Himani 4th Sem Final Report

CHAPTER-1

INTRODUCTION

INTRODUCTION TO STUDY

The field of investment traditionally divided into security analysis and portfolio

management. The heart of security analysis is valuation of financial assets. Value in

turn is the function of risk and return. These two concepts are in the study of investment

.Investment can be defined the commitment of funds to one or more assets that will be

held over for some future time period.

In today fast growing world many opportunities are available,so in order to move with

changes and grab the best opportunities in the field of investments a professional fund

manager is necessary.

Therefore, in the present scenario the Portfolio Management Services (PMS) is fast

gaining importance as an investment alternative for the High Net worth Investors.

Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed

income, debt, cash, structured products and other individual securities, managed by a

professional money manager that can potentially be tailored to meet specific investment

objectives.

When you invest in PMS, you own individual securities unlike a mutual fund investor,

who owns units of the entire fund. You have the freedom and flexibility to tailor your

portfolio to address personal preferences and financial goals. Although portfolio

managers may oversee hundreds of portfolio, your account may be unique.

Investment Management Solution in PMS can be provided in the following ways:

i. Discretionary

ii. Non Discretionary

iii. Advisory

2

Discretionary: Under these services, the choice as well as the timings of the

investment decisions rest solely with the Portfolio Manager.

Non Discretionary: Under these services, the portfolio manager only suggests the

investment ideas.

Advisory: Under these services, the portfolio manager only suggests the investment

ideas.

The choice as well as the execution of the investment decisions rest solely with the

Investor.

Rule 2, clause (d) of the SEBI (portfolio managers) Rules, 1993 defines the term

“Portfolio” as “total holding of securities belonging to any person”.As a matter of fact,

portfolio is combination of assets the outcomes of which cannot be defined with

certainty new assets could be physical assets, real estates, land, building, gold etc. or

financial assets like stocks, equity, debenture, deposits etc.

Portfolio management refers to managing efficiently the investment in the securities

held by professional for others.

Merchant banker and the portfolio management with a view to ensure maximum

return by such investment with minimum risk of loss of return on the money invested in

securities held by them for their clients. The aim Portfolio management is to achieve the

maximum return from a portfolio, which has been delegated to be managed by manger

or financial institution.

There are lots of organization in the market on the lookout for the people like you

who need their portfolios managed for them .They have trained and skilled talent will

work on your money to make it do more for you.

Therefore, if any investors still insist on managing their own portfolio, then ensure

you build discipline into their investment. Work out their strategy and stand by it.

3

MYTHS ABOUT PMS

There are two most common myths found about Portfolio Management Services

(PMS) which we found among most of the Investors. They are as follows.

Myth No. 1: “PMS and Mutual Fund are Similar as the investment option”

As in the Finance Basket both the PMS and Mutual Fund are used for minimizing

risk and maximize the profit of the Investors. The objectives are similar as in both the

product but they are different from each other in certain aspects. They are as follows.

Management Side

In PMS, it’s ongoing personalized access to professional money management

services. Whereas, in Mutual fund gives personalize access to money.

Customization

In PMS, Portfolio can be tailored to address each investor's specific needs. Whereas

in Mutual Fund Portfolio structured to meet the fund's stated investment objectives.

Ownership

In PMS, Investors directly own the individual securities in their portfolio, allowing for

tax management flexibility, whereas in Mutual Fund Shareholders own shares of the

fund and cannot influence buy and sell decisions or control their exposure to incurring

tax liabilities.

Liquidity

4

In PMS, managers may hold cash; they are not required to hold cash to meet

redemptions, whereas, Mutual funds generally hold some cash to meet redemptions.

Minimums

PMS generally gives higher minimum investments than mutual funds. Generally,

minimum ranges from: Rs. 1 Crore + for Equity Options Rs. 5 Crore + for Fixed Income

Options Rs. 20 Lacs + for Structured Products, whereas in Mutual Fund Provide

ongoing, personalized access to professional money management services.

Flexibility

PMS is generally more flexible than mutual funds. The Portfolio Manager may move to

100% cash if it required. The Portfolio Manager may take his own time in building up the

portfolio. The Portfolio Manager can also manage a portfolio with disproportionate

allocation to select compelling opportunities whereas, in Mutual Fund comparatively

less flexible.

Myth No. 2: “PMS is more Risk free than other Financial Instrument”

In Financial Market Risk factor is common in all the financial products, but yes it is true

that Risk Factor vary from each other due to its nature. All investments involve a certain

amount of risk, including the possible erosion of the principal amount invested, which

varies depending on the security selected. For example, investments in small and mid-

sized companies tend to involve more risk than investments in larger companies.

5

INTRODUCTION TO STOCK EXCHANGE

The emergence of stock market can be traced back to 1830. In Bombay, business

passed in the shares of banks like the commercial bank, the chartered mercantile bank,

the chartered bank, the oriental bank and the old bank of Bombay and shares of cotton

presses. In Calcutta, Englishman reported the quotations of 4%, 5%, and 6% loans of

East India Company as well as the shares of the bank of Bengal in 1836. This list was a

further broadened in 1839 when the Calcutta newspaper printed the quotations of banks

like union bank and Agra bank. It also quoted the prices of business ventures like the

Bengal bonded warehouse, the Docking Company and the storm tug company.

Between 1840 and 1850, only half a dozen brokers existed for the limited business.

But during the share mania of 1860-65, the number of brokers increased considerably.

By 1860, the number of brokers was about 60 and during the exciting period of the

American Civil war, their number increased to about 200 to 250. The end of American

Civil war brought disillusionment and many

Failures and the brokers decreased in number and prosperity. It was in those

troublesome times between 1868 and 1875 that brokers organized an informal

association and finally as recited in the Indenture constituting the “Articles of

Association of the Exchange”.

On or about 9th day of July,1875, a few native brokers doing brokerage business in

shares and stocks resolved upon forming in Bombay an association for protecting the

6

character, status and interest of native share and stock brokers and providing a hall or

building for the use of the Members of such association.

As a meeting held in the broker’ Hall on the 5th day of February, 1887, it was

resolved to execute a formal deal of association and to constitute the first managing

committee and to appoint the first trustees. Accordingly, the Articles of Association of

the Exchange and the Stock

Exchange was formally established in Bombay on 3rd day of December, 1887. The

Association is now known as “The Stock Exchange”.

The entrance fee for new member was Re.1 and there were 318 members on the

list, when the exchange was constituted. The numbers of members increased to 333 in

1896, 362 in 1916and 478 in 1920 and the entrance fee was raised to Rs.5 in 1877,

Rs.1000 in 1896, Rs.2500 in 1916 and Rs. 48,000 in 1920. At present there are 23

recognized stock exchanges with about 6000 stock brokers. Organization structure of

stock exchange varies.

14 stock exchanges are organized as public limited companies, 6 as companies

limited by guarantee and 3 are non-profit voluntary organization. Of the total of 23, only

9 stock exchanges have been permanent recognition. Others have to seek recognition

on annual basis.

These exchange do not work of its own, rather, these are run by some persons and

with the help of some persons and institution. All these are down as functionaries on

stock exchange. These are:

i. Stockbrokers

ii. Sub-broker

iii. Market makers

iv. Portfolio consultants etc.

7

1. Stockbrokers: Stock brokers are the members of stock exchanges. These are

the persons who buy, sell or deal in securities. A certificate of registration from SEBI is

mandatory to act as a broker. SEBI can impose certain conditions while granting the

certificate of registrations. It is obligatory for the person to abide by the rules,

regulations and the buy-law. Stock brokers are commission broker, floor broker,

arbitrageur etc.

Detail of Registered BrokersTotal no. of registered brokers as

on 31.03.12Total no. of sub-broker as on

31.03.12

9000 24,000

2. Sub-broker: A sub-broker acts as agent of stock broker. He is not a member of

a stock exchange. He assists the investors in buying, selling or dealing in securities

through stockbroker. The broker and sub-broker should enter into an agreement in

which obligations of both should be specified. Sub-broker must be registered SEBI for a

dealing in securities. For getting registered with SEBI, he must fulfill certain rules and

regulation.

3. Market Makers: Market maker is a designated specialist in the specified

securities. They make both bid and offer at the same time. A market maker has to abide

by bye-laws, rules regulations of the concerned stock exchange. He is exempt from the

margin requirements. As per the listing requirements, a company where the paid-up

8

capital is Rs. 3 Crore but not more than Rs. 5 core and having a commercial operation

for less than 2 years should appoint a market maker at the time of issue of securities.

4. Portfolio Consultants: A combination of securities such as stocks, bonds and

money market instruments is collectively called as portfolio. Whereas the portfolio

consultants are the persons, firms or companies who advise, direct or undertake the

management or administration of securities or funds on behalf of their clients.

Traditionally stock trading is done through stock brokers, personally or through

telephones.

As number of people trading in stock market increase enormously in last few years,

some issues like location constrains, busy phone lines, miss communication etc start

growing in stock broker offices. Information technology (Stock Market Software) helps

stock brokers in solving these problems with Online Stock Trading.

Online Stock Market Trading is an internet based stock trading facility. Investor can

trade shares through a website without any manual intervention from Stock Broker.

There are two different type of trading environments available for online equity

trading.

1. Installable software based Stock Trading TerminalsThis trading environment requires software to be installed on investor’s computer.

This software is provided by the stock broker. This software requires high speed internet

connection. These kind of trading terminals are used by high volume intraday equity

traders.

2. Web (Internet) based trading application

9

This kind of trading environment doesn't require any additional software installation.

They are like other internet websites which investor can access from around the world

through normal internet connection.

Stock exchanges are like market places, where stockbrokers buy and sell securities for

individuals or institutions. As per the SCRA (Securities Contracts Regulation Act) 1956,

the definition of securities includes shares, bonds, stocks, debentures, government

securities, derivatives of securities, units of collective investment scheme (CIS) etc. The

securities market has two interdependent segments: the primary and secondary market.

The primary market is the channel for creation of new securities issued by public

limited companies or by government agencies. New securities issued in the primary

market are traded in the secondary market.

The secondary market operates through the over-the-counter (OTC) market and the

exchange trade market.

Advantages of Stocks Trading

1. Better returnsActively trading stocks can produce better overall returns than simply buying and

holding.

2. Huge ChoiceThere are thousands of stocks listed on markets around the world. There is always a

stock whose price is moving - it’s just a matter of finding them.

3. FamiliarityThe most traded stocks are in the largest companies that most of us have heard of

and understand - Microsoft, IBM, and Cisco etc.

Disadvantages of Stocks Trading

10

1. LeverageWith a margined account the maximum amount of leverage available for stock

trading is usually 4:1. Meaning a $25,000 could trade up to $100,000 of stock. This is

pretty low compared to Forex trading or futures trading.

2. Pattern Day Trader RulesIt requires at least $25,000 to be held in a trading account if the trader completes

more than 4 trades in a 5 day period. No such rule applies to Forex trading or futures

trading.

3. Uptick Rule on Short SellingA trader must wait until a stock price ticks up before they can short sell it. Again

there are no such rules in Forex trading or futures trading where going short are as easy

as going long.

4. Need to Borrow Stock to ShortStocks are physical commodities and if a trader wishes to go short then the broker

must have arrangements in place to borrow that stock from a shareholder until the

trader closes their position. This limits the opportunities available for short selling.

Contrast this to futures trading where selling is as easy as buying.

5. CostsAlthough online trading costs for stock trading are low they still add considerably to

the costs of day trading. Online futures trading are about 1/4 of the cost for the

equivalent value. In the UK 0.5% stamp duty is also levied on all share purchases

making trading virtually impossible, hence the popularity of spread betting.

11

CHAPTER- 2

COMPANY PROFILE

12

COMPANY PROFILE

Sharekhan is one of the leading retail brokerage of City Venture which is running

successfully since 1922 in the country. Earlier it was the retail broking arm of the

Mumbai-based SSKI Group, which has over eight decades of experience in the stock

broking business. Share khan offers its customers a wide range of equity related

services including trade execution on BSE, NSE, Derivatives, depository services,

online trading, investment advice etc.

Earlier with a legacy of more than 80 years in the stock markets, the SSKI group

ventured into institutional broking and corporate finance 18 years ago. SSKI is one of

the leading players in institutional broking and corporate finance activities. SSKI holds a

sizeable portion of the market in each of these segments. SSKI’s institutional broking

arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5%

of all Domestic Institutional portfolio investment in the country.

It has 60 institutional clients spread over India, Far East, UK and US. Foreign

Institutional Investors generate about 65% of the organization’s revenue, with a daily

13

turnover of over US$ 2 million. The content-rich and research oriented portal has stood

out among its contemporaries because of its steadfast dedication to offering customers

best-of-breed technology and superior market information. The objective has been to let

customers make informed decisions and to simplify the process of investing in stocks

Mission of the Sharekhan is

“To educate and empower the individual investor to make better investment decisions through

QUALITY ADVICE INNOVATIVE PRODUCTS and SUPERIOR SERVICE.”

WORK STRUCUTRE OF SHAREKHAN

Sharekhan has always believed in investing in technology to build its business. The

company has used some of the best-known names in the IT industry, like Sun

Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette,

Verisign Financial Technologies India Ltd, Spider Software Pvt. Ltd. to build its trading

engine and content. The Citi Venture holds a majority stake in the company. HSBC,

Intel & Carlyle are the other investors.

14

On April 17, 2002 Sharekhan launched Speed Trade and Trade Tiger, are net-based

executable application that emulates the broker terminals along with host of other

information relevant to the Day Traders. This was for the first time that a net-based

trading station of this caliber was offered to the traders. In the last six months Speed

Trade has become a de facto standard for the Day Trading community over the net.

Sharekhan’s ground network includes over 700+ Shareshops in 130+ cities in India.

The firm’s online trading and investment site www.sharekhan.com - was launched

on Feb 8, 2000. The site gives access to superior content and transaction facility to

retail customers across the country. Known for its jargon-free, investor friendly language

and high quality research, the site has a registered base of over 3 Lacs customers. The

number of trading members currently stands at over 7 Lacs. While online trading

currently accounts for just over 5 per cent of the daily trading in stocks in India, Sh

arekhan alone accounts for 27 per cent of the volumes traded online.

The Corporate Finance section has a list of very prestigious clients and has many

‘firsts’ to its credit, in terms of the size of deal, sector tapped etc. The group has placed

over US$ 5 billion in private equity deals. Some of the clients include BPL Cellular

Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shopper’s Stop. Finally,

Sharekhan shifted hands and Citi venture get holds on it.

PRODUCT AND SERVICES OFFERD BY SHAREKHAN1- Equity Trading Platform (Online/Offline).

2- Commodities Trading Platform (Online/Offline).

3- Portfolio Management Service.

4- Mutual Fund Advisory and Distribution.

5- Insurance Distribution.

6-Forex

15

6. Forex.

16

REASON TO CHOOSE SAHREKHAN LIMITED

ExperienceSSKI has more than eight decades of trust and credibility in the Indian stock market.

In the Asia Money broker's poll held recently, SSKI won the 'India's best broking house

for 2004' award. Ever since it launched Sharekhan as its retail broking division in

February 2000, it has been providing institutional-level research and broking services to

individual investors.

TechnologyWith their online trading account one can buy and sell shares in an instant from any

PC with an internet connection. Customers get access to the powerful online trading

tools that will help them to take complete control over their investment in shares.

AccessibilitySharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for

investors. These services are accessible through many centers across the country

(Over 650 locations in 150 cities), over the Internet (through the website

www.sharekhan.com) as well as over the Voice Tool.

KnowledgeIn a business where the right information at the right time can translate into direct

profits, investors get access to a wide range of information on the content-rich portal,

www.sharekhan.com. Investors will also get a useful set of knowledge-based tools that

will empower them to take informed decisions.

17

http://www.sharekhan.com/

ConvenienceOne can call Sharekhan’s Dial-N-Trade number to get investment advice and

execute his/her transactions. They have a dedicated call-center to provide this service

via a Toll Free Number 1800 22-7500 & 39707500 from anywhere in India.

Customer ServiceIts customer service team assist their customer for any help that they need relating

to transactions, billing, demat and other queries. Their customer service can be

contacted via a toll-free number, email or live chat on www.sharekhan.com.

Investment AdviceSharekhan has dedicated research teams of more than 30 people for fundamental

and technical research. Their analysts constantly track the pulse of the market and

provide timely investment advice to customer in the form of daily research emails, online

chat, printed reports etc.

Benefits Free Depository A/c

Instant Cash Transfer

Multiple Bank Option.

Secure Order by Voice Tool Dial-n-Trade.

Automated Portfolio to keep track of the value of your actual purchases.

24x7 Voice Tool access to your trading account.

Personalized Price and Account Alerts delivered instantly to your Mobile Phone

& E-mail address.

Live Chat facility with Relationship Manager on Yahoo Messenger

Special Personal Inbox for order and trade confirmations.

Buy or sell even single share

18

Anytime Ordering.

Sharekhan offers the following products:-

CLASSIC ACCOUNTThis is a User Friendly Product which allows the client to trade through website

www.sharekhan.com and is suitable for the retail investors who is risk-averse and

hence prefers to invest in stocks or who does not trade too frequently.

Features Online trading account for investing in Equity and Derivatives via

www.sharekhan.com

Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE.

Integration of On-line trading, Saving Bank and Demat Account.

Instant cash transfer facility against purchase & sale of shares.

Competitive transaction charges.

Instant order and trade confirmation by E-mail.

Streaming Quotes (Cash & Derivatives).

Personalized market watch.

Single screen interface for Cash and derivatives and more.

Provision to enter price trigger and view the same online in market watch.

SPEEDTRADE

SPEEDTRADE is an internet-based software application that enables you to buy

and sell in an instant. It is ideal for active traders and jobbers who transact frequently

during day’s session to capitalize on intra-day price movement.

19


Features Instant order Execution and Confirmation.

Single screen trading terminal for NSE Cash, NSE F&O & BSE.

Technical Studies.

Multiple Charting.

Real-time streaming quotes, tic-by-tic charts.

Market summary (Cost traded scrip, highest clue etc.)

Hot keys similar to broker’s terminal.

Alerts and reminders.

Back-up facility to place trades on Direct Phone lines.

Live market debts.

DIAL-N-TRADEAlong with enabling access for trade online, the CLASSIC and SPEEDTRADE

ACCOUNT also gives Dial-n-trade services. With this service, one can dial Sharekhan’s

dedicated phone lines 1800-22-7500, 3970-7500. Beside this, Relationship Managers

are always available on Office Phone and Mobile to resolve customer queries.

SHARE MOBILESharekhan had introduced Share Mobile, mobile based software where one can

watch Stock Prices, Intra Day Charts, Research & Advice and Trading Calls live on the

Mobile. (As per SEBI regulations, buying-selling shares through a mobile phone are not

yet permitted.)

PREPAID ACCOUNTCustomers pay Advance Brokerage on trading Account and enjoy uninterrupted

trading in their Account. Beside this, great discount are also available (up to 50%) on

brokerage.

Prepaid Classic Account: - Rs. 2000

20

Prepaid Speed trade Account: - Rs. 6000

IPO ON-LINECustomers can apply to all the forthcoming IPOs online. This is quite hassle-free,

paperless and time saving. Simply allocate fund to IPO Account, Apply for the IPO and

Sit Back & Relax.

Mutual Fund OnlineInvestors can apply to Mutual Funds of Reliance, Franklin Templeton Investments,

ICICI Prudential, SBI, Birla, Sundaram, HDFC, DSP Merrill Lynch, PRINCIPAL and

TATA with Sharekhan.

Zero Balance ICICI Saving AccountSharekhan had tied-up with ICICI bank for Zero Balance Account for Sharekhan’s

Clients. Now their customers can have a Zero Balance Saving Account with ICICI Bank

after your demat account creation with Sharekhan.

21

CHAPTER-3

RESEARCH METHODOLOGY

22

RESEARCH METHODOLOGY

OBJECTIVE OF THE PROJECT

Each research study has its own specific purpose. It is like to discover to Question

through the application of scientific procedure. But the main aim of our research to find

out the truth that is hidden and which has not been discovered as yet. Our research

study has two objectives:-

To know the concept of Portfolio Management.

To know about the schemes offered by the different insurance companies, new

IPO’s, Mutual Funds.

To know in depth about Insurance, Mutual Funds, Stock, Bonds etc.

To know about the awareness towards stock brokers and share market.

To study about the competitive position of Sharekhan Ltd in Competitive Market.

To study about the effectiveness & efficiency of Sharekhan Ltd in relation to its

competitors

To study about whether people are satisfied with Sharekhan Services &

Management System or not.

23

To study about the difficulties faced by persons while Trading in Sharekhan.

To study about the need of improvement in existing Trading system.

Scope of the Study

The study of the Portfolio Management Services is helpful in the following areas.

In today's complex financial environment, investors have unique needs which are

derived from their risk appetite and financial goals. But regardless of this, every investor

seeks to maximize his returns on investments without capital erosion. Portfolio

Management Services (PMS) recognize this, and manage the investments

professionally to achieve specific investment objectives, and not to forget, relieving the

investors from the day to day hassles which investment require.

It is offers professional management of equity investment of the investor with an

aim to deliver consistent return with an eye on risk.

Identify the key Stock in each portfolio.

To look out for new prospective customers who are willing to invest in PMS.

To find out the Sharekhan, PMS services effectiveness in the current situation.

It also covers the scenario of the Investment Philosophy of a Fund Manager.

RESEARCH DESISGN OF THE STUDY

This report is based on primary as well secondary data, however primary data

collection was given more importance since it is overhearing factor in attitude studies.

One of the most important users of research methodology is that it helps in identifying

the problem, collecting, analyzing the required information data and providing an

alternative solution to the problem .It also helps in collecting the vital information that is

24

required by the top management to assist them for the better decision making both day

to day decision and critical ones.

The study consists of analysis about Investors Perception about the Portfolio

Management Services offered by Sharekhan Limited. For the purpose of the study 100

customers were picked up at random and their views solicited on different parameters.

The methodology adopted includes

Questionnaire Random sample survey of customers Discussions with the concerned

SOURCES OF DATA

Primary data: Questionnaire

Secondary data: Published materials of Sharekhan Limited. Such as

periodicals, journals, news papers, and website.

SAMPLING PLAN

Sampling: Since Sharekhan Limited has many segments I selected Portfolio Management

Services (PMS) segment as per my profile to do market research. 100% coverage was

difficult within the limited period of time. Hence sampling survey method was adopted

for the purpose of the study.

Population: (Universe) customers & non consumers of Sharekhan limited

25

Sampling size: A sample of hundred was chosen for the purpose of the study. Sample consisted of

Investor as based on their Income and Profession as well as Educational Background.

Sampling Methods: Probability sampling requires complete knowledge about all sampling units in the

universe. Due to time constraint non-probability sampling was chosen for the study.

Sampling procedure: From large number of customers & non consumers sample lot were randomly

picked up by me.

Field Study:

Directly approached respondents by the following strategies

Tele-calling

Personal Visits

Clients References

Promotional Activities

Database provided by the Sharekhan Limited.

26

CHAPTER-4

27

PORTFOLIO MANAGMENT SERVICES

28

PORTFOLIO MANGEMNT SERVICES (PMS)

Portfolio (finance) means a collection of investments held by an institution or a

private individual. Holding a portfolio is often part of an investment and risk-limiting

strategy called diversification. By owning several assets, certain types of risk (in

particular specific risk) can be reduced. There are also portfolios which are aimed at

taking high risks – these are called concentrated portfolios.

Investment management is the professional management of various securities

(shares, bonds etc) and other assets (e.g. real estate), to meet specified investment

goals for the benefit of the investors. Investors may be institutions (insurance

companies, pension funds, corporations etc.) or private investors (both directly via

investment contracts and more commonly via collective investment schemes e.g.

mutual funds).

The term asset management is often used to refer to the investment management of

collective investments, whilst the more generic fund management may refer to all forms

of institutional investment as well as investment management for private investors.

Investment managers who specialize in advisory or discretionary management on

behalf of (normally wealthy) private investors may often refer to their services as wealth

management or portfolio management often within the context of so-called "private

banking".

The provision of 'investment management services' includes elements of financial

analysis, asset selection, stock selection, plan implementation and ongoing monitoring

of investments. Outside of the financial industry, the term "investment management" is

often applied to investments other than financial instruments. Investments are often

meant to include projects, brands, patents and many things other than stocks and

bonds. Even in this case, the term implies that rigorous financial and economic analysis

methods are used.

29

Need of PMS

As in the current scenario the effectiveness of PMS is required. As the PMS gives

investors periodically review their asset allocation across different assets as the portfolio

can get skewed over a period of time. This can be largely due to appreciation /

depreciation in the value of the investments.

As the financial goals are diverse, the investment choices also need to be different

to meet those needs. No single investment is likely to meet all the needs, so one should

keep some money in bank deposits and / liquid funds to meet any urgent need for cash

and keep the balance in other investment products/ schemes that would maximize the

return and minimize the risk. Investment allocation can also change depending on one’s

risk-return profile.

30

Borrowers

SecondaryMkt

Client Management

Origination

PortfolioManagerCredit decisionRisk RatingPricing/ReturnPortfolio Decision

Syndication

Loan Trading

Hedging & Securitization

Servicing

Objective of PMS

There is the following objective which is full filled by Portfolio Management Services.

1. Safety Of Fund: - The investment should be preserved, not be lost, and should remain in the

returnable position in cash or kind.

2. Marketability: - The investment made in securities should be marketable that means, the

securities must be listed and traded in stock exchange so as to avoid difficulty in

their encashment.

3. Liquidity: - The portfolio must consist of such securities, which could be en-cashed

without any difficulty or involvement of time to meet urgent need for funds.

Marketability ensures liquidity to the portfolio.

4. Reasonable return: - The investment should earn a reasonable return to upkeep the declining

value of money and be compatible with opportunity cost of the money in terms of

current income in the form of interest or dividend.

5. Appreciation in Capital: - The money invested in portfolio should grow and result into capital gains.

6. Tax planning: - Efficient portfolio management is concerned with composite tax planning

covering income tax, capital gain tax, wealth tax and gift tax.

31

7. Minimize risk: - Risk avoidance and minimization of risk are important objective of portfolio

management. Portfolio managers achieve these objectives by effective

investment planning and periodical review of market, situation and economic

environment affecting the financial market.

PORTFOLIO CONSTRUCTION The Portfolio Construction of Rational investors wish to maximize the returns on their

funds for a given level of risk. All investments possess varying degrees of risk. Returns

come in the form of income, such as interest or dividends, or through growth in capital

values (i.e. capital gains).

The portfolio construction process can be broadly characterized as comprising the

following steps:

1. Setting objectives.

The first step in building a portfolio is to determine the main objectives of the fund

given the constraints (i.e. tax and liquidity requirements) that may apply. Each investor

has different objectives, time horizons and attitude towards risk. Pension funds have

long-term obligations and, as a result, invest for the long term. Their objective may be to

maximize total returns in excess of the inflation rate. A charity might wish to generate

the highest level of income whilst maintaining the value of its capital received from

bequests. An individual may have certain liabilities and wish to match them at a future

date. Assessing a client’s risk tolerance can be difficult. The concepts of efficient

portfolios and diversification must also be considered when setting up the investment

objectives.

32

2. Defining Policy .

Once the objectives have been set, a suitable investment policy must be

established. The standard procedure is for the money manager to ask clients to select

their preferred mix of assets, for example equities and bonds, to provide an idea of the

normal mix desired. Clients are then asked to specify limits or maximum and minimum

amounts they will allow to be invested in the different assets available. The main asset

classes are cash, equities, gilts/bonds and other debt instruments, derivatives, property

and overseas assets. Alternative investments, such as private equity, are also growing

in popularity, and will be discussed in a later chapter. Attaining the optimal asset mix

over time is one of the key factors of successful investing.

3. Applying portfolio strategy.

At either end of the portfolio management spectrum of strategies are active and

passive strategies. An active strategy involves predicting trends and changing

expectations about the likely future performance of the various asset classes and

actively dealing in and out of investments to seek a better performance. For example, if

the manager expects interest rates to rise, bond prices are likely to fall and so bonds

should be sold, unless this expectation is already

factored into bond prices. At this stage, the active fund manager should also determine

the style of the portfolio. For example, will the fund invest primarily in companies with

large market capitalizations, in shares of companies expected to generate high growth

rates, or in companies whose valuations are low? A passive strategy usually involves

buying securities to match a preselected market index. Alternatively, a portfolio can be

set up to match the investor’s choice of tailor-made index. Passive strategies rely on

diversification to reduce risk. Outperformance versus the chosen index is not expected.

This strategy requires minimum input from the portfolio manager. In practice, many

33

active funds are managed somewhere between the active and passive extremes, the

core holdings of the fund being passively managed and the balance being actively

managed.

4. Asset selections .

Once the strategy is decided, the fund manager must select individual assets in

which to invest. Usually a systematic procedure known as an investment process is

established, which sets guidelines or criteria for asset selection. Active strategies

require that the fund managers apply analytical skills and judgment for asset selection in

order to identify undervalued assets and to try to generate superior performance.

5. Performance assessments.

In order to assess the success of the fund manager, the performance of the fund is

periodically measured against a pre-agreed benchmark – perhaps a suitable stock

exchange index or against a group of similar portfolios (peer group comparison). The

portfolio construction process is continuously iterative, reflecting changes internally and

externally. For example, expected movements in exchange rates may make overseas

investment more attractive, leading to changes in asset allocation. Or, if many large-

scale investors simultaneously decide to switch from passive to more active strategies,

pressure will be put on the fund managers to offer more active funds. Poor performance

of a fund may lead to modifications in individual asset holdings or, as an extreme

measure; the manager of the fund may be changed altogether.

34

Steps to Stock Selection Process

\

35

Types of assets

The structure of a portfolio will depend ultimately on the investor’s objectives and on

the asset selection decision reached. The portfolio structure takes into account a range

of factors, including the investor’s time horizon, attitude to risk, liquidity requirements,

tax position and availability of investments. The main asset classes are cash, bonds and

other fixed income securities, equities, derivatives, property and overseas assets.

Cash and cash instruments

Cash can be invested over any desired period, to generate interest income, in a range

of highly liquid or easily redeemable instruments, from simple bank deposits, negotiable

certificates of deposits, commercial paper (short term corporate debt) and Treasury bills

(short term government debt) to money market funds, which actively manage cash

resources across a range of domestic and foreign markets. Cash is normally held over

the short term pending use elsewhere (perhaps for paying claims by a non-life

insurance company or for paying pensions), but may be held over the longer term as

well. Returns on cash are driven by the general demand for funds in an economy,

interest rates, and the expected rate of inflation. A portfolio will normally maintain at

least a small proportion of its funds in cash in order to take advantage of buying

opportunities.

Bonds

Bonds are debt instruments on which the issuer (the borrower) agrees to make

interest payments at periodic intervals over the life of the bond – this can be for two to

36

thirty years or, sometimes, in perpetuity. Interest payments can be fixed or variable, the

latter being linked to prevailing levels of interest rates. Bond markets are international

and have grown rapidly over recent years. The bond markets are highly liquid, with

many issuers of similar standing, including governments (sovereigns) and state-

guaranteed organizations. Corporate bonds are bonds that are issued by companies.

To assist investors and to help in the efficient pricing of bond issues, many bond issues

are given ratings by specialist agencies such as Standard & Poor’s and Moody’s. The

highest investment grade is AAA, going all the way down to D, which is graded as in

default. Depending on expected movements in future interest rates, the capital values of

bonds fluctuate daily, providing investors with the potential for capital gains or losses.

Future interest rates are driven by the likely demand/ supply of money in an economy,

future inflation rates, political events and interest rates elsewhere in world markets.

Investors with short-term horizons and liquidity requirements may choose to invest in

bonds because of their relatively higher return than cash and their prospects for

possible capital appreciation. Long-term investors, such as pension funds, may acquire

bonds for the higher income and may hold them until redemption – for perhaps seven or

fifteen years. Because of the greater risk, long bonds (over ten years to maturity) tend to

be more volatile in price than medium- and short-term bonds, and have a higher yield.

Equities

Equity consists of shares in a company representing the capital originally provided

by shareholders. An ordinary shareholder owns a proportional share of the company

and an ordinary share carries the residual risk and rewards after all liabilities and costs

have been paid. Ordinary shares carry the right to receive income in the form of

dividends (once declared out of distributable profits) and any residual claim on the

company’s assets once its liabilities have been paid in full. Preference shares are

another type of share capital. They differ from ordinary shares in that the dividend on a

preference share is usually fixed at some amount and does not change. Also,

preference shares usually do not carry voting rights and, in the event of firm failure,

37

preference shareholders are paid before ordinary shareholders. Returns from investing

in equities are generated in the form of dividend income and capital gain arising from

the ultimate sale of the shares. The level of dividends may vary from year to year,

reflecting the changing profitability of a company. Similarly, the market price of a share

will change from day to day to reflect all relevant available information. Although not

guaranteed, equity prices generally rise over time, reflecting general economic growth,

and have been found over the long term to generate growing levels of income in excess

of the rate of inflation. Granted, there may be periods of time, even years, when equity

prices trend downwards – usually during recessionary times. The overall long-term

prospect, however, for capital appreciation makes equities an attractive investment

proposition for major institutional investors.

Derivatives

Derivative instruments are financial assets that are derived from existing primary

assets as opposed to being issued by a company or government entity. The two most

popular derivatives are futures and options. The extent to which a fund may incorporate

derivatives products in the fund will be specified in the fund rules and, depending on the

type of fund established for the client and depending on the client, may not be allowable

at all.

A futures contract is an agreement in the form of a standardized contract between

two counterparties to exchange an asset at a fixed price and date in the future. The

underlying asset of the futures contract can be a commodity or a financial security. Each

contract specifies the type and amount of the asset to be exchanged, and where it is to

be delivered (usually one of a few approved locations for that particular asset). Futures

contracts can be set up for the delivery of cocoa, steel, oil or coffee. Likewise, financial

futures contracts can specify the delivery of foreign currency or a range of government

bonds. The buyer of a futures contract takes a ‘long position’, and will make a profit if

the value of the contract rises after the purchase. The seller of the futures contract takes

a ‘short position’ and will, in turn, make a profit if the price of the futures contract falls.

38

When the futures contract expires, the seller of the contract is required to deliver the

underlying asset to the buyer of the contract. Regarding financial futures contracts,

however, in the vast majority of cases no physical delivery of the underlying asset takes

place as many contracts are cash settled or closed out with the offsetting position

before the expiry date.

An option contract is an agreement that gives the owner the right, but not

obligation, to buy or sell (depending on the type of option) a certain asset for a specified

period of time. A call option gives the holder the right to buy the asset. A put option

gives the holder the right to sell the asset. European options can be exercised only on

the options’ expiry date. US options can be exercised at any time before the contract’s

maturity date. Option contracts on stocks or stock indices are particularly popular.

Buying an option involves paying a premium; selling an option involves receiving the

premium. Options have the potential for large gains or losses, and are considered to be

high-risk instruments. Sometimes, however, option contracts are used to reduce risk.

For example, fund managers can use a call option to reduce risk when they own an

asset. Only very specific funds are allowed to hold options.

Property

Property investment can be made either directly by buying properties, or indirectly by

buying shares in listed property companies. Only major institutional investors with long-

term time horizons and no liquidity pressures tend to make direct property investments.

These institutions purchase freehold and leasehold properties as part of a property

portfolio held for the long term, perhaps twenty or more years. Property sectors of

interest would include prime, quality, well-located commercial office and shop

properties, modern industrial warehouses and estates, hotels, farmland and woodland.

Returns are generated from annual rents and any capital gains on realization. These

investments are often highly illiquid.

39

Risk and Risk Aversion

Portfolio theory also assumes that investors are basically risk averse, meaning that,

given a choice between two assets with equal rates of return they will select the asset

with lower level of risk.

For example, they purchased various type of insurance including life insurance,

Health insurance and car insurance. The Combination of risk preference and risk

aversion can be explained by an attitude toward risk that depends on the amount of

money involved.

A discussion of portfolio or fund management must include some thought given to

the concept of risk. Any portfolio that is being developed will have certain risk

constraints specified in the fund rules, very often to cater to a particular segment of

investor who possesses a particular level of risk appetite. It is, therefore, important to

spend some time discussing the basic theories of quantifying the level of risk in an

investment, and to attempt to explain the way in which market values of investments are

determined

Definition of Risk

Although there is a difference in the specific definition of risk and uncertainty, for our

purpose and in most financial literature the two terms are used interchangeably. In fact,

one way to define risk is the uncertainty of future outcomes. An alternative definition

might be the probability of an adverse outcome.

Composite risks involve the different risk as explained below:-

(1). Interest rate risk: -

It occurs due to variability cause in return by changes in level of interest rate. In long

runs all interest rate move up or downwards. These changes affect the value of security.

RBI, in India, is the monitoring authority which effectalises the change in interest rate.

40

Any upward revision in interest rate affects fixed income security, which carry old lower

rate of interest and thus declining market value. Thus it establishes an inverse

relationship in the prize of security.

TYPES RISK EXTENTCash equivalent Less vulnerable to interest rate risk

Long term Bond More vulnerable to interest rate risk.

(2) Purchasing power risk:

It is known as inflation risk also. This risk emanates from the very fact that inflation

affects the purchasing power adversely. Purchasing power risk is more in inflationary

times in bonds and fixed income securities. It is desirable to invest in such securities

during deflationary period or a period of decelerating inflation. Purchasing power risk is

less in flexible income securities like equity shares or common stuffs where rise in

dividend income offset increase in the rate of inflation and provide advantage of capital

gains.

(3) Business risk:

Business risk emanates from sale and purchase of securities affected by business

cycles, technological change etc. Business cycle affects all the type of securities viz.

there is cheerful movement in boom due to bullish trend in stock prizes where as

bearish trend in depression brings downfall in the prizes of all types of securities.

Flexible income securities are nearly affected than fix rate securities during depression

due to decline n the market prize.

(4) Financial risk:

41

Financial risk emanates from the changes in the capital structure of the company. It

is also known as leveraged risk and expressed in term of debt equity ratio. Excess of

debts against equity in the capital structure indicates the company to be highly geared

or highly levered. Although leveraged company’s earnings per share (EPS) are more

but dependence on borrowing exposes it to the risk of winding up. For, its inability to

the honor its commitments towards the creditors are most important.

Here it is imperative to express the relationship between risk and return, which is

depicted graphically below .

Maximize returns, minimize risks

42

RISK VERSUS RETURNRisk versus return is the reason why investors invest in portfolios. The ideal goal in

portfolio management is to create an optimal portfolio derived from the best risk–return

opportunities available given a particular set of risk constraints. To be able to make

decisions, it must be possible to quantify the degree of risk in a particular opportunity.

The most common method is to use the standard deviation of the expected returns. This

method measures spreads, and it is the possible returns of these spreads that provide

the measure of risk. The presence of risk means that more than one outcome is

possible. An investment is expected to produce different returns depending on the set of

circumstances that prevail.

43

For example, given the following for Investment A:

Circumstance Return(x) Probability(p)

I 10% 0.2

II 12% 0.3

III 15% 0.4

IV 19% 0.1

It is possible to calculate:

1. The expected (or average) return

Mean (average) = x = expected value (EV) = ∑px

Circumstance Return(x) Probability(p) px

I 10% 0.2 2.0

II 12% 0.3 3.6

III 15% 0.4 6.0

IV 19% 0.1 1.9

Expected Return (∑px) = 13.5%

2. The Standard deviation

Standard deviation =σ=√ ∑p(x- x) 2

Also Variance (VAR) is equal to the standard deviation squared or σ2

Circumstance Return Probability

Deviation from expected

Return (x -x)

p (x -x)2

I 10% 0.2 -3.5% 2.45

II 12% 0.3 -1.5% .68

III 15% 0.4 +1.5% 1.90

44

IV 19% 0.1 +5.5% 3.03

VARAIANCE= 7.06

Standard deviation (σ) = √Variance

= √ 7.06

= 2.66%

The standard deviation is a measure of risk, whereby the greater the standard

deviation, the greater the spread, and the greater the spread, the greater the risk.

If the above exercise were to be performed using another investment that offered

the same expected return, but a different standard deviation, then the following result

might occur:

If the above exercise were to be performed using another investment that offered the

same expected return, but a different standard deviation, then the following result might

occur: -

Plan Expected Return Risk(standard deviation)

Investment A 9% 2.5%

Investment B 9% 4.0%

Since both investments have the same expected return, the best selection of

investment would be Investment A, which provides the lower risk. Similarly, if there are

two investments presenting the same risk, but one has a higher return than the other,

that investment would be chosen over the investment with the lower return for the same

risk.

In the real world, there are all types of investors. Some investors are completely risk

averse and others are willing to take some risk, but expect a higher return for that risk.

Different investors will also have different tolerances or threshold levels for risk–return

trade-offs – i.e. for a given level of risk, one investor may demand a higher rate of return

than another investor.

45

INDIFFERNCE CURVESuppose the following situation exists

Plan Expected Return Risk(Standard Deviation)

Investment A 10% 5%

Investment B 20% 10%

The question to ask here is, does the extra 10% return compensate for the extra risk?

There is no right answer, as the decision would depend on the particular investor’s

attitude to risk. A particular investor’s indifference curve can be ascertained by plotting

what rate of return the investor would require for each level of risk to be indifferent

amongst all of the investments.

For example, there may be an investor who can obtain a return of 50% with zero risk

and a return of 55 %with a risk or standard deviation of 5% who will be indifferent

between the two investments. If further investments were considered, each with a

higher degree of risk, the investor would require still higher returns to make all of the

investments equally attractive. The investor being discussed could present the following

as the indifference curve shown in Figure.

Indifference CurveExpected Return Risk

50% 0%

55% 5%

70% 10%

100% 15%

120% 18%

230% 25%

Risk

46

Indifference curve It could be the case that this investor would have different indifference curves given

a different starting level of return for zero risk. The exercise would need to be repeated

for various levels of risk–return starting points. An entire set of indifference curves could

be constructed that would portray a particular investor’s attitude towards risk

Indifference CurveUtility scores

At this stage the concept of utility scores can be introduced. These can be seen as a

way of ranking competing portfolios based on the expected return and risk of those

portfolios. Thus if a fund manager had to determine which investment a particular

investor would prefer, i.e. Investment A equaling a return of 10% for a risk of 5% or

Investment B equaling a return of 20% for a risk of 10%, the manager would create

indifference curves for that particular investor and look at the utility scores. Higher utility

scores are assigned to portfolios or investments with more attractive risk–return profiles.

Although several scoring systems are legitimate, one function that is commonly

employed assigns a portfolio or investment with expected return or value EV and

variance of returns σ 2the following utility value:

47

U = EV –.005Aσ2 where:

U = utility value

A = an index of the investor’s aversion, (the factor of .005 is a scaling convention

that allows expression of the expected return and standard deviation in the equation as

a percentage rather than a decimal).

Utility is enhanced by high expected returns and diminished by high risk. Investors

choosing amongst competing investment portfolios will select the one providing the

highest utility value. Thus, in the example above, the investor will select the investment

(portfolio) with the higher utility value of 18.

Expected Return(EV)

Standard deviation(σ)

Utility=EV-.005Aσ2

10% 5% 10 –.005 4 25 = 9.5

20% 10% 20 –.005 4 100 = 18

(Assume A= 4 in this case

Portfolio Diversification

There are several different factors that cause risk or lead to variability in returns on

an individual investment. Factors that may influence risk in any given investment vehicle

include uncertainty of income, interest rates, inflation, exchange rates, tax rates, the

state of the economy, default risk and liquidity risk (the risk of not being able to sell on

the investment). In addition, an investor will assess the risk of a given investment

(portfolio) within the context of other types of investments that may already be owned,

i.e. stakes in pension funds, life insurance policies with savings components, and

property.

One way to control portfolio risk is via diversification, whereby investments are

made in a wide variety of assets so that the exposure to the risk of any particular

security is limited. This concept is based on the old adage ‘do not put all your eggs in

48

one basket’. If an investor owns shares in only one company, that investment will

fluctuate depending on the factors influencing that company. If that company goes

bankrupt, the investor might lose 100 per cent of the investment. If, however, the

investor owns shares in several companies in different sectors, then the likelihood of all

of those companies going bankrupt simultaneously is greatly diminished. Thus,

diversification reduces risk. Although bankruptcy risk has been considered here, the

same principle applies to other forms of risk.

RISK –RETURN MATRIX

Covariance and CorrelationThe goal is to hold a group of investments or securities within a portfolio potentially

to reduce the risk level suffered without reducing the level of return. To measure the

49

success of a potentially diversified portfolio, covariance and correlation are

considered. Covariance measures to what degree the returns of two risky assets move

in tandem. A positive covariance means that the returns of the two assets move

together, whilst a negative covariance means that they move in inverse directions.

Covariance COV(x, y) = ∑p(x-x) (y-y) for two investments x and y, where p is the probability.

Covariance is an absolute measure, and covariances cannot be compared with one

another. To obtain a relative measure, the formula for correlation coefficient [r] is used.

Correlation coefficient

r = COVxyσx .σy

To illustrate the above, here is the example:

Circumstance Probability x-x y-y ∑p(x-x) (y-y)

I 0.2 +1.0 -3.5 -0.7

II 0.3 0 -1.5 0

III 0.4 +1.5 +1.5 0.9

IV 0.1 -4 +5.5 -2.2

COVxy =-2.0

For data regarding (y – y), see earlier example. Assume that a similar exercise has

been run for data regarding (x – x). Assume the variance or σ2 of x= 2.45, and the

variance or σ2 of y = 7.06. Thus, the correlation coefficient would be

r = -2.0 = -0.481

50

√ 2.45 *√7.056If, the same example is run again, but using a different set of numbers for y, a

different correlation coefficient might result of say, –0.988. It can be concluded that a

large negative correlation confirms the strong tendency of the two investments to move

inversely.

Perfect positive correlation (correlation coefficient = +1) occurs when the

returns from two securities move up and down together in proportion. If these securities

were combined in a portfolio, the ‘offsetting’ effect would not occur.

Perfect negative correlation (correlation coefficient = –1) takes place when

one security moves up and the other one down in exact proportion. Combining these

two securities in a portfolio would increase the diversification effect.

Uncorrelated (correlation coefficient = 0) occurs when returns from two securities

move independently of each other – that is, if one goes up, the other may go up or down

or may not move at all. As a result, the combination of these two securities in a portfolio

may or may not create a diversification effect. However, it is still better to be in this

position than in a perfect positive correlation situation.

Unsystematic and systematic risk

As mentioned previously, diversification diminishes risk: the more shares or assets

held in a portfolio or in investments, the greater the risk reduction. However, it is

impossible to eliminate all risk completely even with extensive diversification. The risk

that remains is called market risk; the risk that is caused by general market influences.

This risk is also known as systematic risk or non-diversifiable risk. The risk that is

associated with a specific asset and that can be abolished with diversification is known

as unsystematic risk, unique risk or diversifiable risk.

51

Total risk = Systematic risk + Unsystematic risk

Systematic risk = the potential variability in the returns offered by a security or asset

caused by general market factors, such as interest rate changes, inflation rate

movements, tax rates, state of the economy.

Unsystematic risk = the potential variability in the returns offered by a security or

asset caused by factors specific to that company, such as profitability margins, debt

levels, quality of management, susceptibility to demands of customers and suppliers.

As the number of assets in a portfolio increases, the total risk may decline as a

result of the decline in the unsystematic risk in that portfolio. The relationship amongst

these risks can be quantified as follows

TR2 = SR2 + UR2 or σ2i = σs

2 + σu2

Where:

σ¡ = the investment’s total risk (standard deviation)

σs = the investment‘s systematic risk

σu =the investment’s unsystematic risk.

The correlation coefficient between two investment opportunities can be expressed

as:

σs = σi CORim

Where,

σs = the investment systematic risk

σi = the investment’s total risk (systematic and unsystematic)

CORim = the correlation coefficient between the return of the investment and

those of the market.

If an investment were perfectly correlated to the market so that all its movements

could be fully explained by movements in market, then all of the risk would be

52

systematic & σi = σ s If an investment were not correlated at all to the market, then all of

its risk would be unsystematic

TECHNIQUES OF PORTFOLIO MANAGEMENT

Various types of portfolio require different techniques to be adopted to achieve the

desired objectives. Some of the techniques followed in India by portfolio managers are

summarized below.

(1). Equity portfolio-Equity portfolio is affected by internal and external factors:

(a) Internal factors –Pertain to the inner working of the particular company of which equity shares are

held. These factors generally include:

(1) Market value of shares

(2) Book value of shares

(3) Price earnings ratio (P/E ratio)

(4) Dividend payout ratio

(b) External factors –(1) Government policies

(2) Norms prescribed by institutions

(3) Business environment

(4) Trade cycles

(2). Equity stock analysis –

53

The basic objective behind the analysis is to determine the probable future – value

of the shares of the concerned company. It is carried out primarily fewer than two ways.

(a) Earnings per share

(b) Price earnings ratio

(A) Trend of earning: -

A higher price-earnings ratio discount expected profit growth. Conversely, a

downward trend in earning results in a low price-earnings ratio to discount

anticipated decrease in profits, price and dividend. Rising EPS causes

appreciation in price of shares, which benefits investors in lower tax brackets?

Such investors have not pay tax or to give lower rate tax on capital gains.

Many institutional investor like stability and growth and support high EPS.

Growth of EPS is diluted when a company finances internally its expansion

program and offers new stock.

EPS increase rapidly and result in higher P/E ratio when a company finances its

expansion program from internal sources and borrowings without offering new

stock.

(B) Quality of reported earning: - Quality of reported earnings affects P/E ratio. The factors that affect the quality of

reported earnings are as under:-

Depreciation allowances: - Larger (Non Cash) deduction for depreciation provides more funds to

company to finance profitable expansion schemes internally. This builds up

future earning power of company.

Research and development outlets : -

54

There is higher P/E ratio for a company, which carries R&D programs. R&D

enhances profit earning strength of the company through increased future sales.

Inventory and other non-recurring type of profit : - Low cost inventory may be sold at higher price due to inflationary conditions

among profit but such profit may not always occur and hence low P/E ratio.

(C) Dividend policy: -Dividend policy is significant in affecting P/E ratio. With higher dividend ratio, equity

price goes up and thus raises P/E ratio. Dividend rates are raised to push in share

prices up. Dividend cover is calculated to find out the time the dividend is protected, In

terms of earnings. It is calculated as under:

Dividend Cover = EPS / Dividend per Share

(D) Investors demand: -Demand from institutional investors for equity also enhances the P/E ratio.

(3) Quality of management: -

Investors decide about the ability and caliber of management and hold and dispose

of equity academy. P/E ratio is more where a company is managed by reputed

entrepreneurs with good past records of management performance.

Types of Portfolios

55

The different types of Portfolio which is carried by any Fund Manager to maximize

profit and minimize losses are different as per their objectives .They are as follows.

Aggressive Portfolio:Objective: Growth. This strategy might be appropriate for investors who seek High

growth and who can tolerate wide fluctuations in market values, over the short term.

Growth Portfolio:Objective : Growth. This strategy might be appropriate for investors who have a

preference for growth and who can withstand significant fluctuations in market value.

Balanced Portfolio:

56

Objective: Capital appreciation and income. This strategy might be appropriate for

investors who want the potential for capital appreciation and some growth, and who can

withstand moderate fluctuations in market values

Conservative Portfolio:

Objective: Income and capital appreciation. This strategy may be appropriate for

investors who want to preserve their capital and minimize fluctuations in market value.

Sharekhan Portfolio Management Services

57

Pro Prime

Product Approach

Investment will be keeping in mind 3 investment tenets.

1. Consistent, steady and sustainable returns.

2. Margin of Safety

3. Low Volatility

Product offering

Pro Prime is the ideal for investors looking at steady and superior with low and

medium risk appetite. The portfolio consists of a blend of quality blue chip and growth

stocks ensuring a balanced portfolio with relatively medium risk profile.

The portfolio constitutes of relatively large capitalization stocks, based on sector and

themes which have medium to long term growth potential.

Product Characteristics

58

PMS

PRO PRIME PRO ARBITRAGE PRO TECH

Bottom up stock selection

In depth ,independent fundamental research

High quality companies with relatively large capitalization

Disciplined valuation approach applying multiple valuation measure.

Medium to long term vision, resulting in low portfolio turnover.

How to invest?

Minimum Investment : 10 Lacs

Lock in : 6 months

Reporting: Access to website showing clients holding .Monthly reporting of

portfolio holding /transaction.

Charges: 2.5% pa AMC (Annual Maintenances Charges) fees charged every

quarter ,0.5% brokerage ,20% profit sharing after 15% hurdle is crossed

chargeable at the end of fiscal year.

Pro Arbitrage

Product Approach

An opportunity lies in basis which is the difference between cash and future.

Whenever basis is high we buy the stocks and sell the future to lock in difference .The

difference is bound to be zero at expiry.

Cash –future arbitrage:

The product intends to spot low risk opportunities which will yield more than the

normal low risk product .Whenever such opportunity is spotted stocks will be bought

and to lock in the basis, future will be sold .This position will be liquated in the expiry or

before that if the basis vanishes early .Similarly the scheme will move on from

opportunity to opportunity.


59

Low –Risk: This is relatively low risk product which can be compared with liquid

funds issued by mutual funds.

High return: Compared with other low risk products, this products offers an

indicative post tax return of 8 to 10% plus.

Product Details

Minimum Investment:Rs.1 Crore

Lock in :6 months

Reporting: Fortnightly for portfolio Net worth, Monthly reporting portfolio

Holding /transaction.

Charges: 0.035% brokerage for future ,0.07% for delivery

Pro Tech

Pro tech using the knowledge of technique analysis and the power of depravities

markets to identify trading opportunities in the market .The protech line of the product is

designed around various risk /reward /volatility profiles for the different kind of

investment needs.

Product Approach

Better performance is possible from superior market timing and from picking stocks

before inflation points in their trading cycles .Linear return are possible from having

hedged/ sell market positions in downtrends .Absolute return are targeted by focusing

on finding trading opportunities & not out performance of an index.

Product offered

60

1. Nifty Thirty :

Nifty futures will be bought and sold on the basis of an automated trading system

generated calls to go long/short. The exposure will never exceed the value of portfolio

i.e. no leveraging; but allows us to be short /hedged in Nifty in falling market therefore

allowing the client to earn irrespective of the market direction.

2. Beta Portfolio :

Positional trading opportunities are identified in the future segment based on

technical analysis .Inflection points in the momentum cycles are identified to go long

/short on stock/index futures with 1-2 months time horizon .The idea is to generate the

best possible return in the medium term irrespective of the direction of the market

without really leveraging beyond the portfolio value. Risk protection is done based on

stop losses on daily closing prices.

3. Star Nifty:

Swing trading technique and Dow theory is used to identify short –term reversal

levels for Nifty futures and ride with trend both on the long and short side .This return

can be earned in bull and bear market .Stop and reverse means to reverse ones

position from long to short or vice a versa at the reversal levels simultaneously .The

exposure never exceeds value of portfolio i.e. there is no leveraging.

4. Trailing Stops.

Momentum trading techniques are used to spot short –term momentum of 5-10

days in stocks and stocks /index futures .Trailing stop loss method of risk

management or profit protection is used to lower the portfolio volatility and maximize

return .Trading opportunities are exposed both on the long side and the short side as

the market demands to get the best of both upward and downward trends.

61


Using swing based index –trading systems stop and reverse .trend following and

momentum trading technique.

Nifty based products for low impact cost and low product volatility

Both long and short strategies to earn returns even in falling market.

Trading in future market to allow for active risk protection using trailing stop

losses.

How to invest?

Minimum : Rs.10 Lacs

Lock in : 6 months

Reporting: Fortnightly reporting of portfolio Net Worth, monthly reporting of

portfolio Holding /Transaction.

Charges: 0% AMC (Annual Maintenance Charges), 0.05% brokerage for

derivatives, 20% profit sharing on booked profit quarterly basis

62

CHAPTER -5

DATA ANALYSIS AND

INTERPRETATION

63

1. Do you know about the Investments Option available?

Statistics

Q.1

N Valid 100

Missing 0

Mode 1

Q.1

Frequency Percent Valid Percent Cumulative Percent

Valid 1 92 92.0 92.0 92.0

2 8 8.0 8.0 100.0

Total 100 100.0 100.0

Interpretation: - It was being analyzed that from the survey conducted and the

questionnaire being out to the respective respondents in the course of project training

with regard to the 100 respondents that 49 of them are about investment option and

remaining are not aware.

2. What is the basic purpose of your Investments?

Statistics

Q.2

N Valid 100

Missing 0

Mode 1

64

Q.2


Valid 1 31 31.0 31.0 31.0

2 22 22.0 22.0 53.0

3 16 16.0 16.0 69.0

4 18 18.0 18.0 87.0

5 9 9.0 9.0 96.0

6 4 4.0 4.0 100.0

Tot

al

100 100.0 100.0

Liquidity

Return

Tax Ben

efit

Risk Cover

ing

Capita

l Apprec

iation

Others0

5

10

15

20

25

30

3531

22

1618

9

4

3. What is the most important factor you consider at the time of Investment?

Statistics

Q.3

N Valid 100

Missing 0

Mode 3

65

Q.3


Valid 1 12 12.0 12.0 12.0

2 23 23.0 23.0 35.0

3 65 65.0 65.0 100.0

Total 100 100.0 100.0

12

23

65

Risk ReturnBoth

4. From which option you will get the best returns?

66

Statistics

N Valid 100

Missing 0

Mode 2

Q 4


Valid 1 20 20.0 20.0 20.0

2 22 22.0 22.0 42.0

3 16 16.0 16.0 58.0

4 18 18.0 18.0 76.0

5 8 8.0 8.0 84.0

6 14 14.0 14.0 98.0

7 2 2.0 2.0 100.0

Total 100 100.0 100.0

67

Mutual Fund

Shares Commodity Market

Bonds Fixed Deposit

Property Others0

5

10

15

20

25

20

22

16

18

8

14

2

5. “Investing in PMS is far safer than Investing in Mutual Fund”. Do you agree?

Statistics

68

76

24

Yes

No

6. How much you carry the expectation in Rise of your Income from Investments?

69

N Valid 100

Missin

g

0

Mode 1

Q.5


Valid 1 76 76.0 76.0 76.0

2 24 24.0 24.0 100.0

Total 100 100.0 100.0

Statistics

Q.6

N Valid 100

Missing 0

Q.6


Valid 1 48 48.0 48.0 48.0

2 32 32.0 32.0 80.0

3 12 12.0 12.0 92.0

4 8 8.0 8.0 100.0

Total 100 100.0 100.0

Upto 15% 15-25% 25-35% More than 35%0

10

20

30

40

50

60

48

32

128

70

7. If you invested in Share Market, what has been your experience?Statistics

Q.7

Valid

Mission

100

0

100

Q.7


Valid 1 20 20.0 20.0 20.0

2 34 34.0 34.0 54.0

3 6 6.0 6.0 60.0

4 40 40.0 40.0 100.0

Total 100 100.0 100.0

20

34

6

40Satisfactory ResultsBurned FingerUnsatisfactory ResultsNo

71

8. How do you trade in Share Market?

Statistics

Q.8

N Valid 100

Missin

g

0

Mode 2

Q.8


Vali

d

1 24 24.0 24.0 24.0

2 45 45.0 45.0 69.0

3 31 31.0 31.0 100.0

Tot

al

100 100.0 100.0

24

45

31

HedgingSpeculationInvestment

72

9. How do you manage your Portfolio?

Statistics

N Valid 100

Missing 0

Mode 1

Q.9


Valid 1 57 57.0 57.0 57.0

2 43 43.0 43.0 100.0

Total 100 100.0 100.0

self Depends on Company for Portfolio0

10

20

30

40

50

60

57

43

73

10. Which Portfolio Type you preferred?

Statistics

Q.10

N Valid 100

Missing 0

Mode 1

Q.10


Valid 1 45 45.0 45.0 45.0

2 27 27.0 27.0 72.0

3 28 28.0 28.0 100.0

Total 100 100.0 100.0

Equity Debt Balance0

5

10

15

20

25

30

35

40

45

45

27 28

74

11. Do you recommend Sharekhan PMS to others?

Statistics

Q.11

N Valid 100

Missing 0

Mode 1

Q.11


Valid 1 56 56.0 56.0 56.0

2 44 44.0 44.0 100.0

Total 100 100.0 100.0

52

18

30

EarnedFaced LossNo Profit No Loss

75

12. How was your experience about Portfolio Management services (PMS) of

Sharekhan Limited?

Statistics

Q.12

N Valid 100

Missing 0

Mode 1

Q.12


Valid 1 52 52.0 52.0 52.0

2 18 18.0 18.0 70.0

3 30 30.0 30.0 100.0

Total 100 100.0 100.0

76

56

44

YesNo

CHAPTER-6

77

HYPOTHESIS TESTING

Null Hypothesis: - There is no significant difference between respondents of different

age group towards knowledge about investment option available

Alternative Hypothesis: - There is significant difference between respondents of

different age group towards knowledge about investment option available

AGE * Q.1 Cross tabulation

Count

Q.1

Total1 2

AGE 18-25 33 4 37

16-35 42 3 45

Above 35 17 1 18

Total 92 8 100

78

Chi-Square Tests

Value df

A symp. Sig.

(2-sided)

Pearson Chi-

Square

.652a 2 .722

Likelihood Ratio .638 2 .727

N of Valid Cases 100

a. 3 cells (50.0%) have expected count less than 5. The

minimum expected count is 1.44.

Case Processing Summary

Cases

Valid Missing Total

N

Percen

t N

Percen

t N

Percen

t

OCCUPATION *

Q.1

100 100.0

%

0 .0% 100 100.0

%

Null Hypothesis: - There is no significant difference between respondents of different occupation group towards knowledge about investment option available

Alternative Hypothesis: - There is significant difference between respondents of different occupation group towards knowledge about investment option available

OCCUPATION * Q.1 Cross tabulation

Count

Q.1

Total1 2

OCCUPATION Business 19 3 22

Home Maker 9 0 9

Service 32 0 32

Student 15 4 19

Teaching 17 1 18

Total 92 8 100

79

Chi-Square Tests

Value Df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 9.059a 5 .107

Likelihood Ratio 10.947 5 .052


a. 7 cells (58.3%) have expected count less than 5. The minimum

expected count is .08.


Cases

Valid Missing Total

N Percent N Percent N Percent

OCCUPATION *

Q.2

100 100.0% 0 .0% 100 100.0%

Null Hypothesis: - There is no significant difference between respondents of

occupation group towards purpose of investment


occupation group towards purpose of investment


Count

Q.2

Total1 2 3 4 5 6

OCCUPATION Business 8 5 2 3 2 2 22

Home Maker 1 3 3 1 1 0 9

Service 12 5 5 7 2 1 32

Student 4 7 2 4 2 0 19

Teaching 5 3 4 3 2 1 18

Total 31 22 16 18 9 4 100

80

Chi-Square Tests

Value Df Asymp. Sig. (2-sided)

Pearson Chi-Square 14.88

4a

25 .944



. a. 29 cells (80.6%) have expected count less than 5. The minimum expected

count is .04


Cases

Valid Missing Total


OCCUPATION *

Q.3

100 100.0% 0 .0% 100 100.0%


occupation group towards factor consider while making an investment decision.


different occupation group towards factor consider while making an investment decision.


Count

Q.3

Total1 2 3

OCCUPATION Business 4 7 11 22

Home Maker 0 2 7 9

Service 3 9 20 32

Student 3 5 11 19

Teaching 2 0 16 18

Total 12 23 65 100

81

Chi-Square Tests

Value df Asymp. Sig. (2-sided)







Cases

Valid Missing Total


OCCUPATION * Q 4 100 100.0% 0 .0% 100 100.0%


occupation group towards investment options and their returns.


different occupation group towards investment options and their returns.

OCCUPATION * Q 4 Cross tabulation

Count

Q 4

Total1 2 3 4 5 6 7

OCCUPATION Business 5 6 3 5 0 2 1 22

Home Maker 1 1 2 2 2 1 0 8

Service 7 6 7 5 1 6 0 32

Student 3 3 3 3 4 2 1 19

Teaching 4 6 1 3 1 3 0 18

Total 20 22 16 18 8 14 2 100

82

Chi-Square Tests





a. 38 cells (90.5%) have expected count less than 5. The minimum expected

count is .02.


Cases

Valid Missing Total


OCCUPATION * Q.6 100 100.0% 0 .0% 100 100.0

%

Null Hypothesis: - There is no significant difference between respondents of different occupation group towards expectation of income from investment

Alternative Hypothesis: - There is no significant difference between respondents of different occupation group towards expectation of income from investment


Count

Q.6

Total1 2 3 4

OCCUPATION Business 13 7 1 1 22

Home Maker 5 0 2 2 9

Service 13 11 5 3 32

Student 7 6 4 2 19

Teaching 9 8 0 1 18

Total 48 32 12 8 100

83

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-

Square

13.20

2a

15 .587



a. 16 cells (66.7%) have expected count less than 5. The

minimum expected count is .08.


Cases

Valid Missing Total


OCCUPATION * Q.8 100 100.0% 0 .0% 100 100.0%

Null Hypothesis: - There is no significant difference between respondents of different occupation group towards trading with share market.

Alternative Hypothesis: - There is significant difference between respondents of different occupation group towards trading with share market.


Count

Q.8

Total1 2 3


Home Maker 4 2 3 9

Service 10 16 6 32

Student 3 10 6 19

Teaching 2 7 9 18

Total 24 45 31 100

84

Chi-Square Tests

Value Df Asymp. Sig. (2-sided)






Cases

Valid Missing Total


OCCUPATION *

Q.10

100 100.0

%

0 .0% 100 100.0

%


occupation group towards portfolio preferences


different occupation group towards portfolio preferences

85


Count

Q.10

Total1 2 3


Home Maker 4 1 4 9

Service 16 10 6 32

Student 8 7 4 19

Teaching 5 5 8 18

Total 45 27 28 100

Chi-Square Tests





a. 7 cells (38.9%) have expected count less than 5. The minimum expected

count is .27.


Cases

Valid Missing Total


OCCUPATION *

Q.12

100 100.0% 0 .0% 100 100.0%

Null Hypothesis: - There is no significant difference between respondents of different occupation group towards experience about Portfolio Management services (PMS) of Sharekhan Limited.

Alternative Hypothesis: - There is significant difference between respondents of different occupation group towards experience about Portfolio Management services (PMS) of Sharekhan Limited.

86


Count

Q.12

Total1 2 3


Home Maker 7 2 0 9

Service 16 7 9 32

Student 8 4 7 19

Teaching 7 5 6 18

Total 52 18 30 100

Chi-Square Tests





a. 9 cells (50.0%) have expected count less than 5. The minimum expected count is .18.

87

CHAPTER-7

FACTS AND FINDINGS

88

OBSERVATION AND FINDING

About 85% Respondents knows about the Investment Option, because

remaining 15% take his /her residential property as Investment, but in actual it

not an investment philosophy carries that all the Investment does not create any

profit for the owner.

More than 75% Investors are investing their money for Liquidity, Return and Tax

benefits.

At the time of Investment the Investors basically considered the both Risk and

Return in more %age around 65%.

As among all Investment Option for Investor the most important area to get more

return is share around 22%after that Mutual Fund and other comes into

existence.

More than 76% of Investors feels that PMS is less risky than investing money in

Mutual Funds.

As expected return from the Market more than 48% respondents expect the rise

in Income more than 15%, 32% respondents are expecting between 15-25%

return.

As the experience from the Market more than 34% Investor had lose their money

during the concerned year, whereas 20% respondents have got satisfied return.

About 45% respondents do the Trade in the Market with Derivatives Tools

Speculation compare to 24% through Hedging .And the rest 31% trade their

money in Investments.

Around 57% residents manage their Portfolio through the different company

whereas 43%Investor manage their portfolio themselves.

The most important reasons for doing trade with Sharekhan limited is Sharekhan

Research Department than its Brokerage rate Structure.

89

Out of hundred respondents 56% respondents are using Sharekhan PMs

services.

Investors preferred more than 45% equity Portfolio, 28%Balanceed Portfolio and

about 27% Debt Portfolio with Sharekhan PMS.

About 52% Respondents earned through Sharekhan PMS product, whereas 18%

investor faced loses also.

More than 63% Investor are happy with the Transparency system of Sharekhan

limited.

As based on the good and bad experience with Sharekhan limited around 86%

are ready to recommended the PMS of Sharekhan to their peers, relatives etc.

90

LIMITATION OF THE PROJECT

As only Jaipur was dealt in the survey so it does not represent the view of the

total Indian market.

The sample size was restricted with hundred respondents.

There was lack of time on the part of respondents.

The survey was carried through questionnaire and the questions were based on

perception.

There may be biasness in information by market participant.

Complete data was not available due to company privacy and secrecy.

Some people were not willing to disclose the investment profile.

91

CONCLUSION AND SUGGESTIONS

On the basis of the study it is found that Sharekhan Ltd is better services provider

than the other stockbrokers because of their timely research and personalized advice

on what stocks to buy and sell. Sharekhan Ltd. provides the facility of Trade tiger as

well as relationship manager facility for encouragement and protects the interest of the

investors. It also provides the information through the internet and mobile alerts that

what IPO’s are coming in the market and it also provides its research on the future

prospect of the IPO. We can conclude the following with above analysis.

Sharekhan Ltd has better Portfolio Management services than Other Companies

It keeps its process more transparent.

It gives more returns to its investors.

It charges are less than other portfolio Management Services

It provides daily updates about the stocks information.

Investors are looking for those investment options where they get maximum

returns with less returns.

Market is becoming complex & it means that the individual investor will not have

the time to play stock game on his own.

92

People are not so much ware aware about the Investment option available in the

Market.

Suggestions

The company should also organize seminars and similar activities to enhance the

knowledge of prospective and existing customers, so that they feel more

comfortable while investing in the stock market.

Investors must feel safe about their money invested.

Investor’s accounts must be more transparent as compared to other companies.

Sharekhan limited must try to promote more its Portfolio Management Services

through Advertisements.

Sharekhan needs to improve more it’s Customer Services

There is need to change in lock in period in all three PMS i.e.Protech, Proprime,

Pro Arbitrage.

93

QUESTIONNAIRE

Name : ………………………..……………………………..

Contact No : ………………………………….……………………

E-Mail ID : …………………………….…………………………

1. Do you know about the Investments Option available?

• YES • NO

2. What is the basic purpose of your Investments?

• Liquidity • Return

• Tax Benefits • Risk Covering

• Capital Appreciation • Others

3. What is the most important factor you consider at the time of Investment?

• Risk

• Return

• Both

4. From which option you will get the best returns?

• Mutual Funds • Shares

94

• Commodities Market • Bonds

• Fixed Deposits • Property

• Others

5. “Investing in PMS is far safer than Investing in Mutual Fund”. Do you agree?

• Yes • No

6. How much you carry the expectation in Rise of your Income from Investments?

• Up to 15% • 15-25%

• 25-35% • More than 35%

7. If you invested in Share Market, what has been your experience?

• Satisfactory Return • Burned Finger

• Unsatisfactory Results • No

8. How do you trade in Share Market?

• Hedging

• Speculation

• Investment

9. How do you manage your Portfolio?

• Self • Depends on the company for portfolio

10. Which Portfolio Type you preferred?

95

• Equity • Debt

• Balanced

11. Do you recommend Sharekhan PMS to others?

• Yes • No

12. How was your experience about Portfolio Management services (PMS) of

Sharekhan Limited?

• Earned

• Faced Loss

• No profit No loss

96

BIBLIOGRAPHY

BOOKS

1. Kothari C.R., “Research Methodology”, Published by New age international Pvt.

Ltd. 2nd Edition.

2. Swamy K.N & Appa lyer Siva Kumar, “Management Research Methodology”

Published by Pearson Education

REPORTS & MAGAZINES

1. Journal Of Management Research

WEBLIOGRAPHY:-

1. www.auto.indiamart.com

2. http://www.consumerreports.org

REFERENCES

1. www.sharekhan.com 2. www.sebi.gov.in3. www.moneycontrol.com4. www.karvy.com5. www.valueresarchonline.com

97

http://www.valueresarchonline.com/

http://www.karvy.com/

http://www.moneycontrol.com/


6. www.yahoofinance.com

98

http://www.yahoofinance.com/

Documents

Himani 4th Sem Final Report