating
leverages of the company. For this purpose certain fundamental ratios have to be
calculated.
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CHAPTER - 8
ASSEST ALLOCATION
INTRODUCTION
The portfolio manager has to invest in these securities that form the optimal
portfolio. Once a portfolio is selected the next step is the selection of the
specific assets to be included in the portfolio. Assets in this respect means
group of security or type of investment. While selecting the assets the
portfolio manager has to make asset allocation. It is the process of dividing the
funds among different asset class portfolios.
ASSET ALLOCATION
The different asset class definitions are widely debated, but four common
divisions are stocks, bonds, real-estate and commodities. The exercise of
allocating funds among these assets (and among individual securities within
each asset class) is what investment management firms are paid for.
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as to outperform certain benchmarks (e.g., the peer group of competing funds, bond
and stock indices).
The basic long term objective of any investor should be to maximize his real
overall return on initial investment after investment. To achieve this objective, the
investor should look where the best bargains lie.
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a) Liquidity or marketability
b) Safety of investment
c) Tax Saving
d) Maximization of return
e) Minimization of return
f) Capital appreciation or gain
g) Funds requirements
There are two approaches to the selection of equity portfolio. One is technical
analysis and the other is fundamental analysis. Technical analysis assumes that the
price of a stock depends on supply and demand in the capital market. All financial
and market information of given security is already reflected in the market price.
Charts are drawn to identify price movements of a given security over a period of
time. These charts enable us to predict the future movement of the security.
The fundamental analysis includes the study of ratio analysis, past and present
track record of the company, quality of management, government policies etc…
an efficient portfolio manager can obviously give more weight to fundamental
analysis than technical analysis.
DIVERSIFICATION
Investing funds in a single security is advisable only if the security’s
performance is rewarding. To reduce risk of a portfolio investors resort to
diversification. Diversification means shifting form one security to another
security. The maximum benefits of risk reduction can be achieved by just
having of 10 to 15 carefully selected securities.
Portfolio risk can be divided into two groups- diversible risk and non-
diversible risk. Diversible risk arises from company’s specific factors. Hence, such
risk can be diversified by including stocks of other companies in the portfolio. Non-
diversible risk arises from the influence of economy wide factors which affect returns
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of all companies; investors cannot avoid the risk arising from them. Often investors
tend to buy or sell securities on casual tips, prevailing mood in the market, sudden
impulse, or to follow others. An investor should investigate the following factors
about the stock to be included in his portfolio:
(a) Earnings per share (b) Growth potential (c) Dividend and bonus records (d)
Business, financial and market risks (e) Behavior of price-earnings ratio (f) High and
low prices of the stock (g) Trend of share prices over the few months or weeks.
Y C
--------------------------------------- B HIGH RISK (SHARES)
A (DEBENT) MEDIUM
RISK
O X
Risk free (Bank Deposits)
We can observe from the above diagram that the strategy of an investor should
be at A, B or C respectively, depending upon his preferences and income
requirements. If he takes some risk at B or C, the risk can be reduced if it is concerned
with a specific company risk, but the market risk is outside his control. The risk can
be reduced by a proper diversification of scripts in the portfolio. There may be a
combination of A, B and C positions in his portfolio so that he can have a diversified
risk-return pattern. This diversification can help to minimize risk and maximum the
returns.
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CONCLUSION
“I believe the future is only the past again, entered through another gate” –Sir
Arthur wing Pinero. 1893.
A Casino make money on a roulette wheel, not by knowing what number will
come up next, but by slightly improving their odds with the addition of a “0” and
“00”. Yet many investors buy securities without attempting to control the odds. If we
believe that this dealings is not a ‘Gambling” we have to start up it with intelligent
way.
I can conclude from this project that portfolio management has become an
important service for the investors to identify the companies with growth potential.
Portfolio managers can provide the professional advice to the investors to make an
intelligent and informed investment.
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Portfolio management role is still not identified in the recent time but due it
expansion of investors market and growing complexities of the investors the services
of the portfolio managers will be in great demand in the near future.
Today the individual investors do not show interest in taking professional help
but surely with the growing importance and awareness regarding portfolio’s
manager’s people will definitely prefer to take professional help.
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BIBLIOGRAPHY
REFERENCE BOOKS:
WEBLIOGRAPHY
SOURCES:
www.google.com
www.yahoo.com
www.wikipedia.com
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