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Posted Date:     Total Responses: 0    Posted By: prabodh soni
Aparna    Member Level: Gold   Points/Cash: CH SUNANDA
10    ARWEY
m.srinivas
1. INTRODUCTION:- Vinodh Kumar
Stock exchange operations are peculiar in R Pramod
nature and most of the Investors feel insecure in raghunathan
managing their investment on the stock market Diya Gupta
because it is difficult for an individual to identify ramesh
Active Members More...
companies which have growth prospects for
Today investment. Further due to volatile nature of the
markets, its require constant reshuffling of
 K MOHAN portfolios to capitalized on the growth
(52) opportunities. Even after identifying the growth
 Vandana (29) oriented companies and their securities, the
 Jose Mathew trading practices are also complicated, making it a
(25) difficult task for investors to trade in all the
exchange and follow up on post trading
Last 7 Days formalities. That is why professional investment
advice through portfolio management service can
 R Pramod help the investors to make an intelligent and
(1513) informed choice between alternative investments
 Nitheesh opportunities without the worry of loosing their
(Luck... invested money.Hence this is very much important
(1233) to the stock dealers specially who are new to the
 K MOHAN market.
(828)

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more...
2. MEANING OF PORTFOLIO
MANAGEMENT:-
Portfolio management in common parlance refers
to the selection of securities and their continuous
shifting in the portfolio to optimize returns to suit
the objectives of an investor. In India, as well as in
a number of western countries, portfolio
management service has assumed the role of a
specialized service now a days and a number of
professional merchant bankers compete
aggressively to provide the best to high networth
clients, who have little time to manage their
investments. The idea is catching on with the
boom in the capital market and an increasing
number of people are inclined to make profits out
of their hard-earned savings.
Portfolio management service is one of the
merchant banking activities recognized by
Securities and Exchange Board of India(SEBI).
The service can be rendered either by merchant
bankers or portfolio managers or discretionary
portfolio manager as define in clause (e) and (f) of
Rule 2 of Securities and Exchang Board of India
(Portfolio Managers)Rules, 1993 and their
functioning are guided by the SEBI.

3. OBJECTIVES OF PORTFOLIO
MANAGEMENT:-
The major objectives of portfolio management are
summarized as below:-
i. Keep the security, safety of Principal sum intact
both in terms of money as well as its purchasing
power.
ii. Stability of the flow of income so as to facilitate
planning more accurately and systematically the
re-investment or consumption of income.
iii. To attain capital growth by re-investing in
growth securities or through purchase of growth
securities.
iv. Marketability of the security which is essential
for providing flexibility to investment portfolio.
v. Liquidity i.e.nearness to money which is
desirable for the investor so as to take advantage
of attractive opportunities upcoming in the market.
vi. Diversification: The basic objective of building
a portfolio is to reduce the risk of loss of capital
and income by investing in various types of
securities and over a wide range of industries.
vii. Favourable tax status : The effective yield an
investor gets from his investment depends on tax

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to which it is subject. By minimizing the tax


burden, yield can be effectively improved.

4. BASIC PRINCIPLES OF PORTFOLIO


MANAGEMENT:-
There are two basic principles for effective
portfolio management which are given below:-
1. Effective investment planning for the
investment in securities by considering the
following factors-
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.
II. Constant review of investment: Its require to
review the investment in securities and to continue
the selling and purchasing of investment in more
profitable manner. For this purpose they have to
carry the following analysis:
a. To assess the quality of the management of the
companies in which investment has been made or
proposed to be made.
b. To assess the financial and trend analysis of
companies balance sheet and profit&loss
Accounts to identify the optimum capital structure
and better performance for the purpose of
withholding the investment from poor companies.
c. To analysis 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.

5. ACTIVITIES IN PORTFOLIO
MANAGEMENT:-
A. There are three major activities involved in an
efficient portfolio management which are as
follows:-
a. Identification of assets or securities, allocation
of investment and also identifying the classes of
assets for the purpose of investment.
b. They have to decide the major weights,
proportion of different assets in the portfolio by

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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 to maximize return and minimize risk
in the investment even if there are unlimited risk
in the market.
Let us have a look on the composite risk involve
in the market during operation:-

I. Interest rate risk: This arises due to variability in


the interest rates from time to time. A changes in
the interest rates establishes an inverse
relationship in the price of the security i.e. price of
securities trends to move inversely with change in
rate of interest. Long term securities shows greater
variability in compare to short term securities by
this risk.
II. Purchasing power risk: It is also known as
inflation risk and the inflation affect the
purchasing power adversely. Inflation rates vary
over time and changes unexpectedly causing
erosion in the value of real return and expected
return. Thus purchasing power risk is more in
inflationary conditions especially in respect of
bond and fixed income securities. It is not
desirable to invest in such securities during
inflationary situations. Purchasing power risk is
however less in flexible income securities like
equity shares or common stock where rise in
dividend income off-sets increase in the rate of
inflation and provides advantage of capital gain.

III. Business risk: Business risk arises from sale


and purchase of securities affected by business
cycles, technological changes etc. Business cycles
affect all types of securities viz. there is cheerful
movement in boom due to bullish trend in stock
price where as bearish trend in depression brings
down fall in the prices of all types of securities.
Therefore securities bearing flexible income
affected more than the fixed rated securities
during depression due to decline in their market
price.

IV. Financial Risk: This arises due to changes in


the capital structure of the company. It is also
known as leveraged risk and expressed in the
terms of debt-equity ratio. Excess of debt over
equity in the capital structure of a company

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indicates that the company is highly geared even if


the per capital earnings(EPS) of such company
may be more. Because highly dependence on
borrowings exposes to the risk of winding up for
its inability to honour its commitments towards
lenders and creditors. So the investors should be
aware of this risk and portfolio manager should
also be very careful.
By taking in to accounts of all the above factors,
investment decision in portfolio management are
taken as followings:

B. INVESTMENT DECISION:
By a certain sum of funds, the investment decision
are basically depends upon the following factors:-
I. Objectives of investment portfolio: This is a
crucial point which a Finance Manager must
consider. There can be many objectives of making
an investment. The manager of a provident fund
portfolio has to look for security and may be
satisfied with none too high a return, where as an
aggressive investment company be willing to take
high risk in order to have high capital
appreciation.
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. 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:-
a. There is a wide variety of investments available
in market i.e. Equity shares, preference share,
debentures, convertible bond, Govt.securities and
bond, capital units etc. Out of these what types of
securities to be purchased .

b. What should be the proportion of investment in


fixed interest dividend securities and variable

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dividend bearing securities. The fixed one ensure


a definite return and thus a lower risk but the
return is usually not as higher as that from the
variable dividend bearing shares.

c. If the investment is decided in shares or


debentures, then the industries showed a potential
in growth should be taken in first line. Industry-
wise-analysis is important since various industries
are not at the same level from the investment point
of view. It is important to recognized that at a
particular point of time, a particular industry may
have a better growth potential than other
industries. For example, there was a time when
jute industry was in great favour because of its
growth potential and high profitability ,the
industry is no longer at this point of time as a
growth oriented industry.

d. 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.
To identify the industries, which have a high
growth potential the following
techniques/approaches may be taken in to
consideration:-

a. Statistical analysis of past performance: A


statistical analysis of the immediate past
performance of the share price indices of various
industries and changes there in related to the
general price index of shares of all industries
should be made. The Reserve Bank of India index
numbers of security prices published every month
in its bulletin may be taken to represent the
behaviour of share prices of various industries in
the last fiew years. The related changes in the
price index of each industry as compare with the
changes in the average price index of the shares of
all industries would show those industries which
are having a higher growth potential in the past
fiew years. It may be noted that a Industry may
not remaining a growth Industry for all the time.
So we have to make an assessment of the various
Industries keeping in view the present potentiality
also to finalized the list of Industries in which we
will try to spread our investment.

b. Assessing the intrinsic value of an

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Industry/Company:-

After identifying the Industry, we have to assess


the various factors which influence the value of a
particular share. Those factors generally relate to
the strengths and weaknesses of the company
under consideration, Characteristics of the
industry within which the company fails and the
national and international economic scene. The
major objective of the analysis is to determine the
relative quality and the quantity of the security. It
is also to be seen that the security is good at
current market prices. This approach is known as
intrinsic value approach.
Industry analysis can help to assess the nature of
demand of a particular product, Cost structure of
the industry and other economic and Govt.
constraints on the same. An appraisal of the
particular industries prospect is essential and the
basic profitability of any company is depends
upon the economic prospect of the industry to
which it belongs. The following factors are
important in this regards:-

a. Demand and Supply pattern for the industries


products and its growth potential: The
management expert identify 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.
b. Profitability : It is a vital consideration for the
investors as profit is the measures 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. The other point to
be considered is the ratio analysis, specially return
on investment, gross profit and net profit ratio of
the existing companies in the industry.
c. 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 examine.
d. Labour management relations in the industry:

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The state of labour-management relationship in


the particular industry also has a great deal of
influence on the future profitability of the
industry. So it is vital to see that the industry
under analysis has been maintaining a cordial
relationship between labour and management.
e. Company Analysis: To select a company for
investment a number of qualitative factors have to
be seen to visualize the performance of the
company in future by analyzing its past
performance such as :-
1. Size and ranking: 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 to
assess the risk associated with the company.
2. Growth record: Three growth indicators may be
looked in to i.e.
Price earnings ratio, Percentage growth rate of
earnings per annum and Percentage growth rate of
net block of the company in the past fiew years
should be examined.
3. Financial analysis: By the help of Financial
analysis we can understand
the financial solvency and liquidity, the efficiency,
the profitability and the financial and operating
leverage of the company in which the fund are
used.

4. Pattern of existing stock holding: This analysis


would show the stake of
Various parties associate with the company. An
interesting case in this regard is that of the Panjab
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 received
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.

5. Marketability of the shares: Mere listing of a


share on the stock exchange does
not automatically mean that the share can be sold
and purchase. There may be inactive shares with
no transaction for long period. So we have to

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examined the speculative interest of such scrip,


extent of public holding and the particular stock
exchange where it is traded.
Fundamental analysis thus is basically an
examination of the economics and financial
aspects of a company with the aim of estimating
future earnings and dividend prospect. So after
having analysed of all the relevant information we
have to decide whether we should buy or sell the
securities.

II. Timing of Purchases:-


The timing of dealings in the securities, specially
shares is of crucial
importance, because after correctly identifying the
companies one may lose
money if the timing is bad due to wide fluctuation
in the price of shares of
that companies.
The decision regarding timing of purchases is
particularly difficult because
of certain psychological factors. It is obvious that
if a person wishes to
make any gains, he should buy cheap and sell
dear, i.e. buy when the share are selling at a low
price and sell when they are at a higher price. But
in practical it is a difficult task. When the prices
are rising in the market i.e. there is bull phase,
everybody joins in buying without any delay
because every day the prices touch a new high.
Later when the bear face starts, prices tumble
down everyday and everybody starts counting the
losses. The ordinary investor regretted such
situation by thinking why he did not sell his shares
in previous day and ultimately sell at a lower
price. This kind of investment decision is entirely
devoid of any sense of timing.

There are various theories and technique to deal


with the portfolio management, some of their
concept are discuss shortly hereunder:-

Dow Jones theory: According to this theory of


Charles H. Dow , purchase should be made when
bull trend started i.e. when price of the share are
on the rise and sells them when they are on the fall
i.e. at the time when bearish trend started.

Randam walk theory: Basically stock prices can


never be predicted because they are not a result of

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any underlying factors but are mere statistical ups


and downs. This hypothesis is known as Randam
walk hypothesis. In the Layman’s language it
may be said that prices on the stock exchange
behave exactly the way a drunk would behave
while walking in a blind lane, i.e. up and down,
with an unsteady way going in any direction he
likes, bending on the side once and on the other
side the second time.

Capital Assets Pricing Model(CAPM): CAPM


provides a conceptual framework for evaluating
any investment decision. It is used to estimate the
expected return of any portfolio with the following
formula:

E(Rp) = Rf+Bp(E(Rm)-Rf)
Where,
E(Rp) = Expected return of the portfolio
Rf = Risk free rate of return
Bp = Beta portfolio i.e. market sensitivity index
E(Rm)= Expected return on market portfolio
(E(Rm)-Rf)= Market risk premium

The above model of portfolio management can be


used effectively to:-
*Estimate the required rate of return to investors
on company’s common stock.
**Evalute risky investment projects involving real
Assets.
***Explain why the use of borrowed fund
increases the risk and increases the rate of return.
****Reduce the risk of the firm by diversifying its
project portfolio.
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.

CONCLUSION

From the above discussion it is clear that portfolio


functioning is based on market risk, so one can get
the help from the professional portfolio manager
or the Merchant banker if required before
investment. Because applicability of practical
knowledge through technical analysis can help an
investor to reduce risk. In other words Security
prices are determined by money manager and
home managers, students and strikers, doctors and

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dog catchers, lawyers and landscapers, the


wealthy and the wanting. This breadth of market
participants guarantees an element of
unpredictability and excitement. If we were all
totally logical and could separate our emotions
from our investment decisions then, the
determination of price based on future earnings
would work magnificently. And since we would
all have the same completely logical expectations,
price would only change when quarterly reports or
relevant news was released.
“I believe the future is only the past again,
entered through another gate†–Sir Arthur
wing Pinero. 1893.

If price are based on investors expectations, then


knowing what a security should sell for become
less important than knowing what other investors
expect it to sell for. “ There are two times of a
man’s life when he should not speculate; when
he can’t afford it and when he can†–
Mark Twin,1897.

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. Through it is basically a future
estimation or expectation , one should know the
standard norms and related rules for lowering the
risk.

MRS. APARNA (SEN)BISWAS

dhrubaparna@gmail.com

For more details, visit


http://moneyandemploymentonline.blogspot.com

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Member
Author: arijit Level: Revenue Score:

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roy Bronze
this project gives a good idea. its really helpful

Author: Member
Revenue Score:
DHRUBA Level:
BISWAS Bronze
what a excellant collection.Thanks for such a
quality edition with in dept coverage relating to
portfolio dealings.

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jasmeet singh
Silver
really thanks for sharing you views with all of us.

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raghavendra
Bronze
its is good and helpful to students

Member
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Author: C S K Level:
Bronze
Its very nice tutor for the subject "Security
Analysis and Protfolio Management" Subject
suited for MBA - FINANCE ELECTIVES, i got
benefitted, Thanks....

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SUNIL
Bronze
Good project

Member
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Rajeev Verma
Diamond

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This project is quite informative. the language is


simple and easy to follow.

Regards,

Rajeev

Member
Revenue Score:
Author: Vilas Level:
Diamond
good project dear Aparna.
nice efforts

regards
vilas

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