A REPORT

ON

ANALYSIS OF INDIAN DERIVATIVE MARKET AND

PORTFOLIO CONSTRUCTION

BY

Nibedita Mishra

07BS2527

1
 A REPORT
ON

ANALYSIS OF INDIAN DERIVATIVE MARKET AND

PORTFOLIO CONSTRUCTION

BY

Nibedita Mishra

07BS2527

A report submitted in partial fulfillment of the requirements of

2-year Full Time MBA Program
At
ICFAI Business School, Bangalore

Faculty Guide: Company Guide:

Dr. Padma Srinivasan Mr. Balaji Rao
Faculty Assistant Vice President
ICFAI Business School, Karvy finapolis,
Bangalore. Bangalore.

2
 ACKNOWLEDGEMENT

I would like to take this opportunity to extend my sincere gratitude to my Company

Guide, Mr. Balaji Rao, Assistant Vice-President of Karvy Stock Broking Ltd.,
Bangalore for providing me the opportunity to conduct a project under his
esteemed guidance.

I would like to express my most sincere gratitude to my Faculty Guide Dr. Padma
Srinivasan, Faculty IBS-Bangalore for the invaluable guidance, uninterrupted
supervision, encouragement and motivation she had extended for this project. I am
indebted to her guidance and valuable suggestion.

3
 ABSTRACT
The project undertaken is analysis of derivatives in Indian market and how derivatives in Indian
market are been used by investors what are the various strategies followed by them according to
market fluctuations.

• First part is to understand the market movements in Indian derivatives market, the
various types of derivatives in Indian market and a comparison between them, the types
of contracts in derivatives such as forward contracts, future contracts, option contracts,
swaps.

• I have explained straddle strategy and how one investor can mitigate its losses and
maximize its returns by using this strategy.

• With this the various advantages of derivatives like leverage and liquidity, also some uses
of derivatives such as speculation, arbitrage and hedging.

• Second part of the project is about portfolio management.

• It deals with the construction of an optimal portfolio on the basis of risk-return

evaluation, loss minimization and profit maximization.

• In this part why portfolios are made and what are points to be considered in making a
portfolio are explained. With this which sectors to be taken and under that sector what are
the companies to be taken are described.

• Portfolios are made for Stocks, Mutual Funds and on asset allocation.

4
 TABLE OF CONTENTS
SERIAL NO. CONTENT PAGE NO.
Acknowledgement Iii
Abstract Iv
1 INTRODUCTION
1.1 Company Background 1
1.2 Project Description 3
1.3 Objective 4
1.4 Methodology 4
1.5 Limitations of the study 4
2 DERIVATIVES
2.1 Derivatives in India 5
2.2 Derivatives Market Players 5
2.3 Forwards & Futures 6
2.4 Options 7
2.5 Straddle Strategy 11
3 SWOT ANALYSIS OF INDIAN 15
DERIVATIVE MARET
4 PORTFOLIO CONSTRUCTION
4.1 Objective of Portfolio Construction 16
4.2 Diversification of Portfolio 16
4.3 Types 17
4.4 Industry Analysis 17
4.5 Company Analysis 23
4.6 Portfolios constructed on Stocks 30
4.7 Portfolio on asset allocation 36
4.8 Mutual Fund 41
4.8.1 Constructed portfolios in Mutual Funds 44
5 Data Analysis 52
6 Findings 57

5
7 Conclusion 58
8 References 59

1. INTRODUCTION:

1.1 Company Profile: -

• Karvy is a premier financial services provider and came among the top 5 in India in all its
business segments.
• In 1982, it began with a small group of practicing Chartered Accountants who founded
the flagship company-Karvy Consultants Limited.
• Karvy covers the financial services such as Stock Broking, Depository Participants,
Distribution of Financial Products- Mutual Funds, Bonds, Fixed Deposits, Equities,
Insurance Broking, Commodities Broking, Personal Finance and Advisory services,
Merchant Banking and Corporate Finance, Placement of Equity, IPOs, among
others.
• Karvy has a Professional Management team and ranks among the best in Technology,
Operations and Research of various Industrial Segments.
• Over the last 20 years Karvy has travelled the success route, towards building a reputation
as an integrated financial; services provider, offering a wide spectrum of services.
• Karvy highly qualified man power, cutting-edge technology, comprehensive
infrastructure and total customer-focus has secured for us the position of an emerging
financial services giant enjoying the confidence and support of an enviable clientele
across diverse fields in the financial world.

Milestones:

• 1982: Audit and taxation services

• 1985: Share registry and transfer (R&T)

Business recently hived off to a joint venture of 50:50 with Computershare Ltd.,
Australia

• 1990: Retail broking operations (cash segment) commenced on the HSE.

• 1990-95: Distribution of investment products (Mutual funds, IPOs, Bonds etc)

Commenced NSE operations

• 1997: Custodial services launched

6
 • 2001-02: Equity Derivatives broking commenced

Expanding Institutional segment clientele

Setting up of the research desk and Private Client Group at Mumbai

Management Team: -

• K Sridhar
• V Mahesh
• V Ganesh
• S Gopichand
• J Ramaswamy
• M S Manohaar
• S Ganapatahy Subramanian

Achievements: -

• Among the top 5 stock brokers in India (4% of NSE volumes)

• India's No. 1 Registrar & Securities Transfer Agents
• Among the top 3 Depository Participants
• Largest Network of Branches & Business Associates
• ISO 9002 certified operations by DNV
• Among top 10 Investment bankers
• Largest Distributor of Financial Products
• Adjudged as one of the top 50 IT uses in India by MIS Asia
• Full- Fledged IT driven operations

7
1.2 Project Description:
The project undertaken is analysis of derivatives in Indian market and how derivatives in Indian
market are been used by investors. What are the various strategies followed by them according to
market fluctuations.

First part is to understand the market movements in Indian derivatives market, the various types
of derivatives in Indian market and a comparison between them, the types of contracts in
derivatives such as forward contracts, future contracts, option contracts, swaps.

With this the various advantages of derivatives like leverage and liquidity, also some uses of
derivatives such as speculation, arbitrage and hedging.

Analysis of Indian derivatives starts with taking volume and price of index futures, index
options, stock futures and stock options from existence to till date from these data factors like
growth and correlation between the index movements with derivatives can be found out. Hence
project overall helps us in understanding the market movements with the help of market
indicators and proper positions can be taken by using trading strategies.

I have explained straddle strategy and how it is used to maximize returns and to minimize losses
of an investor.

Second part of the project is about portfolio management.

It deals with the construction of an optimal portfolio on the basis of risk-return evaluation, loss
minimization and profit maximization.

In this part why portfolios are made and what are points to be considered in making a portfolio
are explained. With this which sectors to be taken and under that sector what are the companies
to be taken are described.

8
Based on the following 3 points portfolios are made. Those are

1. The risk taking capacity

2. The return objective

3. The waiting period

In a last line how to get maximum return with taking minimum risk is the main objective of
portfolio construction.

1.3 Objectives:
• To understand the market movements in Indian derivatives market.

• To construct an optimal portfolio with maximum return taking minimum risk.

• To study the risk management of various stocks and portfolio with the index futures by
using different strategies.

• To get a clear knowledge of the market, in terms of risk and return factor of derivatives.
• The project will further help us in understanding more about pricing strategies and
techniques used in futures and options market.
• It will further enhance our knowledge in terms of futures and options trading.
• Futures are one of the upcoming segments in the Stock market, and knowledge of the
same for trading becomes essential for every trader.

1.4 Methodology:
The methodology to be adopted while executing the project will be as follows.

• Collecting secondary data from websites, analyst reports, annual reports, news articles
and PROWESS.
• Understanding the demand and supply of natural resources and their impact on the
markets as a whole.
• Understanding various fluctuations in markets due to various impacts.
• Understand the relationship between economy and various markets.
• Documenting the findings.

1.5 Limitations:

9
 • The required return we will get is only the prediction not the exact one.

• If the market conditions are not fluctuated the calculated returns are true.

• Time is major limitations here.

• Controlling risk and avoiding losses cannot be avoided completely.

• Complete awareness of the product from the investors perspective

2. DERIVATIVES:

Derivatives:

• Derivative is a product whose value is derived from the value of one or more basic
variables, called bases (underlying asset, index or reference rate) in a contractual manner.

• The underlying asset can be equity, Forex, commodity or any other asset.

• Derivative contracts have several variants. The most common variants are forwards,
futures, options and swaps.

2.1 Derivatives in India:

Derivatives markets broadly can be classified into two categories, those that are traded on the
exchange and those traded one to one or ‘over the counter’. They are known as

• Exchange Traded Derivatives

• OTC Derivatives (Over The Counter)

2.2 Derivatives market players:

Hedgers: The objective of these kinds of traders is to reduce the risk. They are not in
the derivatives market to make profits. They are in it to safeguard their existing positions.
Apart from equity markets, hedging is common in the foreign exchange markets where
fluctuations in the exchange rate have to be taken care of in the foreign currency

10
 transactions or could be in the commodities market where spiraling oil prices have to be
tamed using the security in derivative instruments.

Speculators: They are traders with a view and objective of making profits. They are
willing to take risks and they bet upon whether the markets would go up or come down.

Arbitrageurs: Riskless Profit Making is the prime goal of Arbitrageurs. Buying in one
market and selling in another, buying two products in the same market are common. They
could be making money even without putting their own money in and such opportunities
often come up in the market but last for very short timeframes. This is because, as soon as
the situation arises arbitrageurs take advantage and demand-supply forces drive the
markets back to normal.

2.3 Forwards and futures:

Every futures contract is a forward contract. They:

• Are entered into through exchange, traded on exchange and clearing corporation/house
provides the settlement guarantee for trades.
• Are of standard quantity; standard quality (in case of commodities).
• Have standard delivery time and place.

COMPARISON OF FORWARDS AND FUTURES:

Features Forward Contract Future Contract

Operational Mechanism Not traded on Traded on exchange

exchange

Contract Specifications Differs from trade to Contracts are standardized contracts.

trade.

Counterparty Risk Exists Exists, but assumed by Clearing

Corporation/ house.

11
 Liquidation Profile Poor Liquidity as Very high Liquidity as contracts are
contracts are tailor standardized contracts.
maid contracts.

Price Discovery Poor; as markets are Better; as fragmented markets are

fragmented. brought to the common platform.

2.4 TRADING STRATEGIES FOR OPTIONS

Strategy is a plan how to enter into a market and when to exit and what could be the possible
outcome of profit and what could be the maximum loss that we may incur by implementing
There are many strategies available for trading options. A few like

• Long call
• Long put
• Short put
• Short call

These strategies are explained in brief in order to get a fair idea to trade in different markets like
bullish, bearish and flat.

Strategy 1:-

Long call
Profit Unlimited ,increase as the spot price increases
Loss Limited to the premium paid
Break even Strike price +premium
Time decay Hurts
Use Very bullish outlook
Volatility Volatility increase helps the position
Margin No

Profit +ve

PROFIT
12

Profit +ve
 STRIKE
PRICE

BEP

PROFIT

Price 

Pay off diagram

Here downside risk can be hedged by taking protective put.

Strategy 2:

Long put
Profit Unlimited increases as spot price decreases
Loss Limited to the premium paid
Break even Strike price - premium
Time decay Hurts
Use Very bullish
Volatility Volatility increases helps the profit
Margin No

PROFIT
+VE
STRIKE

PROFIT
B
-VE
EP
13
 PRICE ->

Pay off diagram

Here upside risk can be hedged by taking protective call

Strategy3:

Short put
Profit Limited to premium
Loss Unlimited increases as the spot price decreases
Break even Strike price – premium
Time decay Helps
Use Bullish outlook
Volatility Volatility decrease helps the position
Margin Yes

BEP

PROFIT
PREMIUM

STRIKE

PROFIT

PRICE --

14
 Pay off diagram

Strategy 4:

Short call
Profit Limited to the premium received
Loss Unlimited, increases as the spot price increases
Break even Strike + premium
Time decay Helps
Use Bearish outlook
Volatility Volatility decrease helps the position
Margin Yes

BEP
Profit +ve
PREMIUM

STRIKE

Profit -ve

PRICE 

Pay off diagram

15
2.5 STRADDLE STRATEGY
It is defined as an options strategy with which the investor holds a position in both a call
and put with the same strike price and expiration date.

Net effect on both a call and a

put option with the same
strike price and
Call only expiration

Profit or

Losses Stock Price

Put only

• An investor should consider buying Index Straddles when he is convinced that a

particular index will make a major directional move but is not sure in which direction.

• An index straddle involves both index call and index put with both the options having the
same strike price and expiration month.

Long Straddle (or Buy Straddle):

The long straddle is also known as buy straddle or simply "straddle” is a neutral strategy in
options trading that involve the simultaneously buying of a put and a call of the same underlying
stock, striking price and expiration date.

Profit or

Losses

0 30 40 50

Stock Price

16
 -400$ at expiration

Long straddles are unlimited profit, limited risk options trading strategies that are used when the
options trader thinks that the underlying securities will experience significant volatility in the
near term.

Unlimited Profit Potential:

Large profit is attainable with the long straddle when the underlying stock price makes a strong
move either upwards or downwards at expiration.

The formula for calculating profit is given below:

Maximum Profit = Unlimited

Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid OR
Price of Underlying < Strike Price of Long Put - Net Premium Paid

Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid OR Strike Price of
Long Put - Price of Underlying - Net Premium Paid

Limited Risk:

Maximum loss for the long straddle occurs when the underlying stock price on expiration date is
trading at the strike price of the options bought. At this price, both options expire worthless and
the options trader loses the entire initial debit taken to enter the trade.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying = Strike Price of Long Call/Put

Breakeven Point(s):

There are 2 break-even points for the long straddle. The breakeven points can be calculated using
the following formulae.

Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid

Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid

17
Case: 1

NIFTY was traded at a price of Rs.4320 in 1st April. An option trader enters a long straddle by
buying an April 4320 put for Rs 63 and an April 4320 call foe Rs 63. The net debit taken to enter
the trade is Rs 126, which is his maximum possible loss. The contract expired on 24th April.

On the day of expiry NIFTY was traded at a price of Rs. 4999. The 63 put was worthless but the
April 63 call expired in the money and had an intrinsic value of Rs 679. Subtracting the debt of
Rs. 126, the long straddle trader got a profit of Rs. 679- Rs. 126 = Rs 553

On expiration in July, if NIFTY stock is still trading at Rs 4320, both the April 63 put and the
April 63 call expire worthless and the long straddle trader suffers a maximum loss which is equal
to the initial debit of Rs 126 taken to enter the trade.

Short Straddle (or Sell Straddle):

The short straddle is a neutral options strategy that involves the simultaneous selling of a put and
a call of the same underlying stock, striking price and expiration date.

Short Straddle Construction

Sell 1 ATM Call

Sell 1 ATM Put

Short straddles are limited profit, unlimited risk options trading strategies that are used when the
options trader thinks that the underlying securities will experience little volatility in the near
term.

400$

Profit or losses

0$ 30 40 50

Stock price at

Expiration

18
Limited Profit:

Maximum profit for the short straddle is achieved when the underlying stock price on expiration
date is trading at the strike price of the options sold. At this price, both options expire worthless
and the options trader gets to keep the entire initial credit taken as profit.

The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received - Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Call/Put

Unlimited Risk:

Large losses for the short straddle can be incurred when the underlying stock price makes a
strong move either upwards or downwards at expiration, causing the short call or the short put to
expire deep in the money.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Strike Price of Short Call + Net Premium Received OR
Price of Underlying < Strike Price of Short Put - Net Premium Received

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received OR Strike Price
of Short Put - Price of Underlying - Net Premium Received + Commissions Paid

Breakeven Point(s):

There are 2 break-even points for the short straddle. The breakeven points can be calculated
using the following formulae.

Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

Case: 2

NIFTY in options was trading at a price of Rs. 4320 in 1st April. An options trader enters a short
straddle by selling an April 4320 put for 65 and an April 4400 call for 65. The net amount taken
to enter the trade is Rs (65+65) = Rs 130. This is the maximum possible profit

On the date of expiry the value of NIFTY was 4999. The April 65 put expired worthless but the
April 65 call expired in the money and with an intrinsic value of Rs (4999 – 4320) = Rs 599.
Deducting the net of Rs 130, the short straddle trader’s loss was 599- 130= Rs 469

19
On expiration in April, if NIFTY index is still trading at Rs 4400, both the April 65 put and the
April 65 call expire worthless and the short straddle trader gets to keep the entire initial credit of
Rs 130 taken to enter the trade as profit.

3. SWOT ANALYSIS OF INDIAN DERIVATIVE MARKETS:

20
4. PORTFOLIO CONSTRUCTION:

Portfolios are held directly by investors or managed by financial professionals. There are 4 basic
steps involved in portfolio construction.

-Security valuation
- Asset allocation
-Portfolio optimization
-Performance measurement

4.1 Objectives of portfolio management:

- Safety of the investment
-Stable current returns
- Appreciation in the value of capital
-Marketability
-liquidity

4.2 Diversification of portfolio:-

Investing all the funds in just one or two stocks may not be desirable because of the risks
involved. It is necessary to spread the investment over a flow selected securities.

There are 2 types of diversification are explained below.

1- Naïve diversification:-

• In this type, securities are selected in a random basis only reduces the risk of a portfolio
to a limited extent.

• When the numbers of securities in a portfolio are 10 of 12, the risk decreases to the level
of systematic risk in the market.

• When it is beyond 15, there is no decrease in total risk.

2- Markowitz diversification:-

According to Markowitz, naïve diversification may not reduce the volatility of the rate of return
of a portfolio, if the prices of different securities in the portfolio move in a similar fashion.

21
 So effective diversification is achieved only if the securities tend to fluctuate in opposing fashion
that means the portfolio must have some stocks with positive betas and other with negative betas.

The purpose of effective diversification is to significantly reduce the volatility of a portfolios rate
of return.

4.3 TYPES OF PORTFOLIOS:

 Portfolios of Stocks

 Portfolios of mutual funds

 Portfolios on Asset allocation

Based on the following 3 points portfolios are made. Those are

1. The risk taking capacity

2. The return objective

3. The waiting period

1. Portfolios of Stocks:

To construct this type of portfolio, first some sectors are selected based on their past
performances, growth prospective.

Here are the details of some growing sectors performances.

4.4 Industry Analysis:

INDUSTRY ANALYSIS: BANKING SECTOR
• With the Indian economy growing at 9% and investments riding high, the Indian banking
sector is on an upswing.
• Banking in India is fairly mature in terms of supply, product range but reach in rural India
still remains a challenge for the private sector and foreign banks.
• Currently, India has 88 scheduled commercial banks—28 public sector banks, 29
private banks and 31 foreign banks.
• They have a combined network of over 53,000 branches and 17,000 ATMs.
• The public sector banks hold over 75% of total assets of the banking industry, with the
private and foreign banks holding 18.2% and 6.5% respectively.
• Interest income growth estimated to be 32.8%
• Operating profit is estimated to rise by around 15.6% and net profit by 27.5% in 07.

22
 • OPM (Operating Profit Margin) and NPM (Net Profit Margin) registered a decline of 362
basis points and 52 basis points respectively due to higher interest expanded. During
2007, OPM was estimated to be 24.43%, whereas NPM was around 12.78%.

Financial Performance:

Most of the banks are going for branch expansion and ramping up employee base and are
expected to face higher operating expenses in absolute terms.

However, due to efficient management of funds, stronger other income growth and high
proportion of retail loans will see margins reaching higher levels.

Operating Profit Margin (OPM) of banks like Kotak, Axis, Syndicate, BOI, and PNB are
estimated to improve during 2007 as against 2006. OPM of Kotak, Axis, Syndicate, BOI, and
PNB are estimated to be 32.8%, 24.9%, 18.7%, 28% and 21.1% respectively.

INDUSTRY ANALYSIS: CEMENT SECTOR

• The cement industry is a core sector and plays one of the major roles for the growth of the
country. Cement is one of the most basic construction materials, and hence, an essential
item for the infrastructure development of the country.

• The strong demand for this sector is due to the following reasons:

-Strong housing demand

-Higher level of commercial construction activity

23
 -Increased government focus on infrastructure spending

-Higher investment in industrial projects

• Indian economy grew at annual rate of 8.9% during 2007. Higher farm output and
improved growth in the mining sector helped Indian economy to grow at 8.9% despite a
sharp slowdown in manufacturing growth.
• The developing economy and the resulting improvements in income dynamics along with
factors like favorable demographics and spending patterns are driving the
consumption demand.
• With rising income, the consumption has also scaled a new height, giving rise to a new
middle class, with higher aspiration.
• The Indian cement industry is second in the world after China. 95% is consumed
domestically and only 5% is exported.
• Demand is growing at more than 10% per annum. More than 90% of production comes
from large cement plants.
• There are a total of 130 large and more than 350 small cement manufacturing units in
the country.
• Cement industry in India is poised for strong growth, driven by continued investments in
housing and infrastructure.
• The increase in sales was 14% during 2007 compared with 2006. It is mostly contributed
by industry majors like ACC, Ambuja, Grasim and Ultratech.
• Huge investments planned for infrastructure both by government and private sector,
booming housing construction and expansion in corporate production facilities is likely to
fast forward the growth in the Indian cement industry.
• The increase in EBITDA by 11% also shows the operational effectiveness of the cement
industry as a whole. Interest expenses have registered a growth of 6%. Reported PAT has
changed by 13%.

INDUSTRY ANALYSIS: OIL AND GAS SECTOR

• India’s state-owned Oil and Natural Gas Corporation (ONGC) is the largest oil
company in India’s upstream sector, accounting for three-fourths of the total
production during 2007.
• The sector contributes about 45% of India’s primary energy consumption.
• India is the sixth largest crude consumer and the ninth largest crude importer in the
world. About 30.87% and 11.21% is contributed by oil and gas sector to the overall
imports and exports respectively.
• India has the sixth largest refining capacity — 2.56m barrels per day, which
represent 2.99% of world capacity.

24
Industry Revenue:

• During 2007, the net sales of the oil and gas industry jumped by 6.5% to Rs1, 658,400m
from Rs1, 557,139m in 2006. The price rise of the crude oil has affected all the
downstream players and the government has ordered the upstream players to support
them.
• The operating profit of the industry jumped from Rs145, 343.70m to Rs170, 704.40m, i.e.
a growth of 17.44%, during 2007 with respect to the previous year.
• The operating profit margin also showed an upward trend with an increase from 9.33% to
10.29% compared to the corresponding the previous year. Due to increase in the crude oil
prices, many companies imported less oil. As a result, there was reduction in the costs
associated with raw materials.
• The net profit of the oil and gas industry jumped from Rs102, 147.70m in 2006 to Rs127,
937.90m during 2007, witnessing an increase of 25.24%.
• The NPM of the quarter jumped from 6.56% to 7.71% during 2007 with respect to the
corresponding previous year. There was reduction in the costs associated with
depreciation and the provision for deferred tax was also reduced.

INDUSTRY ANALYSIS: POWER SECTOR

• India’s GDP is projected to grow at 10% in the 11th Plan Period (2007-12); the desirable
growth rate for power sector would be 12%.
• To meet the projected demand in 2011-12, additional capacity requirement of about
78,500MW is required to be added during the plan period.
• Recognizing that electricity is one of the key drivers for rapid economic growth and
poverty alleviation, the industry has set itself the target of providing access to all
households in the next seven years.
• About 44% of the households do not have access to electricity.
• Hence, meeting the target of providing universal access is a daunting task, requiring
significant addition to generation capacity and expansion of the transmission and
distribution network.
• The industry is expected to grow at 27% in terms of sales in JFM08.
• The operating profit of the industry is expected to grow at 28% and net profit at
12% compared with same period of the previous year.
• The year 2007 was favorable for the power industry compared with the year 2006.
• OPM for the 2007 is estimated to be 24.43%, showing an increase of 247 basis points
compared with the same period of the previous year.
• Operating profit is expected to touch Rs43.84 billion, showing an increase of 30% during
the same period.
• Net profit for 2007 is expected to have touched Rs35.58 billion, reporting an increase of
14.3% compared to same period of the previous year.
• Despite the rise in net profit, NPM will record 19.83%, a decline of 51 basis points
compared to same period of the previous year.
• Depreciation expenses for the quarter are expected to decline by 145 basis points.

25
 • On the other hand, interest and tax expenses are expected to jump by 91 and 317 basis
points.

INDUSTRY ANALYSIS: TELECOM SECTOR

• Service sector is one of the most significant sectors of the Indian economy, contributing
nearly 55% to the GDP in 2006–07. The services sector in 2007 was down at 10.2%
compared with 11.8% in 2006.
• But it continued to be the key driver of economic activities, holding a share of more than
44% of GDP.
• The Indian telecom industry revenues is expected to witness a modest growth of 27%
and touch Rs142 billion in 2007 compared to 2006, crossing another milestone of 250m
subscribers in October 2007.
• The total number of telecom subscribers in the country touched 264m at the end of
November 2007, of which 225m were mobile subscribers and 39m were fixed/landline
subscribers.
• The overall tele-density improved further to 23% in November 2007 compared with 22%
in October 2006. Operating margins of the telecom industry is expected to decline from
35% in 2006 to 33% in 2007, reflecting an increase in their operational expenses in this
period.
• The net profit margin for the industry may also decline from 19% to 17% due to
increased interest expenses, taxes payable and increased depreciation on new physical
assets.
• However, the growth in the bottom-line (net profit) of the industry may be restricted to
14% reaching Rs24 billion in 07 as a result of 26% rise in depreciation and 36% rise in
taxes.
• Going by the number of mobile phone subscribers, India has become the world’s fastest
growing region.
Financial performance:

Sterlite Optical is expected to show the highest increase in net profits as well as a commendable
improvement in margins. This is because of increase in revenue coming from the acquisition of
Power Transmission business from Sterlite Industries (India) Limited. On the contrary, the net
profit for HFCL is expected to decrease by 88%, following which the net profit margin may dip
to 3.8% in 2007 from 14.1% in 2006.

INDUSTRY ANALYSIS: STEEL SECTOR

• India is one of the largest producers of sponge iron and the 5th largest crude steel
producer in the world with an overall crude steel production of about 50.72mmt in
2006-07.
• Its share in global steel production was approximately 4.04% in 2006.

26
 • The steel industry now accounts for a capital base of US$22.86 billion and contributes
around 6% to the gross national product, commanding a weight of 5.13 in the Index of
Industrial Production and provides direct employment to more than 0.4m people.
• On the basis of companies taken for projection, a total industry sale for 2007 is estimated
to be Rs353631.88m, with 9% growth on YoY basis.
• India has been growing at a CAGR of more than 9% per annum in spite of infrastructure
constraints.
• This is due to increase in staff and power cost. The NPM decreased by 173.89 basis
points due to increase in interest cost. The Net sales during 2008 are estimated register a
growth of 13% to reach for Rs403647.08m.
• Indian steel production was about 50.72mmt in 2006-07; it grew by 8.93% from 44.54mt
in 2006-07 and consumption recorded a significant growth of 11.56% to reach 46.14mmt.
These achievements indicate that a stable foundation for future development of Indian
steel industry has been laid.
• Import of steel rose by 23.89% from 4.31mmt in 2005-06 to 5.34mmt in 2006-07. Steel
export saw very little increase; it rose by 1.66% from 4.81mmt in 2006-07 to 4.89mmt in
2006-07.
• In India, the per capita consumption of steel is around 33kg as against 242kg in China
and an average of over 400kg in the developed countries. Looking at India's per capita
consumption of steel, one can say that there is room for growth in demand.
• Major growth drivers of steel include automobiles, construction, oil and gas and
consumer durable industry.
• The Government of India anticipates a three-fold rise in steel production capacity to
120m tonne, making India the second-largest steel producer in the world by 2016.
• There is a series of mega projects–either being implemented or in the proposal stage—
which once operational, will re-write the structure of steel industry and its dynamics. The
reform process will further boost the future of the industry.

INDUSTRY ANALYSIS: PHARMACEUTICAL SECTOR

• The global pharmaceutical market in 2007 registered a growth of 9%.
• The robust performance of the pharmaceutical companies in domestic markets and
overseas markets has resulted in sales upsurge.
• The reasons attributed to this upsurge include strong financial performance, dividend
announcements, healthy product pipeline, significant growth in money from Foreign
Converted Currency Bonds for M&A and aggressive marketing efforts. Globally, the
Indian market ranks fourth in terms of volume and 13th in terms of value.
• Indian pharmaceutical industry accounts for 1% of GDP. India currently holds US$7.3
billion of the US$643 billion global pharmaceutical industry. Indian pharmaceutical
industry size is increasing at 10% a year.
• During 2007, the industry registered 23% increase in sales and 13% jump in operating
profit on the back of segmental performance and exports.

27
 • Pharmaceutical industry witnessed an increase in product approvals; Aurobindo was
leading with highest number of approvals.
• The Indian pharma industry is expected to become a US$11.6 billion opportunity by the
end of 2009.
• The net sales of the pharmaceuticals industry will register a growth of 16% to Rs126,
039m during 2008 compared with corresponding quarter of the previous year.
Industry Revenue:

• On the back of increased exports and improved segmental performance, total industry
revenue rose by 23.46% to Rs112, 515.10m in 2007 as against Rs91, 128.25m in 2006.
• The major growth drivers for the industry during 2007 were penetration in geographical
markets to capture generics and increasing contract research and manufacturing
(CRAMS) projects.
• Acquisition of generic brands and launching of new products brought more revenues to
the industry.
• The net profit of the industry witnessed a jump by 16.73% from Rs18, 067.17m in 2006
to Rs21, 093.06m in 2007.

After the sector analysis, some stocks are picked from the growing sectors based on
their past performances and fundamental studies.

4.5 COMPANY ANALYSIS:

COMPANY NAME- DABUR INDIA LTD. SECTOR- FMCG

MARKET CAP- 9063.6 Cr (LARGE CAP) CMP-Rs 108.5
P/E-35.96 EPS- 2.92 INDUSTRY P/E-29.7

1:

Dabur India is the fourth largest company and one of the frontrunners in the FMCG sector with
interest in health care, personal care and food products. Dabur Retail’s H&B Stores brand ‘New
U’ is in the process of launching some of the world’s most sought after cosmetic and personal
care brands in India with an international tie up. Dabur plans to launch 150 outlets with an
investment of Rs 140 Cr by 2009-10. In FMCG sector it is the major player.

2:

28
 COMPANY NAME- AUROBINDO PHARMA SECTOR- PHARMACEUTICAL
MARKET CAP- Rs 1790.38Cr (MID CAP) CMP- Rs 308.2
P/E-5.3 EPS- Rs 55 INDUSTRY P/E-18.7

It manufactures generic pharmaceuticals and active pharmaceuticals ingredients. After month of

underperformance, the pharma sector is back to the limelight because of its defensive nature and
constant growth rate. Its focus is on generic business, which is more profitable. Recently
Aurobindo pharma has concluded a strategic deal, for acquisition of intellectual property and
marketing authorizations, with TAD Italy, a generic company. This deal will give Aurobindo
access to more than 70 ready to market products and the chance to enter the Italian generic
market. This deal will maximize the potential of synergies by shifting TAD’s product
manufacturing to Aurobindo’s facilities. The deduction of excise duty announced in the recent
budget will boost Aurobindo’s growth potential.

3:

COMPANY NAME- ABBOTT INDIA SECTOR-PHARMACEUTICAL

MARKET CAP- Rs 814.58Cr CMP-Rs 540
P/E-6.6 EPS-Rs79 INDUSTRY P/E-18.7

The company has decided to expand into drugs for HIV. Over the last couple of years, the
company has outperformed the Indian pharmaceutical industry, growing at 16% per annum.

Reasons for growth in India:

-Expansion in size of sales and marketing force.

For the last financial year ended 30 Nov 2007, Abbott India recorded a turnover of Rs 620 Cr, up
16.5% over the previous year. PAT was Rs 68.4 Cr, which represents an EPS of 46.43. The DPS
was 17.5 with respect to the current price of 524; this represents a PE of 10.88 and a dividend
yield of over 3%.

29
Margins have held steady for the last couple of years. The last quarter show a muted growth at
11% year on year.

COMPANY NAME- NESTLE INDIA SECTOR- FMCG

MARKET CAP- Rs 15144.02Cr CMP-Rs 1555
P/E- 36.6 EPS-Rs 42.9 INDUSTRY P/E-29.7
4:

NIL seems to be the best player on the Indian consumerisation story. All 4 segments of NIL are
expected to show good growth on account of product innovation and value addition. It has
rewarded its shareholders with good amount of dividends.

Its EV/EBITDA of 16.1 is in line with the industry standards.

NIL has 4 segments: milk products & nutrition, beverages, prepared dishes & cooking aids and
chocolate & confectionary. Last year the company added 4 new brands and apart from this it has
done value addition in 6 existing brands.

From the annual result it can be shown that the company has a continuous growth in sales,
operating profit so as of net profit. It has an EPS of Rs 42.92 and P/E of 36.6.

COMPANY NAME- NTPC SECTOR- POWER

MARKET CAP- Rs 156911.19 Cr CMP-Rs 195
P/E-Rs 22.86 EPS- 8.33 INDUSTRY P/E-33.7
5:

30
NTPC is the largest thermal power generating company in India. Its core business is engineering,
construction and operation of power generating plants. NTPC showed a robust financial result
and achieved an all time high performance levels. Of the total power generated by India, 28.5%
is contributed by NTPC. It has planned Rs 13588 Cr for financial year 2008-09. It is in the
process of implementing additional projects in joint ventures and strategic alliances. It also has
global plans of expansion in mining, power generation, engineering and project management
services. NTPC is also looking at getting into other energy sources like biomass, cogeneration,
fuel cells etc to reduce its current dependence on thermal fuels.

For the last 5 years it shows an increase in sales, its operating profit and in net profit. It has also
continuous increase in EPS and DPS. This stock is highly liquid and the debt/equity ratio is very
less.

COMPANY NAME- ICICI BANK SECTOR-BANKING

MARKET CAP- Rs 96219.65 CMP-Rs 764
P/E-31.44 EPS-Rs 27.95 INDUSTRY P/E- 32

6:

ICICI Bank’s net income grew by 33% year on year. Larger numbers of new branches are
expected to open over next 6 months. Overall we can say that the core earning is very strong for
this company.

From the financial figures we can estimate that the sales of this stock have increased 50%. The
EPS has increases from Rs 28 to Rs 35.

COMPANY NAME- INDIA CEMENTS LTD SECTOR- CEMENT

MARKET CAP- Rs 5093.44Cr CMP-Rs 183
P/E-7.5 EPS-Rs 25 INDUSTRY P/E-10.2

31
India cement remains one of the biggest players in south India. It shows a marvelous profit in the
last 2 years. India Cements Ltd has informed that the Company has acquired a second bulk cargo
carrier (motor vessel) with capacity of 38,002 DWT from Essar Shipping Ltd of Mumbai.

India Cements Ltd (ICL) was established in Feb.'46, it is a diversified company with interests in
cement, shipping and real estate development. It is the largest producer of cement in South India
with 28% market share. The company has access to huge limestone resources. India Cement
plans to become a pan-India player with facilities in Rajasthan, Himachal and Madhya Pradesh.
The company is very attractive at current levels with P/E of just 7.

COMPANY NAME- DENA BANK SECTOR- BANKING

MARKET CAP- Rs 1162 Cr(SMALL CAP) CMP-Rs 58.3
P/E-Rs 7.8 EPS-7.93 INDUSTRY P/E- 11.8

8:

Dena Bank one of the premier public sector banks, has introduced Dena Smart Card, to facilitate
anywhere banking.

Dena Bank is the first bank to launch this unique customer friendly product. It is for the first time
in India that a Bank is using Smart Card for storing account details.

The bank proposes to open 15 branches in the country in the current year.

From the past 5 years analysis it can be predicted that this bank shows a vast increase in profit
and also net worth. The EPS increased 3 times than last year.

COMPANY NAME- SHREE RENUKA SUGAR SECTOR- SUGAR

MARKET CAP- Rs 3305 Cr (MID CAP) CMP-Rs 121.25
P/E- 35 EPS-Rs 27.3 INDUSTRY P/E-18.9
9:

32
Indian sugar industry is on the edge of upturn with lower production, reducing industry and
expected rise in domestic sugar prices.

Renuka Sugar is the fifth largest sugar manufacturer and largest trader of sugar of India. The
company is also the largest manufacturer of ethanol blended with gasoline in India.

Stock is currently trading at 10.4x FY09E PE compared to 12.7x for Bajaj Hindustan and 13.6x
as average PE of last sugar cycle.

SECTOR- TELECOM
COMPANY NAME- BHARTI AIRTEL
MARKET CAP- Rs 159995.3 Cr(LARGE CAP) CMP-Rs 855.9
P/E-40 EPS-Rs 21.25 INDUSTRY P/E-

Bharti Airtel is a leader in the Indian telecom scenario, the telecom penetration level in
India is very low around 23%. This situation is favorable for players like Bharti, who has
been giving good results consistently. The company has already got 1000 IPTV
customers in NCR. Bharti Airtel plans a nation-wide launch of IPTV and Dish TV.

11:

COMPANY NAME- CAIRN INDIA SECTOR- PETROLEUM

MARKET CAP- Rs 45582 Cr(LARGE CAP) CMP-Rs 260.8
P/E- EPS- INDUSTRY P/E-14.9

33
CAIRN's discovery in the Rajasthan block is a big step towards reducing reliance on imports to
meet India's ever-increasing oil needs. At peak production, Cairn's crude production should
account for 17% of India's total crude production. With Crude prices at $110, the company is
expected to do extremely well. Recently company did a Private placement at Rs 224/share.
Company buyout is also not ruled out.

12:

COMPANY NAME- RANBAXY LABS SECTOR- PHARMA

MARKET CAP- Rs18051 Cr(LARGE CAP) CMP-Rs 499
P/E-29 EPS-Rs 16.7 INDUSTRY P/E-18.7

Incorporated in Jun.'61 as a private limited company, Ranbaxy Laboratories (RLL) manufactures

and markets pharmaceutical dosage forms (for human health care), animal health care products,
bulk drugs and intermediates, diagnostics, laboratory chemicals and reagents. It is the largest
exporter of bulk drugs and pharmaceutical dosage forms in India. The board of Ranbaxy
Laboratories has cleared a scheme of de-merger of the company's New Drug Discovery Research
(NDDR) unit into a subsidiary, Ranbaxy Life Science Research (RLSRL). This is subject to
requisite approvals.

COMPANY NAME- BIOCON LTD. SECTOR- PHARMA

MARKET CAP- Rs 4342 Cr CMP-Rs504
P/E-10.3 EPS-Rs 43 INDUSTRY P/E-18.7

13:

34
Biocon Ltd was incorporated in the year 1978. Biocon is India's largest biotech company with a
presence in bio-pharmaceuticals, enzymes, customs research and clinical research. The company
was promoted as a joint venture with Ireland-based MNC Biocon Biochemical. Later, Unilever
Plc acquired Biocon Biochemical's stake in February 1995, but sold it to the current promoters in
June 1999. For a consideration of Ç30 million Biocon has reached agreement to acquire a 70%
stake in German pharmaceutical company, AxiCorp GmbH for a consideration of Ç30 million
With the strategic investment in AxiCorp, Biocon establishes its first presence in Europe in order
to market its injectible insulin on its own, and also to build up marketing and distribution
capabilities for many other products of its portfolio.

14. TATA TEA:

• The Company was incorporated on 18th October 1962, as a private limited company and
was converted into a public limited company on 8th May, 1963.
• Tata Tea Ltd has announced the following Audited results for the quarter ended
December 31, 2007:
• The Company has posted a profit after tax of Rs 588.80 million for the quarter ended
December 31, 2007 as compared to Rs 942.00 million for the quarter ended December 31,
2006. Total Income has increased from Rs 2987.20 million for the quarter ended
December 31, 2006 to Rs 4013.80 million for the quarter ended December 31, 2007.
• The Unaudited Consolidated results are as follows:
• The Group has posted a consolidated net profit of Rs 13073.10 million for the quarter
ended December 31, 2007 as compared to Rs 1171.90 million for the quarter ended
December 31, 2006. Total Income has increased from Rs 11193.20 million for the quarter
ended December 31, 2006 to Rs 11896.50 million for the quarter ended December 31,
2007.
• The Company cultivates tea, coffee, cardamom, etc., plantations and manufacturing,
selling and exporting instant tea and blended and packeted teas. It has a factory at Munnar
(Kerala) for the manufacture of instant tea and blending and packaging factories at
Bangalore (Karnataka) and Naine, Allahabad (U.P.).
15. ONGC:

• During 2007, the company hit with more gas in Rajasthan. This developed positive
sentiments among investors and hence the stock price jumped by 24% from Rs997.10 to
Rs1236.50.
• The P/E (High) was 19.65.

16. Reliance Energy: The share price of the company opened at Rs1, 349.40 and closed at Rs2,
134.60, recording an increase of 58% during 2007. During the period, the company planned to

35
extend its foot print to African markets and also bagged an order of over Rs37, 250m. All these
factors led to the increase in share price of the investor.

17. Suzlon Energy: The share price of the company opened at Rs1, 474.25 and closed at Rs1,
935.75, showing an increase of 31%. The increase is mostly due to the investors’ expectations.

18. Tata Power: The share price of the company opened at Rs910.80 and closed at Rs1, 470.95,
showing an increase of 62% during the quarter 2007. The increase in revenues and investors’
expectations of excellent results led to the drastic increase of 62% in the share price.

19. Tata Teleservices: Tata Teleservices emerged as a top gainer in the equity markets. The
company gained 39.9%. Stock prices scaled new heights with the company receiving GSM
license from the Department of Telecommunications.

20. Reliance Communications: Reliance Communications has once again done well to register
a decent gain on the bourses in the 2007, gaining 22%. Reliance Communications announced that
the Ministry of Communications and IT, Government of India, made allotment of startup
spectrum to the company for providing GSM services under the Unified Access Services
Licenses.

21. Sun Pharmaceuticals: During the quarter, the company settled its patent row with Novartis.
As a result, it resulted in jump in the stock price by 26.67% from Rs964.75 to Rs1, 222.05.

The P/E (High) for the company was 42.50.

4.6 Portfolio:

36
 CONSERVATIVE PORTFOLIO
No. of Current Sector MARKET
BANKING (20%) Exposure Amount
Shares Mkt Price Total CAP
SBI 5% 29 1741 50489 LARGE CAP
ICICI BANK 5% 58 864 50112 LARGE CAP
AXIS BANK 5% 60 832 49920 LARGE CAP
DENA BANK 5% 858 58.3 49764 SMALL CAP
200285
POWER (20%)
TATA POWER 5% 38 1316 50008 LARGE CAP
NTPC LTD 5% 256 195 49920 LARGE CAP
TORRENT POWER 4% 325 123.15 39975 LARGE CAP
ALSTOM PROJECTS INDIA LTD 6% 83 718.9 59668 MID CAP
199571
TELECOM (15%)
BHARTI AIRTEL 6% 70 855.9 59913 LARGE CAP
R COM 4% 71 560.9 39760 LARGE CAP
IDEA CELLULAR 5% 480 104.1 49968 LARGE CAP
149641
FMCG (12%)
BRITANNIA 4% 30 1320.15 39600 LARGE CAP
NESTLE INDIA 4% 26 1555 40430 LARGE CAP
TATA TEA 4% 46 875 40250 MID CAP
120280
PHARMACEUTICALS (15%)
RANBAXY LAB 4% 80 499.4 39920 LARGE CAP
AUROBINDO PHARMA 6% 180 333 59940 MID CAP
ABBOTT INDIA 5% 93 540 49290 SMALL CAP
149150
STEEL (18%)
TATA STEEL 7% 90 776.25 69840 LARGE CAP
JINDAL STEEL AND POWER
24
LTD 5% 2126 50880 LARGE CAP
GODAVARI POWER & ISPAT
270
LTD 6% 222.2 59940 MID CAP
120720
999587 999587

MARKET CAP EXPOSURE

37
 LARGE CAP 680735 68%

MID CAP 219798 22%

SMALL CAP 99054 10%

TOTAL 999587 100%

SEMI-AGGRESSIVE PORTFOLIO
No. of Current Sector
BANKING (20%) Exposure Shares Mkt Price Amount Total Market Cap

38
 LARGE
ICICI BANK 4% 52 764 39728 CAP
UCO BANK 6% 1434 41.85 58794 MID CAP
INDUSIND BANK 6% 637 94.15 59878 MID CAP
SMALL
DENA BANK 4% 686 58.3 39788 CAP
198188
POWER (20%)
LARGE
RELIANCE ENERGY 5% 39 1281.15 49959 CAP
TORRENT POWER 8% 650 123 79950 MID CAP
ALSTOM PROJECTS INDIA LTD 7% 97 718.9 69646 MID CAP
199555
FMCG (20%)
LARGE
NESTLE 5% 32 1555 49760 CAP
LARGE
BRITANNIA 5% 38 1320 50160 CAP
GODREJ CONSUMER 5% 394 126.8 49959 MID CAP
TATA TEA 5% 57 875 49875 MID CAP

PHARMACEUTICALS (20%)
LARGE
SUN PHARMA 6% 45 1328.55 59760 CAP
BIOCON 8% 159 504.6 80136 MID CAP
SMALL
ABBOTT INDIA 6% 111 540 59940 CAP
140076
STEEL (10%)
LARGE
TATA STEEL 5% 64 776.25 49664 CAP
GODAVARI POWER & ISPAT LTD 5% 225 222.2 49995 MID CAP
99659
CEMENT (10%)
INDIA CEMENT 5% 273 183 49959 MID CAP
BINANI CEMENT 5% 613 81.55 49990 MID CAP
99949
996941 996941

MARKET CAP EXPOSURE

LARGE CAP 299031 30%

39
MID CAP 598182 60%

SMALL CAP 99728 10%

TOTAL 996941 100%

AGGRESSIVE PORTFOLIO

40
 Cur.
No. of Market Sector MARKET
FMCG (20%) Exposure Shares Price Amount Total CAP

41
BRITANNAIA 4% 30 1320.15 39600 LARGE CAP
DABUR INDIA LTD 8% 766 104.5 79664 LARGE CAP
TATA TEA 4% 46 875 40250 MID CAP
GODREJ CONSUMER 4% 315 126.8 39942 MID CAP
199456
PHARMACEUTICALS (20%)
BIOCON 4% 79 504.6 39863 MID CAP
WANBURY LTD 5% 399 125.4 49875 SMALL CAP
RPG LIFE 5% 1458 34.3 50009 SMALL CAP
ABBOTT INDIA 6% 111 540 59940 SMALL CAP
199687
OIL AND GAS (20%)
ONGC 6% 57 1051 59907 LARGE CAP
CAIRN INDIA LTD 7% 268 260.8 69894 LARGE CAP
ALPHA GEP(INDIA) LTD 7% 117 598 69966 SMALL CAP
199767
SUGARS(12%)
RENUKA SUGARS 7% 577 121.25 69961 SMALL CAP
EID PARRY INDIA LTD 5% 258 194 50052 SMALL CAP
120013
DIVERSIFIED (13%)
GRASIM IND 6% 23 2597 59731 LARGE CAP
VOLTAS 7% 385 181.8 69993 MID CAP
1218496
STEEL (15%)
JINDAL STAINLESS 7% 483 145.05 70035 MID CAP

PENNAR INDUSTRIES 8% 2421 33.05 79893 SMALL CAP

149928

998575 998575

MARKET CAP EXPOSURE

LARGE CAP 308796 31 %
MID CAP 260083 26 %
SMALL CAP 429696 43 %

42
 TOTAL 99857 100%
5

4.7 PORTFOLIO ON ASSET ALLOCATION

• Asset allocation is a tool which allocates different asset classes based on level of risk
capacity and risk tolerance.

43
 • In this process, an individual must select assets that will generate adequate return to meet
the financial goals at the desired level of risk.

• Asset allocation is dividing the investments between various asset classes such as debt,
equities, insurance, commodity, gold/silver real estate, antiques and art and speculation.

• The principal reason for diversifying investments across different asset classes is to
minimize the risk of a portfolio.

• Once an individual has identified these asset classes, he/she needs to know how to divide
his/her investments in these asset classes. The key considerations in choosing the asset
classes are the level of return and the risk. Liquidity, transaction costs and ease of
investment are the other considerations.

The factors that one should consider in choosing exposures to different asset classes are as
follows:

1. Risk Tolerance:
• Stage in life: A younger person, having a safe livelihood and few dependents, has time on
his/her side can take more risk while choosing a portfolio.
• Net-worth: If one owns lot of assets and have few liabilities i.e. have a high net worth one
can afford to take more risk as one has a cushion of assets that can safeguard one from
short-term losses occurring in due to market fluctuations.
• Experience with investments: If one has prior experience in investing in financial markets
and one is comfortable with short-term fluctuations then one can take more risk and
hence more exposure to equity/real estate.

2. Investment objective: This explains the purpose for which the investments are being made.
Different objectives would demand that one modify their investment portfolio to meet these
goals. Objectives could be:

• A person nearing his/her retirement would want a regular stream of income from the
investment, while preserving the capital value, and should hence choose a safer portfolio.
That means in this case the risk is low, so as the return.
• If one is looking at growth along with preservation of capital, and is investing for a goal
that is very important, such as saving for one's child's education, then one can take some
more risk in pursuit of higher returns.
• If one is looking at high growth and investing for a goal that is not very important then
one can afford to take more risk.

3. Time Horizon: The time for which one would like to hold an investment also impacts the
level of risk that one can undertake.

44
ANALYSIS:

Here in this case, I have considered 4 cases.

• In first case, investment is equally distributed between all the asset classes. By the help of
their expected return of asset classes, the return on portfolio is 17.14%.

• In second case, instead of putting Rs 50,000 in debt only Rs 10,000 is invested and the
rest amount is put in equity to increase the return on portfolio. After this the return on
portfolio is 18.28%.

• In third case, the investment in asset class reality and speculation has increased by Rs
20,000 each. Now the return on portfolio has become 18.91%.

• In the fourth case, the amount of investment has been increased in the asset classes giving
higher returns and the return on portfolio is 19.92% nearly equals to 20%.

In this way, we can maximize our return by investing more in the asset classes of higher returns
and with this our risk profile of the portfolio also be increased.
PORTFOLIO ON ASSET ALLOCATION

ASSET CLASS EXPECTED RETURN (%)

DEBT FDs 8

PO 8

PPF 8

EQUITY 18

INSURANCE 15

GOLD/ SILVER 15

REAL ESTATE 20

COMMODITIES 17

SPECULATION 27

Case1: (EQUAL FUND ALLOCATION ACROSS ALL THE ASSETS)

TOTAL
AMOUNT %AGE RETURN ASSET
ASSET CLASS PROPORTION ALLOCATION % RETURN VALUE

45
DEBT 50000 14.28571429 8 4000 54000

EQUITY 50000 14.28571429 18 9000 59000

INSURANCE 50000 14.28571429 15 7500 57500

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 50000 14.28571429 20 10000 60000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 50000 14.28571429 27 13500 63500

Total 350000 100 60000 410000

RETURN ON PORTFOLIO (%) = 17.14285714

Case 2(FUND ALLOCATION ACROSS ALL THE ASSETS)

TOTAL
AMOUNT %AGE RETURN ASST
ASSET CLASS PROPORTION ALLOCATION % RETURN VALUE

DEBT 10000 2.857142857 8 800 10800

EQUITY 90000 25.71428571 18 16200 106200

INSURANCE 50000 14.28571429 15 7500 57500

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 50000 14.28571429 20 10000 60000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 50000 14.28571429 27 13500 63500

Total 350000 100 64000 414000

RETURN ON PORTFOLIO (%) = 18.28571429

Case 3: (FUND ALLOCATION ACROSS ALL THE ASSETS)

ASSET CLASS AMOUNT %AGE RETURN RETURN TOTAL

46
 ASST
PROPORTION ALLOCATION % VALUE

DEBT 10000 2.857142857 8 800 10800

EQUITY 50000 14.28571429 18 9000 59000

INSURANCE 50000 14.28571429 15 7500 57500

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 70000 20 20 14000 84000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 70000 20 27 18900 88900

Total 350000 100 66200 416200

RETURN ON PORTFOLIO (%) = 18.91428571

Case4: (FUND ALLOCATION ACROSS ALL THE ASSETS)

TOTAL
AMOUNT %AGE RETURN ASST
ASSET CLASS PROPORTION ALLOCATION % RETURN VALUE

DEBT 5000 1.428571429 8 400 5400

EQUITY 50000 14.28571429 18 9000 59000

47
INSURANCE 40000 11.42857143 15 6000 46000

GOLD/SILVER 50000 14.28571429 15 7500 57500

REALITY 50000 14.28571429 20 10000 60000

COMMODITIES 50000 14.28571429 17 8500 58500

SPECULATION 105000 30 27 28350 133350

Total 350000 100 69750 419750

RETURN ON PORTFOLIO (%) = 19.92857143

4.8 MUTUAL FUND:

• A mutual fund is a professionally-managed firm of collective investments that collects
money from many investors and puts it in stocks, bonds, short-term money market instruments,
or other securities.

• After realizing capital gains or losses, the investment proceeds are then passed along to
the individual investors annually, through the fund manager.

Working of a Mutual Fund:

48
 INVESTORS
Pass back Put their
to money
Investors get a blend
of liquidity returns
and safety

RETURNS FUND MANAGEMENT

Genera Invest in balanced

te portfolio

SECURITIES

• The funds that are collected from the investors are in turn invested in a portfolio of
marketable securities and the value of the portfolio is updated every day.

• The investor’s share is denominated in units. The value of units changes with the change
in the portfolio’s value, every day. The value of one unit of investment is called Net Asset Value
or NAV.

• The investment portfolio of mutual fund is created according to the stated investment
objectives of the fund.

Mutual Fund Evaluation: -

The following are the parameters used in analyzing a fund and its management: -

A- Total Return

B- Portfolio Turnover

D- Good Performers

E- Size of the Fund

49
 F- Cash Flows

G- Analyzing Fund Management

Net Asset Value: -

The net asset value is the market value of the assets of the scheme minus its liabilities.

NAV = (Market Value of fund Investments + Receivables + Accrued Income – Liabilities –

Accrued Expenses) / Number of Units Outstanding

Mutual Fund Products: -

Mutual Funds are broadly categorized into

1.) Nature of participation: Open and Close-end funds

2.) Nature of Income Distribution: Dividend, Growth, Reinvestment of Dividends

Return on Investment in Mutual Funds: -

The following are the methods for computing the returns on mutual fund products:

Percentage Change in NAV: -

It is an absolute measure of return, which funds the NAV appreciation between two points of
time, as a percentage. For e.g. if the NAV of a fund was Rs. 46.90 at the beginning and Rs. 55.30
at the end of the year, the percentage change in NAV

= [(55.30 – 46.90) / 46.90] X 100

= 17.91%

Formula = [(Absolute change in NAV) / NAV at the beginning] X 100

Simple Total Return: -

The total return method takes into account the dividends distributed by the mutual funds and adds
it to the NAV appreciation to arrive at returns.

Suppose an investor bought units of a mutual fund scheme at a price of Rs. 12.45 per unit. The
face value of the unit is Rs. 10. He redeems the investment a year later at Rs. 14.80 per unit.
During the year he also receives a dividend at 5%. The rate of return can be computed as follows:
-

= {[(14.8 – 12.45) + 0.50] / 12.45} X 100

50
 = 22.89%

Total Return with Dividend Reinvestment: -

Total Return with reinvestment can be computed as follows:

= [(Value of holdings at the end of the period / Value of Holdings at the beginning of the
period) – 1] X 100

Value of holdings at the beginning of the period = Number of units at the beginning X Beginning
NAV

Value of holdings at the end of the period = (Number of units held at the beginning + number of
units reinvested) X NAV at the end

Number of units Reinvested = Dividends / Ex-dividend NAV

Example: - an investor buys 75 units of a fund at Rs. 9.5 on Jan. 1, 2001. On June 30, 2001 he
receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On December 31,
2001 the fund’s NAV was Rs. 11.25

The beginning value of the investment is 9.5 X 75 = Rs.712.50

No. of units reinvested = 75 / 10.25 = 7.31

End period value of investment = 82.31 X 11.25 = 925.98

The return on investment (ROI) is = [(925.98 / 712.5) – 1] X 100 = 29.96%

Mutual Fund Selection: -

The following factors are considered while selecting a mutual fund: –

1.) Size of the Fund

2.) Age of the Fund

3.) Time of the Launch

51
4.) Cost of Ownership

I have considered the above points in making my portfolio on mutual funds. I have taken the
schemes based on their NAV, Corpus, one year return and launch date.

Form the launch date, we get to know the consistency of the scheme and its performance, from
corpus it can be predicted that how much capital they are managing and from their one year’s
return it can be obtained that what is their annual return, does it provide return more than any
other scheme and what is amount of risk involved in it.

4.8.1 THEME- Conservative

Theme wise
Exposure Chart % Allocated
ALL CAPS (regular) 30
ALL CAPS
(opportunistic) 5

LARGE CAPS 35
LARGE & MIDCAPS 5
MID CAPS 5

BALANCED FUND 20

THEMATIC 0

TOTAL 100

52
INDICATIVE INVESTMENT AMOUNT Rs. 5 lakhs

INDICATIVE HOLDING PERIOD 1 year plus

Schem % 1
Sector e Theme Exp Year
THEMEWISE Expos Exposu Exposu osu Corpus Retur launch
ALLOCATION ure re re re NAV (in Cr.) n date

02-05- (month (absol

08 & year) ute)
ALL CAPS
(Regular) 30%
Fidelity Equity 19-04-
Fund 8% 40000 25.95 2836.49 18.82 05
Templeton India 26-08-
Growth Fund 6% 30000 92.24 319.85 34.55 96
20-04-
UTI Equity Fund 8% 40000 40.94 1650.42 24.93 92
Tata Growth 25-06-
Fund - Growth 8% 40000 150000 30 39.84 80.02 21.84 94
ALL CAPS
(Opportunistic) 5%
Reliance Equity
Opportunities 07-03-
Fund 5% 25000 25000 5 23.74 1839.16 10.38 05

LARGE-CAP
ORIENTED 35%
Tata Select 24-05-
Equity Fund 9% 45000 59.49 135.83 22.43 96
Franklin India 30-11-
Bluechip 9% 45000 158.69 2193.81 20.65 93

HSBC Equity 03-12-

Fund 9% 45000 95.90 1056.84 34.01 02

Birla Advantage 24-02-

Fund 8% 40000 175000 35 142.54 427.91 13.84 95
LARGE & MID-
CAP
ORIENTED 5%
TATA Pure 7/5/199
Equity Fund 5% 25000 25000 5 79.15 315.84 26.49 8
53
THEME - Semi Aggressive
Theme wise Exposure
Chart % Allocated
ALL CAPS (regular) 25

ALL CAPS (opportunistic) 10

LARGE CAPS 25

LARGE & MIDCAPS 10

MID CAPS 15
MID & SMALL CAPS 5

THEMATIC 10

TOTAL 100

54
 Semi Aggressive

INDICATIVE INVESTMENT AMOUNT Rs. 5 lakhs

INDICATIVE HOLDING PERIOD 1 year plus
Schem
INDICATIVE 1 e Theme % NAV Corpus 1
HOLDING year Exposu Exposu Expo 2/5/20 (in Year Launch
PERIOD plus re re sure 08 crore) Retn. Date
(month (absol
& year) ute)
ALL CAPS
(Regular) 25%
Birla Sun Life
Equity Fund - 27-08-
Growth 8% 40000 230.01 1175.93 23.44 98
Reliance RSF - 10-05-
Equity - Growth 9% 45000 23.74 559.78 51.44 05
Sundaram BNP
Paribas Growth 15-02-
Fund - Growth 8% 40000 125000 25 88.52 155.77 33.07 97
ALL CAPS
(Opportunistic 10%
ABN AMRO
Opportunities 30-03-
Fund - Growth 5% 25000 25.98 216.28 21.50 05
Kotak
Opportunities 25-08-
Fund - Growth 5% 25000 50000 10 41.53 700.45 40.50 04
LARGE-CAP
ORIENTED 25%
Birla SunLife
Frontline
Equity Fund – 30-08-
Growth 6% 30000 66.87 329.25 27.24 02
Canara Robeco
Equity
Diversified 12-09-
Fund - Growth 6% 30000 39.45 90.07 26.73 03
Tata Select 24-05-
Equity Fund 7% 35000 59.49 135.83 22.43 96
Kotak 30 - 22-12-
Growth 6% 30000 125000 25 92.26 590.39 33.14 98
LARGE &
55
THEME - Aggressive

Theme wise Exposure

Chart % Allocated
ALL CAPS (regular) 15
ALL CAPS (opportunistic) 20
LARGE CAPS 15
LARGE & MIDCAPS 15

MID CAPS 15

MID & SMALL CAPS 5

THEMATIC 15
TOTAL 100

56
57
 Aggressive
INDICATIVE INVESTMENT AMOUNT Rs. 5 lakhs

INDICATIVE HOLDING PERIOD 1 Year plus

Sector Scheme Theme % NAV Corpus

THEMEWISE Exposu Exposur Exposu Expo 2/5/20 (in 1 Year launch
ALLOCATION re e re sure 08 crore) Retn. Date
(month absolut
& year) e
ALL CAPS
(Regular) 15%
Birla SunLife
Equity Fund - 27-08-
Growth 5% 25000 230.01 1175.93 23.44 98
Reliance RSF - 10-05-
Equity - Growth 5% 25000 23.74 559.78 51.44 05
JM Equity-
31-12-
Growth
5% 25000 75000 15 43.96 81.08 22.37 94
ALL CAPS
(Opportunistic) 20%
UTI
Opportunities 20-07-
Fund - Growth 7% 35000 18.63 476.25 32.21 05
ABN AMRO
Opportunities 30-03-
Fund - Growth 6% 30000 25.98 216.28 21.50 05
Tata Equity
Opportunities
31-03-
Fund - Growth
7% 35000 100000 20 76.71 493.00 29.24 92
LARGE-CAP
ORIENTED 15%
HDFC Top 200 -
Growth 31-08-
7% 35000 143.02 2102.44 27.84 96
UTI Master 18-02-
Growth - Growth 8% 40000 75000 15 53.88 354.10 22.72 93
LARGE &
MID-CAP
ORIENTED 15%
Sundaram BNP
Paribas Select 19-07-
Focus - Growth 6% 30000 83.19 700.71 37.98 02
Reliance Vision
58
59
5. DATA ANALYSIS:
• Here, I have shown the no. of contracts and turnover in stock futures and index futures.

• Stock futures were introduced in November 2001 and Index futures were in June 2000.

• Though Index Futures were introduced earlier as compare to Stock Futures, but the no. of
trading and turnover is more in Stock Futures.

• We can say that Index future trading is much more liquid than Stock Future trading.

Year Stock Futures Year Index Futures

No. of Turnover No. of Turnover
contracts (Rs. cr.) contracts (Rs. cr.)
2008-09 15601531 336900.9 2008-09 12063172 280100.25
2007-08 203587952 7548563.23 2007-08 156598579 3820667.27
2006-07 104955401 3830967 2006-07 81487424 2539574
2005-06 80905493 2791697 2005-06 58537886 1513755
2004-05 47043066 1484056 2004-05 21635449 772147
2003-04 32368842 1305939 2003-04 17191668 554446
2002-03 10676843 286533 2002-03 2126763 43952
2001-02 1957856 51515 2001-02 1025588 21483
2000-01 - - 2000-01 90580 2365

In this table below, I have shown the comparison between the no. of contracts in Index Futures
and Stock futures.

Year No. of Contracts

Index Futures Stock Futures
2008-09 12063172 15601531
2007-08 156598579 203587952
2006-07 81487424 104955401
2005-06 58537886 80905493
2004-05 21635449 47043066
2003-04 17191668 32368842
2002-03 2126763 10676843
2001-02 1025588 1957856
2000-01 90580 0

60
In this graph plotted below, it is clearly visible that the no. of trading in case of stock futures is
much more as compare to Index Futures.

• Here, I have shown the no. of contracts and turnover in stock options and index options.

• Stock Options were introduced in July 2001 and Index Options were in June 2001.

• Earlier the no. of contracts in case of stock options was more in comparison to Index
Options, but gradually the case was reversed.

• We can say that now Index Options trading is much more liquid than Stock Options
trading.

Year Stock Options Year Index Options

No. of Turnover No. of Turnover
contracts (Rs. cr.) contracts (Rs. cr.)
2008-09 699890 15864.65 2008-09 5365231 133564.86
2007-08 9460631 359136.55 2007-08 55366038 1362110.88
2006-07 5283310 193795 2006-07 25157438 791906
2005-06 5240776 180253 2005-06 12935116 338469
2004-05 5045112 168836 2004-05 3293558 121943
2003-04 5583071 217207 2003-04 1732414 52816
2002-03 3523062 100131 2002-03 442241 9246
2001-02 1037529 25163 2001-02 175900 3765
2000-01 - - 2000-01 - -

61
This is the table showing the no. of contracts in Index Options and Stock Options.

Year No. of contracts

Index Options Stock Options
2008-09 5365231 699890
2007-08 55366038 9460631
2006-07 25157438 5283310
2005-06 12935116 5240776
2004-05 3293558 5045112
2003-04 1732414 5583071
2002-03 442241 3523062
2001-02 175900 1037529
2000-01 0 0

From this graph below is showing the comparison between no. of trading in Index Options and in
Stock Options.

This table shows the total no. of contracts in derivative segment and their growth.

62
 Year Total
No. of contracts Turnover (Rs. cr.)
2008-09 33729824 766430.64
2007-08 425013200 13090477.75
2006-07 216883573 7356242
2005-06 157619271 4824174
2004-05 77017185 2546982
2003-04 56886776 2130610
2002-03 16768909 439862
2001-02 4196873 101926
2000-01 90580 2365

TOP 10 STOCKS OF NIFTY IN FUTURE SEGMENT:

63
SYMBOL SECURITY WEIGHTAGE (%)
RELIANCE RELIANCE INDUSTRIES LTD 12.47
ONGC OIL AND NATURAL GAS CORP. 6.46
BHARTIARTL BHARTI AIRTEL LIMITED 5.34
NTPC NTPC LTD 4.89
RCOM RELIANCE COMMUNICATIONS 3.96
INFOSYSTCH INFOSYS TECHNOLOGIES LTD 3.51
DLF DLF LIMITED 3.48
SBIN STATE BANK OF INDIA 3.33
ICICIBANK ICICI BANK LTD. 3.22
TCS TATA CONSULTANCY SERV LT 3.06

TOP 5 MOST ACTIVE FUTURES CONTRACTS:

SERIAL CONTRACT NO. OF TRADED VALUE % OF CONTRACTS

NO. DESCRIPTOR CONTRACTS (RS. CR.) TO TOTAL
CONTRACTS
1 NIFTY JAN 2008 3687166 147980 16
2 NIFTY FEB 2008 957758 39209 7
3 REL JAN 2008 498713 19969 4
4 RCOM JAN 2008 268377 8268 2
5 TATA STEEL 18221 5888 1
JAN 2008
OTHERS 8,486,867 320095 60
TOTAL 14,081,102 541,409 100

64
6. FINDINGS IN DERIVATIVES:

• From the above comparison we can see that people are trading more in the future than the
options. The gap between futures and options has increased and keeps on increasing.

• The reason behind this is the more liquidity in case of futures than options.

• People in futures have equal right and obligation to perform which makes the trading
more in volume and value. While in options, one party that means buyer is stronger and
the other that the seller is weaker. That’s why volume of trading is less.

• Between cash market and derivative market we can see that the volume is much more in
derivatives as comparison to cash market. This is because of the leverage in derivatives
segment. Though it is introduced much later, but the growth is much faster than cash
market.

• The total trade value has increased tremendously in last 1 year. This shows that more
number of people is trading in stock market.

• With the increase in turnover, the number of contracts also increased in the last year.

• Trading in Stock futures (in 2007-08-203587952) is very high as compare to Index

futures (in 2007-08-156598579).

FINDINGS IN CASE OF PORTFOLIO CONSTRUCTION:

• Research your investment options before you construct your portfolio.

• Allocate your assets to obtain the desired portfolio characteristics to suit your distinct
investor profile.

• Select individual securities and build a portfolio for each of the asset class under
consideration.

• Diversify your portfolio to lower investment risk.

• Understand the case study given to comprehend asset allocation.

• Track your portfolio by following the performance of your selections.

65
 • Observe a few Do’s and Don’ts of Investing.

7. CONCLUSION:
Although the financial derivatives market is growing much faster speed, but there are also many
investors, don’t have any idea regarding this segment.

These are the factors affecting the growth of derivatives.

1: Increased volatility in asset prices in financial markets.

2: Increased integration of national financial markets with the international markets.

3: Marked improvement in communication facilities and sharp decline in their costs.

4: Development of more sophisticated risk management tools, providing economic agents a

wider choice of risk management strategies.

In this vast area of derivatives, a considerable amount of work is yet to be done to inculcate
more interest of investors in derivatives. The regulation and settlement procedure of derivatives
not be simplified. That means it can’t be said that even today the derivatives market has reached
the stage of perfection. An increase number of innovations are entering into the financial
derivatives market but the imperfection in the market is still increasing. Such barriers demand for
increasing role of regulations in the financial market, which can bring success that is yet awaited.

In derivative segment, I have explained the straddle strategy how it can minimize the risk of the
investor.

Here, I have made portfolio for stocks, mutual funds and portfolio on asset allocation. For stocks
and mutual funds I have also constructed conservative (the low risk taker investor), semi-
aggressive (medium risk taker investors) and aggressive (the high risk taker investors). I have
considered the return objective of the investor and the risk taking capacity of him before
constructing the portfolio.

66
67
8. REFERENCES:

Books and Journals:

• Business World (Both Web and Print edition)

• Business Week (Web edition)
• Capital market print edition
• Newspapers viz. Business Standard, Business Line, Economic Times etc.
• fundamentals of futures and options markets by “JOHN C.HULL”
• derivatives in India “Ajay shah & Sushan Thomas”
• fundamentals of futures and options markets by “Ravi Shankar”

Websites:

1. www.reliancemoney.com
2. www.investopedia.com
3. www.nse-india.com
4. www.bseindia.com
5. www.derivativesindia.com
6. www.finance-research.net

68