Project Report

The Other side of Portfolio Management

Submitted in partial fulfillment Of the requirements for the degree of Bachelors in Management Studies 2005-06

ACKNOWLEDGMENT

I would like to thank, my project guide Prof. S.P. Das for giving me adequate knowledge and assistance throughout the project work. I express my sincere thanks to our coordinator Prof. Sancheta Banerjee and Prof. Amit Kamkhalia , Valerian Rodriguez for their helpful support. Lastly, I would like to thank my college and University Of Mumbai for giving me such an opportunity to work on the project of stock exchange and enhance my knowledge

INDEX
Sr. No. 1 2 3 4 5 6 6 7 8 10 11 12 13 14 15 16 17 18 19 Topics Introduction of overall project Page No. 1

Bombay Stock Exchange (BSE) National Stock Exchange (NSE) Interviews

20

Conclusion

Bibliography and References Glossary Abbreviation

Introduction
Constructing a portfolio of investments is one of the most significant financial decisions facing individuals and institutions. A decision-making process must be developed which identifies the appropriate weight each investment should have within the portfolio. The portfolio must strike what the investor believes to be an acceptable balance between risk and reward. In addition, the costs incurred when setting up a new portfolio or rebalancing an existing portfolio must be included in any realistic analysis. In this paper, we consider convex transaction costs, including linear (proportional) transaction costs, piecewise linear transaction costs, and quadratic transaction costs. In order to properly reflect the effect of transaction costs, we suggest rescaling the risk term by the funds available after paying the transaction costs. Essentially, the standard portfolio optimization problem is to identify the optimal allocation of limited resources

among

limited

set

of

investments.

Optimality

is

measured using a tradeoff between perceived risk and expected return. Expected future returns are based on historical data. Risk is measured by the variance of those historical returns. When more then among one investment is involved, the covariance individual investments becomes

important. In fact, any deviation from perfect positive correlation allows a beneficial diversified portfolio to be constructed. Efficient portfolios are allocations that achieve the highest possible return for a given level of risk. Alternatively, efficient portfolios can be said to minimize the risk for a given level of return. These ideas earned their inventor a Nobel Prize and have gained such wide acceptance that countless references could be cited; however, the original source is Markowitz [25]. One linear standard formulation of the the portfolio minimum problem expected minimizes a quadratic risk measurement with a set of constraints specifying portfolio return, E0,and enforcing full investment of funds. The decision variables xi are the proportional weights of the ith security in the portfolio. Here n securities are under consideration. Let i denote the expected value of $1 invested in security i at the end of the period of interest, and let Q denote the positive semidefinite covariance matrix of these values. We assume here that short selling is not allowed, so the proportions xi are restricted to be nonnegative. This formulation is:

where e denotes the vector of all ones. By varying the parameter E0 and solving multiple instances of this problem, the set of efficient portfolios can be generated. This set, visualized in a risk/return plot, is called the efficient frontier. An investor may decide where along the efficient frontier (s)he finds an acceptable balance between risk and reward. In this paper, we describe a method for finding an optimal portfolio when convex transaction costs have to be paid. Our method requires the solution of a convex program of similar size to the Markowitz model. The model allows different costs for different securities, and different costs for buying and selling, and captures the feature that transaction costs are paid when a security is bought or sold and the transaction cost reduces the amount of that particular security that is available. If there is no risk-free security, then the solution to this convex program may involve discarding assets. Discarding assets reduces the measure of risk. Clearly, it is not an attractive strategy in practice. In this situation, we propose modifying the risk term by scaling it by the amount available after transaction costs have been paid. This rescaled objective can be regarded as the risk per dollar invested, so both the risk and the return in our model are measured using the portfolio arising after paying the

transaction costs. This rescaled objective may also be attractive even if there is a risk-free security. We show that an optimal solution to the model with the rescaled objective will not result in assets being discarded. Lobo et al. [24] develop a similar model to ours, and we discuss their model in more detail later in this paper. The portfolio rebalancing problem has similarities to the index tracking problem [1, 11, 15]. See Zenios [36] for a discussion of portfolio optimization models. The optimal solution to the portfolio optimization problem is sensitive to the data Q and , so estimating this data accurately is the subject of current research; see Chopra and Ziemba [13] or Bengtsson and Holst [3] for example. Stochastic programming approaches to portfolio optimization have been investigated in [14, 19, 29, 30] and elsewhere; such approaches work with sets of scenarios. Modification of a portfolio should be performed at regular intervals, and determination of the appropriate interval in the presence of transaction costs is a problem of interest. Preferably, selection of the interval should be done in conjunction with selection of the method used for rebalancing. This paper contains a method for rebalancing. There has been interest in portfolios that can be modified continuously, starting with Merton [27]. These methods are generally limited to problems with a small number of securities. For a recent survey on the impact of transaction costs on the dynamic rebalancing problem, see Cadenillas [9]. For a discussion of handling capital gains taxes in dynamic portfolio allocation problems, see Cadenillas and Pliska [10]. This paper is organized as follows. We turn to

the portfolio rebalancing problem in 2. First, we motivate the cost model and provide examples of costs that fit this model. We give an example where this model gives a solution that is not an attractive practical strategy. We show that this particular type of solution cannot arise if there is a riskless asset. Alternative approaches to this problem are also discussed in 2. A method for preventing the unattractive solution is presented in 3, with the properties of the optimal solution returned by this method given in 4; this method leads to a model which can be cast as a quadratic programming problem. Efficiently finding a portfolio to maximize the Sharpe ratio is the subject of 5. Computational results for two empirical datasets are presented in 6. Finally,we offer concluding remarks in 7.

Portfolio Rebalancing Problem

What we consider is an extension of the basic portfolio optimization problem in which transaction costs are incurred to rebalance a portfolio, x, into a new and efficient portfolio, x. A portfolio may need to be rebalanced periodically simply as updated risk and return information is generated with the passage of time. Further, any alteration to the set of investment choices would necessitate a rebalancing decision of this type. In addition to the here obvious are two cost of brokerage of other fees/commissions, examples

transaction costs that can be modeled in this way: 1. Capital gains taxes are a security-specific selling cost that can be a major consideration for the rebalancing of a portfolio. For more discussion of the impact of capital gains, especially in a dynamic portfolio allocation model, see Cadenillas and Pliska [10]. 2. Another possibility would be to incorporate an investors confidence in the risk/return forecast as a subjective cost. Placing high buying and selling costs on a security would favor maintaining the current allocation x. Placing a high selling cost and low buying cost could be used to express optimism that a security may outperform its forecast. The transaction costs are assumed to be convex. To obtain a portfolio x from an initial portfolio x, we pay transaction costs c(x x), where c is a convex nonnegative function with c(0) = 0. Transaction costs which meet this model include proportional, convex piecewise linear, and convex quadratic transaction costs. Proportional transaction costs have the structure:

where cBi and cSi are positive constants. We normalize so that the initial wealth is eT x = 1. The resulting model for minimizing the variance of the resulting portfolio subject to meeting an expected return of E0 > 0 in the presence of transaction costs
is

Note that we are allowing short selling here. If transaction costs are linear and if shortselling costs are also linear and at least as large as the cost of selling the asset, we can model the transaction costs for security i as the convex piecewise linear function

where cSS i is the proportional cost for short selling, with cSS i _ cSi . The return on an asset is the proportional increase in the value of the asset from the beginning to the end of the

period. We represent the expected return using _, so _ = e. When there are no transaction costs we have eT x = 1, so the constraint T x _ E0 isequivalent to the constraint _T x _ E0 1. However, when transaction costs are incurred, we will have T x < _T x + 1 for asset allocations x, and so in this paper we use the more restrictive constraint T x _ E0. A user might also require restrictions such as limiting the proportion of assets that can be invested in a group of securities. We can express this as a homogeneous constraint on x. For example, if security 1 must constitute no more than 10% of the resulting portfolio, we can impose the constraint

We generalize this to allow m homogeneous constraints in our model, written in the form Ax _ 0 where A is an m n matrix and a is an m-vector. Note that a restriction on short selling can be modelled using a constraint of this form. Convex nonlinear transaction cost functions can be used to model the scarcity effect. The cost function models the impact of trading a security that is somewhat illiquid on the price of the security. As more of a security is bought or sold, the proportional cost increases. Piecewise linear convex transaction cost functions were considered by Bertsimas et al. [4],

for example. Quadratic transaction cost functions are frequently used in such a situation, and for more on quadratic transaction cost functions, see, for example, Niehans [31]. Our assumptions on the transaction cost function are listed below: We generalize this to allow m homogeneous constraints in our model, written in the form Ax _ 0 where A is an m n matrix and a is an m-vector. Note that a restriction on short selling can be modelled using a constraint of this form. Convex nonlinear transaction cost functions can be used to model the scarcity effect. The cost function models the impact of trading a security that is somewhat illiquid on the price of the security. As more of a security is bought or sold, the proportional cost increases. Piecewise linear convex transaction cost functions were considered by Bertsimas et al. [4], for example. Quadratic transaction cost functions are frequently used in such a situation,and for more on quadratic transaction cost functions, see, for example, Niehans [31]. Our assumptions on the transaction cost function are listed below: Assumption 1 The transaction cost function c satisfies the following: 1. c(x) is a convex function of x. 2. c(0) = 0. 3. c(x) _ 0 for all x. Continuous nonconvex transaction cost functions are considered in 4.3. Model (3) contains a nonlinear equality constraint, so it is not a convex optimization problem. It

can be made convex by relaxing the transaction cost constraint, giving the problem:

A drawback to this model is that it may result in an optimal solution where assets are discarded, as we show in 2.1. When the transaction costs are proportional as in (2), separate buy and sell variables can be introduced for each security and the equality form of the transaction cost constraint can be used. However, if a complementarity restriction on the buy and sell variables is not also imposed, the optimal solution may require both buying and selling a particular asset, which is clearly not an advisable practical strategy. The example of 2.1 illustrates this phenomenon. If there is a riskless asset available then the transaction cost constraint will hold at equality at the optimal solution to (5), as we show in 2.2. We introduce the following terminology for these two cases. Definition 1 A feasible asset allocation x is wasteful if eT x + c(x x) < 1. Otherwise it is called frugal. Lobo et al. [24] give a model equivalent to (5) for the case of linear transaction costs. Their model maximizes the expected return, subject to the variance being below some threshold. For the example given in 2.1, this leads to an optimal solution where the transaction cost

inequality is satisfied strictly, corresponding to discarding assets. Adcock and Meade [1] add a linear term for the costs to the original Markowitz quadratic risk term and minimize this quantity. This requires finding an appropriate balance between the transaction costs and the risk. The model assumes a fixed rate of transaction costs across securities. The risk is measured in terms of the adjusted portfolio before transaction costs are paid. Konno and Wijayanayasake [22] consider a cost structure that is considerably more involved than ours, with the result that the model is harder to solve. Yoshimoto [35] considers a similar transaction cost model to ours and proposes a nonlinear programming algorithm to solve the problem and their computational results indicate that ignoring transaction costs can result in inefficient portfolios. In Braun and Mitchell [7], we investigated a different relaxation of (3) for the case of proportional transaction costs and showed that good solutions could be obtained using that relaxation. In particular, with such a cost structure, (3) can be reformulated as a quadratic program with complementarity constraints. The complementarity constraints impose a combinatorial structure on the problem and make it hard to solve. We examined a semidefinite programming relaxation of this problem in [7], and further references for this type of problem can be found there. An alternative model is to reduce the vector of expected returns by the transaction costs. Best and Hlouskova [5] give an efficient solution procedure for this

problem for the case of proportional transaction costs and a diagonal covariance matrix Q. The model implicitly assumes that transaction costs are paid at the end of the period, impacting both the risk and the return. If the transaction costs must be paid at the beginning of the period then care must be taken in the sale of assets to pay the transaction costs, in order to ensure that the resulting portfolio has securities in the same proportion. Further, the return calculation assumes a return on the amount paid in transaction costs, so this constraint needs to be modified. If the transaction costs include a fixed cost per transaction, one modeling approach is to either place an upper bound on the number of transactions or to include a penalty term for the number of transactions. This gives rise to a mixed integer nonlinear programming problem. This approach has been investigated widely; see, for example, Perold [32], Bienstock [6], Bertsimas et al [4], Konno and Wijayanayasake [22], Kellerer et al. [21], and Lee and Mitchell [23]. The presence of the integrality restriction makes the formulation far harder to solve than the one presented in this paper.

The

Importance

of

Having

an

Investment/Portfolio Management Plan

As an individual or organization accumulates wealth, they a re presented the opportunity to invest that wealth, to preserve it, and hopefully create additional wealth from those investments. While capital preservation and even some incremental returns may happen by chance over a short time period, over the long haul it is unlikely you will have such good fortune without a plan. The Investment Policy is the foundation. Components of a typical Investment Policy: Investment Objectives Definition of Responsibilities Management of Assets Asset Allocation Guidelines Investment Guidelines Investment Manger Mandates Review and Evaluation Process The first step in developing your plan, is to define your investment objectives. These typically include statements on the relative importance of: - capital preservation - liquidity management (having your funds available when you need them) - and return expectations. Capital preservation is more often than not the #1 objective. The importance of this objective is a function of

risk tolerance, and that tolerance needs to be assessed honestly You need to ask yourself what is the percentage level of my portfolio that I am willing to not have available to me. That could be, for example, a 20% unrealized market value depreciation (or 'paper loss'), or it could be a 20% investment that became 'illiquid'. There is no place in the investment markets that you can hide from risk. If you invest, you take on risk, and if you invest according to a well developed plan, you will be paid properly for the risk you do take. From that definition of risk tolerance, you can now lay out the risk management guidelines, or parameters, of your investment policy. These guidelines include, but are not limited to maturity, duration and credit quality restrictions, as well as concentration limits at the asset class, sector, industry and security levels. The second part of this equation is the realistic return you can expect, given your risk parameters. There is no free lunch in this process. Many investors struggle with the low expected returns of a conservative investment strategy, and take on more risk than they should, in the quest for higher returns. That is why it is critically important to establish your risk tolerance first, and stick to it. Asset Allocation Strategy drives your expected return. The expected returns will be a function of what exposures you have to the permitted asset classes, and how the returns of those asset classes move in tandem - or

correlate. Conventional wisdom suggests that a broadly diversified strategy will produce the best risk adjusted Returns, over the long haul. To manage your risk, diversify your portfolio and establish benchmarks for each style. Diversification makes a difference. Don't try to guess which asset class to be in, and to manage market risk also guess when to sell out. When you spread your investments across asset classes you tend to spread your risks and increase the likelihood of offsetting losses with can gains. help Your you investment money StocksBonds Growth and value Government, corporate, and municipal Large-cap, mid-cap, and small-cap Investment and non-investment grade Indian. and international Short-, intermediate- and long-term Stocks and bonds don't always move in the same direction. Historically, when stocks are down, bonds have been up. For example, stocks have posted negative returns in only eight different years since 1950. In those same down years for stocks, bonds delivered positive results, cushioning the impact and helping to minimize losses. By maintaining a management consultant

assemble a diversified portfolio of stocks, bonds, and market mutual funds that best match your investment objectives. Typical allocations include:

diversified portfolio, you may be able to smooth out the inevitable ups and downs of investing. Even though there has been tremendous volatility in the stock markets over recent years, the average return for the S&P 500 over the past ten years (1992-2002) is 9.34%. Evaluate investment performance against stated benchmark returns and portfolio risks. Over the long term, fundamentals are the most important drivers for the performance of the markets and the economy. We believe it is important to maintain discipline and focus, especially in times of uncertainty. We encourage investors to stick with their planned investment strategy and not be swayed into making mistakes by betting on short-term event. Be sure to account for the impact of inflation on your returns. Growth 1 of a $1 investment in stocks, bonds, and Treasury bills vs. inflation. $1 invested in 1951 would be worth the following amounts at the end of 2002: $ 223.09 Common Stocks (S&P 500) $ 22.89 Long-Term Government Bonds (Lehman Brothers Long Gov Bond) $ 12.55 Treasury Bills (3 month U.S. Treasury Bills) compared to the impact of inflation over the same period :: $ 6.83 Inflation (Consumer Price Index)

1 Source:

Prepared by Banc One Investment Advisors Corporation using data from Wiesenberger, a Thomson Financial Company. Measured by the Standard & Poors 500 Composite Total Return Index - capitalizationweighted.

Stick to your plan. It takes time and effort to develop a plan that comprehensively defines your risk tolerance. And, it is no small undertaking to establish return expectations that can be produced within those risk management parameters. Once you've gone through this rigorous process of developing and stress-testing your Investment Plan and Policy, put it in place and let it work. Studies 2 show that asset allocation decisions result in an impact of 92% on your portfolio results. The next most significant factor is security selection - the skills your investment manager employs in constructing and managing an investment portfolio to a benchmark. The least significant factor is market timing, which is not a strategy that has produced a consistently good track record. As market conditions, and your investment objectives may change, from time to time, it is appropriate to review your plan periodically. Many investors initiate such a review process every year or two. If your plan is comprehensive, it is quite possible you will conclude that no revisions are needed for you plan at that time.

Defining Your Investment Objectives

Investing wisely is a function of your specific needs and goals. Each investor has different objectives that need to be met depending on age, income, planned activities, and attitudes about risk. How can you work with your investment advisor to best determine which investments are right for you? Among the important factors to consider are personal status, plans, and constraints. Some of the issues that you and your advisor should consider in defining the objectives that are right for you are listed below. Goals and Needs You may have specific goals and requirements that you want your investment portfolio to

fulfill. For example, you may be funding college for children, business expansion, travel plans, or retirement needs. You should identify these goals and needs clearly with your investment advisor so that his or her recommendations for your portfolio can assist you in meeting them. Age Your age is an important consideration when deciding how much risk to assume. Portfolio assets that are riskier and that will fluctuate more over time may be appropriate for younger investors but not for others. An individual who does not expect to liquidate the assets in his or her portfolio for a number of years has more time to recover from a market downturn, while an investor close to retirement may be more likely to prefer stable assets and capital preservation. Age also affects the choice between income-earning securities and those oriented toward capital gains. An investor who is employed and near peak earning power will probably want to minimize paying taxes, and will therefore lean toward investments that do not provide current income. Income Both your absolute income level and your income requirements influence your investment objectives in several ways. First, income, like age, influences the choice between dividend-paying or interest-paying investments, and those whose primary return is in the form of capital gains. You may prefer income-producing investments if you need to supplement or replace earned income. Your

income level also affects your investment choices because it determines your tax rate. Low-tax-bracket investors generally those whose income is lower will be more likely to prefer income-producing investments. High-taxrate investors are more likely to choose tax-deferred or tax-sheltered assets. Income also may influence risk preferences. High income investors may be more willing to choose higher risk investments since they can more easily contribute additional investment capital should they sustain losses. Taxes Your after-tax return is the return that matters. You should fully inform your investment advisor about your tax rate and any special tax circumstances that might apply to you. This will determine whether you should seek tax exempt or tax-sheltered securities as a part of your portfolio. The appropriateness of income or capital gains should be discussed in the context of your personal situation, so you may want your investment advisor to consult with your accountant. If you have tax-qualified or tax-deferred assets, you should hold these as separate portfolios which will likely carry different investment objectives. Occupation Your occupation also can affect portfolio objectives. Some professions produce more stable incomes than others, enabling the investor to tolerate more investment fluctuations. Your profession also may determine other assets. For example, does your job provide an adequate retirement plan, or must you fund your

retirement

from

your

investment

portfolio?

If

your

employer provides a stock-purchase plan, this may be a substantial part of your personal wealth, and you should consider it as a diversification issue when you make other portfolio choices. If you receive tax-qualified or tax-deferred assets from your job, these also will influence your investment decisions. Wealth Investment objectives should take into

consideration the assets you hold outside the portfolio. For example, if you have substantial equity in your home, you may want to minimize real estate holdings in your financial assets, or you may need to consider a different type of real estate asset. If you hold illiquid assets, then new investments may emphasize liquidity. The value of your existing assets will probably affect your tolerance for risk. In addition, your level of wealth has probably influenced your lifestyle. Maintaining a desired lifestyle into retirement and throughout will need to be factored into your investment bjectives. Time Horizon An important consideration in setting investment objectives is your time horizon. When do you expect to liquidate a portfolio? Should you choose assets of short or long maturity? Do you have time to recover from a declining market, or is capital preservation important to meet an immediate financial need? Liquidity Liquidity is the ease with which you can convert your assets to cash at fair market value. It is essential that

you recognize the need to convert your assets into cash at the appropriate times. Do you require a portfolio that can be liquidated easily, or can you afford to wait? Since greater liquidity generally results in lower return, it is necessary to give serious consideration to the inherent tradeoffs. Tolerance for Risk Your tolerance for risk is a very personal decision, and a question that is difficult for many investors to answer. In general, markets tend to provide higher returns in exchange for bearing higher risks. Often you will find that the investments with the highest longterm returns are very volatile in the short run. It is important to be honest with yourself in assessing whether you are comfortable with market volatility, and the level you can tolerate. While it is easy in hindsight to wish you had invested in a risky segment of the market that has performed well recently, a more realistic view is to look forward at the risk that might occur in the future. Other Special Circumstances Are there other

considerations of which your advisor should be aware? Consider here any special needs, goals, or problems you have not already addressed. Putting It All Together A professional investment advisor can work with you to answer all of these questions and prepare a written statement of investment objectives. Together you should then be able to determine a target rate of return, and an appropriate mix of assets to place in

the portfolio. Regular feedback will enable your advisor to incorporate any changes in your needs or circumstances. Advisors particularly well qualified to help you with this process may hold the Chartered Financial Analyst (CFA) designation, awarded by the Association for Investment Management and Research (AIMR).

INVESTMENT PERFORMANCE COUNCIL (IPC) Global Investment Performance Standards (GIPS) Guidance Statement on Portfolio Recordkeeping Requirements Introduction The following guidance relates only to records necessary to satisfy the recordkeeping requirements of the GIPS standards. In all instances, either paper (hard-copy) records or electronically stored records will suffice. If records are stored electronically, the records must be easily accessible and printable if needed. Although most firms are looking for a very precise list of the minimum supporting evidence that must be maintained in order to be able to recreate the firms performance history, there is not a single list of records that will suffice in all situations. GIPS provision 1.A.1 states All data and information necessary to support a firms performance presentation and to perform the required calculations must be captured and maintained. Proposed Adoption Date: June 2005 Proposed Effective Date: 1 January 2006 Retroactive Application: No Public Comment Period: Oct Dec 2004

Guiding Principles 1. Above all else, a firm must meet any and all regulatory requirements concerning records that must be maintained. 2. A firm must maintain sufficient records that allow for the recalculation of account-level returns. Depending on the system and methods used for calculating account-level returns, one firm may need different records than another. For each period, records to support those returns might include a combination of the following (this list is not meant to be an exhaustive list): Associated bank/custodial statements and reconciliations. Investment portfolio listing and valuations, including pricing calculations for non-market traded or illiquid securities Portfolio transactions reports Outstanding trade reports Corporate action reports Income received/earned reports Accrued income reports Tax reclaim reports Cash flow/weighted cash flow reports Fee information 3. A firm must maintain records that allow for the recalculation of composite-level returns. For each period, records to support those returns must include The accounts that are included in the composite;

 When each portfolio entered (and/or exited) the composite; The portfolio performance return for each account; The market value used to weight each account (BMV or BMV plus weighted cash flows); Fee information, if model fees are used; 4. A firm must maintain records to support why an account was assigned to a specific composite, or was excluded from all composites. Supporting records might include: Investment management agreements and amendments thereto; Email/other correspondence with clients regarding investment management strategy amendments 5. A firm must maintain records to support their claim of compliance on a firmwide basis. Information should be maintained to establish: Total firm assets under management Excluded accounts (non-discretionary, e.g.) Complete list and description of the firms composites; Compliant presentations, and supporting information for all composites 6. A firm should maintain all policies and procedures manuals (both current and previous versions) that support the claim of compliance. 7. Firms are encouraged to ensure that they have adequate service-level agreements with third party administrators to provide the records necessary for verification, both currently and at a date in the future.

8. A firm should maintain certain other specific records necessary to support a claim of compliance, such as (but not limited to): Client reports; Attribution information; if utilized to determine account composite assignment; Marketing output/RFPs responses; Third party performance data; Externally reviewed system and control reports (such as accounting reports or other internal controls/compliance reports for the client and/or custodians); Third party sub-advisory agreements; Board, Investment Committee or Composite/GIPS Compliance Committee minutes; Assets under management reconciliations (AUM per GIPS reports to AUM per regulatory returns); Client fee schedules/agreements; Custody fees data; Systems manuals especially for the systems that generate the composite reports (including returns and additional disclosures/statistics); A list of recipients of compliant presentations. 9. Subject to local regulatory requirements, once a firm has been verified, a firm may be able to reduce the amount of records stored. For example, an annual account transaction report may be maintained instead of individual monthly detail reports. The summary report could be used to recreate period-specific information if needed. Microfiche or electronically-stored reports are acceptable. However,

all records deemed necessary must be maintained for each year that is presented in a GIPS-compliant presentation.

Effective Date This Guidance Statement is proposed to take effect 1 January 2006. Firms currently coming into compliance should apply this guidance to all periods. Firms are encouraged, but not required to apply this guidance prior to the Effective Date. Applications 1. We have custodial records, trade confirmations, portfolio reports, holdings corporate and valuations, transactions income action reports,

received/earned reports, accrued income reports, and cash flow/weighted cash flow reports. Must we maintain all these records for all portfolios (both discretionary and non-discretionary) in order to satisfy GIPS 1.A.1? No. The firm must maintain sufficient records to support the firms performance record. This might include a

combination of the types of records listed. The firm must determine which records would suffice and maintain these records for all portfolios/composites for each period of performance presented. 2. How long must I keep the records? For example, we show a 25-year track record for our Large Cap Value Equity strategy. Must we still maintain the records? Yes. The firm must maintain records to support performance presentations for as long as the particular period is being presented. For example, a firm with a 25 year track record of their Large Cap Value Equity strategy would need to maintain sufficient records for the full 25 year period. 3. I have a group of portfolios that I dont use for advertising or marketing purposes. Must I keep the records for these accounts, even if I dont market their performance? Yes; the firm must maintain sufficient records that allow for the recalculation of account level and composite level returns regardless of whether the accounts are used for marketing or not. 4. Certain types of records (e.g. thermal printed faxes) have a limited life and in many cases such documents more than 10 years old. What happens if these records begin to disintegrate and are no longer readable?

Individual

documents

are

not

required,

summary

documents are acceptable. With the advent of technology, firms can rely on electronic scans of paper documents in order to satisfy the record-keeping requirements. 5. Do we have to keep trade tickets? The determination of which records are necessary to support the performance record is left up to the firm. In certain cases, the trade tickets may prove a useful resource to capture and maintain some of the data needed to support the record. In other cases, this data may be captured elsewhere. Since records capturing duplicate information isnt necessary, the firm must make the determination of which records to maintain. 6. I have records to support my performance; however, the records are stored in a system that is not operable and I do not have access to the records. Is this acceptable? Records stored in a system that is not operable will not satisfy the requirements of the GIPS standards to maintain data and information necessary to support the firms performance presentation. 7. I have a question that has not been answered directly by this Guidance Statement on the recordkeeping requirements. What should I do? Temporarily, the firm should maintain as much data as possible and seek legal counsel to consult on the most appropriate data to keep.

Selecting, Reviewing and Replacing Investment Managers

BIBLIOGRAPHY AND REFERENCES

IMC Library (Churchgate)- Some of the Newspaper cuttings such as Business Standard, Economics Times Etc. "Determinants of Portfolio Performance" by Gary Brinson, Randolf Hood, G Beebower. Finacial Analysts Journal, May/June 1991.

Internet sites- www.bseindia.com Reference booksThe Indian Financial System Indian Stock Market. (Chapter 26) A.K Sharma G.S Batra

- Books given by Mr. Sanjay Sakpal Indian Securities Market: A Review - NSEIL publication NSE Newsletters SC(R)A, 1956 & Rules SEBI Act, 1992, Rules & Regulations Depository Act, 1996 & Rules Rules, Regulations and Byelaws of NSEIL & NSCCL www.nseindia.com www.sebi.gov.in www.rbi.org.in www.finmin.nic.in

GLOSSARY
Stock: Stock means the capital or fund that a company Stock exchange:

Is any organization, association or group of persons, incorporated or not, which constitutes, maintains or provides a market place or facilities for bringing together purchase and sellers of securities, Recognized stock exchanges: Means a stock exchange which is for the time being recognized by central government / SEBI under sec.4 Securities: It includes shares, scrips, stocks, bonds, debentures, stock or other marketable securities of a like nature in or of any incorporated company or other body corporate Options in securities: Means a contract for the purchase or sale of a right to buy or sell, or right to buy and sell securities in future, and includes a Teji, Mandia put, call, or put and call in securities. Corporate: In the present context, corporate means incorporated companies or other body corporate registered under companies Act, Members: Means member of recognized stock exchange

Money market: A deal in financial assets with a short term, i.e. tenure is less than one year, like treasury bills, certificates of deposits, call money, commercial bills, commercial papers etc.

Capital market: Is one in which financial assets having longer tenure are interacted like equity shares, debentures, bonds, warrants etc.

Primary market: In which capital raised by issuing securities. It facilitates formation of capital through public issue and private placement.

Secondary market: For trading of outstanding securities through stock exchanges including OTCEI

Gilt-edge securities: Main feature of this market is that normally institutional investors like commercial banks, provident funds, etc. subscribe these securities and retain up to maturity.

Pay-in: Selling of shares Pay-out: Purchase/ buying of shares.

Contract Note: Is a confirmation trade document of trade(s) done on a particular day for and on behalf of a client in a format prescribed by the exchange It establishes a legally enforceable relationship between the member and client in respect of settlement of traders executed on the exchange as stated in the contract note

ABBREVIATION
ABC Additional Base Capital

BMC Base Minimum Capital BSE Bombay Stock Exchange CDSL Central Depositories Services Ltd. CM Capital Market Co. Company DCA Department of Company Affairs DEA Department of Economic Affairs DP Depository Participant DPG Dominant Promoter Group DQ Disclosed Quantity DvP Delivery versus Payment FI Financial Institution FII Foreign Institutional Investors F&O Futures and Options FTP File Transfer Protocol IOC Immediate or Cancel IPF Investor Protection Fund ISIN International Securities Identification Number LTP Last Trade Price MBP Market By Price MTM Mark To Market NSE National Stock Exchange NSCCL National Securities Clearing Corporation Limited NSDL National Securities Depository Ltd. OTC Over The Counter NEAT National Exchange for Automated Trading NCFM NSE's Certification in Financial Markets NSCCL National Securities Clearing Corporation Ltd. RBI Reserve Bank of India RDM Retail Debt Market SAT Securities Appellate Tribunal SBTS Screen Based Trading System SC(R)A Securities Contracts (Regulation) Act, 1956 SC(R)R Securities Contracts (Regulation) Rules, 1957 SEBI Securities and Exchange Board of India SGF Settlement Guarantee Fund SRO Self Regulatory Organisation T+2 Second day from the trading day TM Trading Member UTI Unit Trust of India VaR Value at Risk VSAT Very Small Aperture Terminal WDM Wholesale Debt Market