Portfolio management of various funds

8/8/2019 Portfolio management of various funds

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PORTFOLIO MANAGEMENT

Internship at IDBI fortis Life Insurance Limited AGBS HDERABAD

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METHODOLOGY

RESEARCH DESIGN OF THE STUDY

This report is based on primary as well secondary data, however secondary data collection wasgiven more importance in the project since it is more of analysis. One of the most important uses of research methodology is that it helps in identifying the problem, collecting, analyzing the requireddata and providing an alternative solution to the problem .It also helps in collecting the vital

information that is required by the top management to assist them for the better decision makingboth day to day decisions and critical ones. The study consists of analysis of various funds offered by IDBI as well as various companies in themarket.

The methodology adopted includes

Questionnaire Discussions with few investors

SOURCES OF DATA

Primary data : Questionnaire

Secondary data : Published materials of funds such as periodicals, journals, news papers,and websites.

Duration of Study

The Study was carried out for the period of two months from June1 2010 to July31 2010.


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Field Study:

Directly approached respondents by the following strategies

Personal Visits Clients References Database provided by the IDBI Fortis Life insurance.


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CHAPTER-1

INTRODUCTION OF COMPANY

About IDBI Fortis

IDBI Fortis Life Insurance Co Ltd is a joint-venture of IDBI Bank, India s premier development andcommercial bank, Federal Bank, one of India s leading private sector banks and Fortis InsurancInternational, a multinational insurance giant based out of Europe. In this venture, IDBI owns 48equity while Federal Bank and Fortis own 26% equity each.At IDBI Fortis, we endeavor to delive

products that provide value and convenience to the customer. Through a continuous processinnovation in product and service delivery we intend to deliver world-class wealth managementprotection and retirement solutions to Indian customers. Having started in March 2008, in just fivmonths of inception we became one of the fastest growing new insurance companies to garner R100 Cr in premiums. The company offers its services through a vast nationwide network across thebranches of IDBI Bank and Federal Bank in addition to a sizeable network of advisors and partnerIn only its first year of operations, as on March 31st 2009, the company collected more than 328 Cin premiums highest first year collection in the history of Indian life insurance industry, througover 87000 policies and over Rs 2825 Cr in Sum Assured.Do visit www.idbifortis.com to know more.

Vision and Values

Maintaining integrity through our values

Our Vision

To be the leading provider of wealth management, protection and retirement solutions that meet

the needs of our customers and adds value to their lives. Our Mission

To continually strive to enhance customer experience through innovative product offerings,dedicated relationship management and superior service delivery while striving to interact with oucustomers in the most convenient and cost effective manner.


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To be transparent in the way we deal with our customers and to act with integrity.

To invest in and build quality human capital in order to achieve our mission.

Our Values

Transparency: Crystal Clear communication to our partners and stakeholders Value to Customers: A product and service offering in which customers perceive value

Rock Solid and Delivery on Promise: This translates into being financially strong, operationallyrobust and having clarity in claims

Customer-friendly: Advice and support in working with customers and partners

Profit to Stakeholders: Balance the interests of customers, partners, employees, shareholders

and the community at large


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CHAPTER 2

Portfolio Management

What Is Portfolio:

A portfolio is a collection of securities. Since it is rarely desirable to invest the entire funds of an

individual or an institution in a single security, it is essential that every security be viewed in a

portfolio context.

A set or combination of securities held by investor. A portfolio comprising of different types

of securities and assets.

As the investors acquire different sets of assets of financial nature, such as gold, silver, real

estate, buildings, insurance policies, post office certificates, NSC etc., they are making a provision

for future. The risk of each of such investments is to be understood before hand. Normally the

average householder keeps most of his income in cash or bank deposits and assumes that they are

safe and least risky. Little does he realize that they also carry a risk with them the fear of loss or

actual loss or theft and loss of real value of these assets through the rise price or inflation in the

economy? Cash carries no interest or income and bank deposits carry a nominal rate of 4% on

savings deposits, no interest on current account and a maximum of 9% on term deposits of one

year. The liquidity on fixed deposits is poor as one has to wait for the period to maturity or takeloan on such amount but at a loss of income due to penal rate. Generally risk averters invest only in

banks, Post office and UTI and Mutual funds. Gold, silver real estate and chit funds are the other

avenues of investment for average Householder, of middle and lower income groups. If the investor

desired to have a real rate of return which is substantially higher than the inflation rate he has to

invest in relatively more risky areas of investment like shares and debenture of companies or bonds


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of Government and semi-Government agencies or deposits with companies and firms. Investment

in Chit funds, Company deposits, and in private limited companies has a highest risk. But the basic

principle is that the higher the risk, the higher is the return and the investor should have a clear

perception of the elements of risk and return when he makes investments. Risk Return analysis isthus essential for the investment and portfolio management.

Why Portfolio:

You will recall that expected return from individual securities carries some degree of risk.

Risk was defined as the standard deviation around the expected return. In effect we equated a

security s risk with the variability of its return. More dispersion or variability about a security s

expected return meant the security was riskier than one with less dispersion.

The simple fact that securities carry differing degrees of expected risk leads most investors

to the notion of holding more than one security at a time, in an attempt to spread risks by not

putting all their eggs into one basket. Diversification of one s holdings is intended to reduce risk in

an economy in which every asset s returns are subject to some degree of uncertainty. Even the

value of cash suffers from the inroads of inflation. Most investors hope that if they hold several

assets, even if one goes bad, the others will provide some protection from an extreme loss.

Portfolio Management:

The portfolio management is growing rapidly serving broad array of investors both

individual and institutional with investment portfolio ranging in asset size from few thousands to

crores of rupees. Despite growing importance, the subject of portfolio and investment

management is new in the country and is largely misunderstood. In most cases, portfolio

management has been practiced as a investment management counseling in which the investor has

been advised to seek assets that would grow in value and / or provide income.

Portfolio management is concerned with efficient management of investment in the

securities. An investment is defined as the current commitment of funds for a period of time in

order to derive a future flow of funds that will compensate the investing unit:


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- For the time the funds are committed.

- For the expected rate of inflation, and

- For the uncertainty involved in the future flow of funds.

The portfolio management deals with the process of selection of securities from the numberof opportunities available with different expected returns and carrying different levels of risk and

the selection of securities is made with a view to provide the investors the maximum yield for a

given level of risk or ensure minimize risk for a given level of return.

Investors invest his funds in a portfolio expecting to get a good return consistent with the

risk that he has to bear. The return realized from the portfolio has to be measured and the

performance of the portfolio has to be evaluated.

It is evident that rational investment activity involves creation of an investment portfolio.

Portfolio management comprises all the processes involved in the creation and maintenance of an

investment portfolio. It deals specially with security analysis, portfolio analysis, portfolio selection,

portfolio revision and portfolio evaluation. Portfolio management makes use of analytical

techniques of analysis and conceptual theories regarding rational allocation of f unds. Portfolio

management is a complex process, which tries to make investment activity more rewarding and

less risky.

D efinition of Portfolio Management :

It is a process of encompassing many activities of investment in assets and securities. The

portfolio management includes the planning, supervision, timing, rationalism and conservatism in

the selection of securities to meet investor s objectives. It is the process of selecting a list of

securities that will provide the investor with a maximum yield constant with the risk he wishes to

assume.

Application to portfolio Management:

Portfolio Management involves time element and time horizon. The present value of future

return/cash flows by discounting is useful for share valuation and bond valuation. The investment

strategy in portfolio construction should have a time horizon, say 3 to 5 year; to produce the

desired results of say 20-30% return per annum.


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Besides portfolio management should also take into account tax benefits and investment

incentives. As the returns are taken by investors net of tax payments, and there is always an

element of inflation, returns net of taxation and inflation are more relevant to tax paying investors.

These are called net real rates of returns, which should be more than other returns. They shouldencompass risk free return plus a reasonable risk premium, depending upon the risk taken, on the

instruments/assets invested.

Objective of Portfolio Management:-

The objective of portfolio management is to invest in securities is securities in such a way

that one maximizes one s returns and minimizes risks in order to achieve one s investment

objective.

A good portfolio should have multiple objectives and achieve a sound balance among them. Any

one objective should not be given undue importance at the cost of others. Presented below are

some important objectives of portfolio management.

1. Stable Current Return: -

Once investment safety is guaranteed, the portfolio should yield a steady current income.

The current returns should at least match the opportunity cost of the funds of the investor. What

we are referring to here current income by way of interest of dividends, not capital gains.

2. Marketability: -

A good portfolio consists of investment, which can be marketed without difficulty. If there

are too many unlisted or inactive shares in your portfolio, you will face problems in encasing them,

and switching from one investment to another. It is desirable to invest in companies listed on major

stock exchanges, which are actively traded.

3. Tax Planning: -


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Since taxation is an important variable in total planning, a good portfolio should enable its

owner to enjoy a favorable tax shelter. The portfolio should be developed considering not only

income tax, but capital gains tax, and gift tax, as well. What a good portfolio aims at is tax planning,

not tax evasion or tax avoidance.

4. Appreciation in the value of capital:

A good portfolio should appreciate in value in order to protect the investor from any erosion

in purchasing power due to inflation. In other words, a balanced portfolio must consist of certain

investments, which tend to appreciate in real value after adjusting for inflation.

5. Liquidity:

The portfolio should ensure that there are enough funds available at short notice to take

care of the investor s liquidity requirements. It is desirable to keep a line of credit from a bank for

use in case it becomes necessary to participate in right issues, or for any other personal needs.

6. Safety of the investment:

The first important objective of a portfolio, no matter who owns it, is to ensure that the

investment is absolutely safe. Other considerations like income, growth, etc., only come into the

picture after the safety of your investment is ensured.

Investment safety or minimization of risks is one of the important objectives of portfolio

management. There are many types of risks, which are associated with investment in equity stocks,

including super stocks. Bear in mind that there is no such thing as a zero risk investment. Moreover,

relatively low risk investment give correspondingly lower returns. You can try and minimize theoverall risk or bring it to an acceptable level by developing a balanced and efficient portfolio. A good

portfolio of growth stocks satisfies the entire objectives outline above.

Scope of Portfolio Management:-


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Portfolio management is a continuous process. It is a dynamic activity. The following are the

basic operations of a portfolio management.

a) Monitoring the performance of portfolio by incorporating the latest market conditions.

b) Identification of the investor s objective, constraints and preferences.

c) Making an evaluation of portfolio income (comparison with targets and achievement).

d) Making revision in the portfolio.

e) Implementation of the strategies in tune with investment objectives.

Approaches of Portfolio Management:-

Different investors follow different approaches when they deal with investments. Four basic

approaches are illustrated below, but there could be numerous variations.

i) The Holy-Cow Approach:

These investors typically buy but never sell. He treats his scrips like holy cows, which are

never to be sold for slaughter. If you can consistently find and then confine yourself to buying only

prized bulls, this holy cow approaches may pay wellin the long run.

ii) The Pig-Farmer Approach:

The pig-farmer on the other hand, knows that pigs are meant for slaughter. Similarly, an

investor adopting this approach buys and sells shares as fast as pigs are growth and slaughtered.

Pigs become pork and equity hard cash.

iii) The Rice-Miller Approach:

The rice miller buys paddy feverishly in the market during the season, then mills, hoards and

sells the rice slowly over an extended period depending on price movements. His success lies in his

shills in buying and selling, and his financial capacity to hold stocks. Similarly, an investor following

this approach grabs the share at the right price, takes a position, holds on to it, and liquidates

slowly.


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iv) The Woolen-Trader Approach:

The woolen-trader buys woolen ever a period of time but sells them quickly during the

season. Hid success also lies in his skill in buying and selling, and his ability to hold stocks. An

investor following this strategy over a period of time but sells quickly, and quits.

SEBI Guidelines to Portfolio Management:-

SEBI has issued detailed guidelines for portfolio management services. The guidelines have

been made to protect the interest of investors. The salient features of these guidelines are given

here under;

1) The nature of portfolio management services shall be investment consultant.

2) The portfolio manager shall not guarantee any return ti his clients.

3) Client s funds will be kept in separate bank account.

4) The portfolio manager shall acts as trustee of client s funds.

5) The portfolio manager can invest in money or capital market.

6) Purchase and sale of securities will be at prevailing market price.

Different Phases of Portfolio Management:

Portfolio management is a process encompassing many activities aimed at optimizing the

investment of one s funds. Main five phases can be identified in this management process:

a. Security Analysis

b. Portfolio Analysis

c. Portfolio Selection

d. Portfolio Revision

e. Portfolio Evaluation


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f. Portfolio Construction

(A) SECURITY ANALYSIS:-

The different types of securities are available to an investor for investment. In stock

exchange of the country the shares of 7000 companies are listed. Traditionally, the securities were

classified into ownership such as equity shares, preference share, and debt as a debenture bonds

etc. Recently companies to raise funds for their projects are issuing a number of new securities with

innovative feature. Convertible debenture, discount bonds, Zero coupon bonds, Flexi bond, floating

rate bond, etc. are some of these new securities.From these huge group of securities the investors

has to choose those securities, which he considers worthwhile to be included in his investment

portfolio. So for this detailed security analysis is most important.

The aim of the security analysis is to find out intrinsic value of a security. The basic value is

also called as the real value of a security is the true economic worth of a financial asset. The real

value of the security indicates whether the present market price is over priced or under priced i n

order to make a right investment decision. The actual price of the security is considered to be a

function of a set of anticipated capitalization rate. Price changes, as anticipation risk and return

change, which in turn change as a result of latest information.

Security analysis refers to analyzing the securities from the point of view of the scrip prices,

return and risks. The analysis will help in understanding the behaviour of security prices in the

market for investment decision making. If it is an analysis of securities and referred to as a macro

analysis of the behaviour of the market. Security analysis entails in arriving at investment decisions

after collection and analysis of the requisite relevant information. To find out basic value of a

security the potential price of that security and the future stream of cash flows are to be forecast

and then discounted back to the present value. The basic value of the security is to be compared

with the current market price and a decision may be taken for buying or selling the security. If the

basic value is lower than the market price, then the security is in the over bought position, hence it


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is to be sold. On the other hand, if the basic value is higher than the market price the security s

worth is not fully recognized by the market and it is in under bought position, hence it is to be

purchased to gain profit in the future.

There are mainly three alternative approaches to security analysis, namely fundamental

analysis, technical analysis and efficient market theory.

The fundamental analysis allows for selection of securities of different sectors of the

economy that appear to offer profitable opportunities. The security analysis will help to establish

what type of investment should be undertaken among various alternatives i.e. real estate, bonds,

debentures, equity shares, fixed deposit, gold, jewellery etc. Neither all industries grow at same

rate nor do all companies. The growth rates of a company depend basically on its ability to satisfy

human desires through production of goods or performance is important to analyze nation

economy. It is very important to predict the course of national economy because economic activity

substantially affects corporate profits, investors attitudes, expectations and ultimately security

price.

According to this approach, the share price of a company is determined by these

fundamental factors. The fundamental works out the compares this intrinsic value of a security

based on its fundamental; them compares this intrinsic value, the share is said to be overpriced and

vice versa. The mispricing security provides an opportunity to the investor to those securities,

which are under priced and sell those securities, which are overpriced. It is believed that the market

will correct notable cases of mispricing in future. The prices of undervalued shares will increase and

those of overvalued will decline.

Fundamental analysis helps to identify fundamentally strong companies whose shares are

worthy to be included in the investor s portfolio.

The second alternative of security analysis is technical analysis. The technical analysis is thestudy of market action for the purpose of forecasting future price trends. The term market action

includes the three principal sources of information available to the technician price, value, and

interest. Technical Analysis can be frequently used to supplement the fundamental analysis. It

discards the fundamental approach to intrinsic value. Changes in price movements represent shifts

in supply and demand position. Technical Analysis is useful in timing a buy or sells order. The


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technical analysis does not claim 100% of success in predictions. It helps to improve the knowledge

of the probability of price behaviour and provides for investment. The current market price is

compared with the future predicted price to determine the extent of mispricing. Technical analysis

is an approach, which concentrates on price movements and ignores the fundamentals of theshares.

A more recent approach to security analysis is the efficient market hypothesis/theory.

According to this school of thought, the financial market is efficient in pricing securities. The

efficient market hypothesis holds that market prices instantaneously and fully reflect all relevant

available information. It means that the market prices of securities will always equal its intrinsic

value. As a result, fundamental analysis, which tries to identify undervalued or overvalued

securities, is said to be a useless exercise.

Efficient market hypothesis is direct repudiation of both fundamental analysis and technical

analysis. An investor can t consistently earn abnormal return by undertaking fundamental analysis

or technical analysis. According to efficient market hypothesis it is possible for an investor to earn

normal return by randomly choosing securities of a given risk level.

(B) PORTFOLIO ANALYSIS:-

The main aim of portfolio analysis is to give a caution direction to the risk and return of an

investor on portfolio. Individual securities have risk return characteristics of their own.Therefore,

portfolio analysis indicates the future risk and return in holding of different individual instruments.

The portfolio analysis has been highly successful in tracing the efficient portfolio. Portfolio analysis

considers the determination of future risk and return in holding various blends of individual

securities. An investor can sometime reduce portfolio risk by adding another security with greater

individual risk than any other security in the portfolio. Portfolio analysis is mainly depending on Risk

and Return of the portfolio. The expected return of a portfolio should depend on the expected

return of each of the security contained in the portfolio. The amount invested in each security is

most important. The portfolio s expected holding period value relative is simply a weighted average

of the expected value relative of its component securities. Using current market value as weights,

the expected return of a portfolio is simply a weighted average of the expected return of the


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securities comprising that portfolio. The weights are equal to the proportion of total funds invested

in each security.

Tradition security analyses recognize the key importance of risk and return to the investor.

However, direct recognition of risk and return in portfolio analysis seems very much a seat-of-the-

pants process in the traditional approaches, which rely heavily upon intuition and insight. The

result of these rather subjective approaches to portfolio analysis has, no doubt, been highly

successfully in many instances. The problem is that the methods employed do not readily lend

themselves to analysis by others.

Most traditional method recognizes return as some dividend receipt and price appreciations

aver a forward period. But the return for individual securities is not always over the same common

holding period nor are he rates of return necessarily time adjusted. An analyst may well estimate

future earnings and P/E to derive future price. He will surely estimate the dividend. But he may not

discount the value to determine the acceptability of the return in relation to the investor s

requirements.

A portfolio is a group of securities held together as investment. Investments invest their

funds in a portfolio of securities rather than in a single security becausethey are risk averse. By

constructing a portfolio, investors attempt to spread risk by not putting all their eggs into one

basket. Thus diversification of one s holding is intended to reduce risk in investment.

Most investor thus tends to invest in a group of securities rather than a single security. Such

a group of securities held together as an investment is what is known as a portfolio. The process of

creating such a portfolio is called diversification. It is an attempt to spread and minimize the ri sk in

investment. This is sought to be achieved by holding different types of securities across different

industry groups.

(C) PORTFOLIO SELECTION: -

Portfolio analysis provides the input for the next phase in portfolio management, which is

portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides

the highest returns at a given level of risk. A portfolio having this characteristic is known as an


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efficient portfolio. The inputs from portfolio analysis can be used to identify the set of efficient

portfolios. From this set of efficient portfolios the optimum portfolio has to be selected for

investment. Harry Markowitz portfolio theory provides both the conceptual framework and

analytical tools for determining the optimal portfolio in a disciplined and objective way.

(D) PORTFOLIO REVISION: -

Once the portfolio is constructed, it undergoes changes due to changes in market prices and

reassessment of companies. Portfolio revision means alteration of the compositionof debt/equity

instruments, shifting from the one industry to another industry, changing from one company to

another company. Any portfolio requires monitoring and revision. Portfolios activities will depend

on daily basis keeping in view the market opportunities. Portfolio revision uses some theoretical

tools like security analysis that already discuss before this, Markowitz model, Risk-Return

evaluation.

Portfolio revision involves changing the existing mix of securities. This may be effected

either by changing the securities currently included in the portfolio or by altering the proportion of

fund invested in the securities. New securities may be added to the portfolio or some of the existing

securities may be removed from the portfolio. Portfolio revision thus, leads to purchasing and sales

of securities. The objective of portfolio revision is the same as the objective of portfolio selection,

i.e maximizing the return for a given level of risk or minimizing the risk foa given level of return. The

ultimate aim of portfolio revision is maximization of returns and minimizing of risk.

Having constructed the optimal portfolio, the investor has to constantly monitor the

portfolio to ensure that it continues to be optimal. As the economy and financial mark ets are

dynamic, changes take place almost daily. As time passes, securities, which were once attractive,

may cease to be so. New securities with promises of high returns and low risk may emerge. The

investor now has to revise his portfolio in the light ofthe development in the market. This revision

leads to purchase of some new securities and sale of some of the existing securities from the

portfolio. The mixture of security and its proportion in the portfolio changes as a result of the

revision.


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Portfolio revision may also be necessitated some investor related changes such as

availability of additional funds, changes in risk attitude need of cash for other alternative use etc.

Whatever be the reason for portfolio revision, it has to be done scientifical ly and objectively

so as to ensure the optimality of the revised portfolio. Portfolio revision is not a casual process to

be carried out without much care. In fact, in the entire process of portfolio management portfolio

revision is as important as portfolio analysis and selection. In portfolio management, the maximum

emphasis is placed on portfolio analysis and selection which leads to the construction of the

optimal portfolio. Very little discussion is seen on portfolio revision which is as important as

portfolio analysis and selection.

Portfolio revision involving purchase and sale of securities gives rise to certain problem

which acts as constraints in portfolio revision, from those constraints some may be as following:

1. Statutory Stipulations:

Investment companies and mutual funds manage the largest portfolios in every country.

These institutional investors are normally governed by certain statutory stipulations

regarding their investment activity. These stipulations often act as constraints in timely

portfolio revision.

2. Transaction cost:

Buying and selling of securities involve transaction costs such as commission and brokerage.

Frequent buying and selling of securities for portfolio revision may push up transaction cost

thereby reducing the gains from portfolio revision. Hence, the transaction costs involved in

portfolio revision may act as a constraint to timely revision of portfolio.

3. Intrinsic difficulty:

Portfolio revision is a difficult and time-consuming exercise. The methodology to be

followed for portfolio revision is also not clearly established. Different approaches may be


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adopted for the purpose. The difficulty of carrying out portfolio revision it self may act as a

restriction to portfolio revision.

4. Taxes:

Tax is payable on the capital gains arising from sale of securities. Usually, long term capital

gains are taxed at a lower than short-term capital gains. To qualify as long-term capital gain,

a security must be held by an investor for a period not less than 12 months before sale.

Frequent sales of securities in the course of periodic portfolio revision of adjustment will

result in short-term capital gains which would be taxed at a higher rate compared to long-

term capital gains. The higher tax on short-term capital gains may act as a constraint to

frequent portfolios.

(F) PORTFOLIO PERFORMANCE EVALUATION:-

Portfolio evaluating refers to the evaluation of the performance of the portfolio. It is

essentially the process of comparing the return earned on a portfolio with the return earned on

one or more other portfolio or on a benchmark portfolio. Portfolio evaluation essentially comprises

of two functions, performance measurement and performance evaluation. Performancemeasurement is an accounting function which measures the return earned on aportfolio during the

holding period or investment period. Performance evaluation , on the other hand, address such

issues as whether the performance was superior or inferior, whether the performance was due to

skill or luck etc.

The ability of the investor depends upon the absorption of latest developments which

occurred in the market. The ability of expectations if any, we must able to cope up with the wind

immediately. Investment analysts continuously monitor and evaluate the result of the portfolioperformance. The expert portfolio constructer shall show superior performance over the market

and other factors. The performance also depends upon the timing of investments and superior

investment analysts capabilities for selection. The evolution of portfoli o always followed by revision

and reconstruction. The investor will have to assess the extent to which the objectives are

achieved. For evaluation of portfolio, the investor shall keep in mind the secured average returns,


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average or below average as compared to the market situation. Selection of proper securities is the

first requirement. The evaluation of a portfolio performance can be made based on the following

methods:

a) Sharpe s Measure

b) Treynor s Measure

c) Jensen s Measure

(a) Sharpe Measure:

The objective of modern portfolio theory is maximization of return or minimization of risk.

In this context the research studies have tried to evolve a composite index to measure risk basedreturn. The credit for evaluating the systematic, unsystematic and residual risk goes to sharpe,

Treynor and Jensen. Sharpe measure total risk by calculating standard deviation. The method

adopted by Sharpe is to rank all portfolios on the basis of evaluation measure. Reward is in the

numerator as risk premium. Total risk is in the denominator as standard deviation of its return. We

will get a measure of portfolio s total risk and variability of return in relation to the risk premium.

The measure of a portfolio can be done by the following formula:

Rt Rf

SI =

f

Where,

SI = Sharpe s Index

Rt = Average return on portfolioRf = Risk free return

f = Standard deviation of the portfolio return.


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For instance:

Which portfolio perform better performance from following two portfolio, by using Sharpe s

model

Portfolio Average return Standard deviation Risk free rate

A 50% 10% 24%

B 60% 18% 24%

Performance can be finding out by the following formula:

For Portfolio A: Rt Rf

SI =

f

Rt = 50

Rf = 24

f = 0.10

0.50 0.24

SI = = 0.26 / 0.100.10

= 2.6 Portfolio A

For Portfolio B: Rt Rf


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SI =

f

0.60 0.24

SI = = 0.36 / 0.18

0.18

= 2, Portfolio B

Conclusion : According to the calculated portfolio A has better performance than portfolio B

(b) Treynor s Measure:

The Treynor s measure related a portfolio s excess return to non-diversifiable or systematic

risk. The Treynor s measure employs beta. The Treynor based his formula on the concept of

characteristic line. It is the risk measure of standard deviation, namely the total risk of the portfolio

is replaced by beta. The equation can be presented as follow:

Rn - Rf

Tn =

m

Where, T n = Treynor s measure of performance

Rn = Return on the portfolio

Rf = Risk free rate of return

m = Beta of the portfolio ( A measure of systematic risk)


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For instance: Which securities perform better performance from following two portfolios, by using

Treynor s method

Portfolio Return m Risk free rate

X 44% 0.12% 22%

Z 52% 2.40% 22%

For portfolio X: Rn - Rf

Tn =

m

Rn = 0.44 Rf = 0.22 m = 0.12

0.44 0.22 0.22

Tn = = = 0.092

2.40 2.40

For portfolio Y: 0.52 - 0.22 0.30

Tn = = = 0.125

2.4 2.40

Conclusion: Portfolio Y is better than X because T nx < Tny

(c) Jensen s Measure:

Jensen attempts to construct a measure of absolute performance on a risk adjusted basis.

This measure is based on CAPM model. It measures the portfolio manager s predictive ability to

achieve higher return than expected for the accepted riskiness. The abil ity to earn returns through


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successful prediction of security prices on a standard measurement. The Jensen measure of the

performance of portfolio can be calculated by applying the following formula:

Rp = Rf + (RMI Rf ) x

Where, R p = Return on portfolio

RMI = Return on market index

Rf = Risk free rate of return

For instance: From the following data, the portfolio performance can be measure according to

Jensens model as follow:

Portfolio Estimated Return on portfolio Portfolio Beta

I 40% 1.5

II 34% 1.1

III 46% 1.8

Market Index: 36% 1.03

Risk free rate of return: 20%

Market Beta =1.00

For portfolio I:

RMI = 40%, Rf = 20%, = 3

Rp = 20 + (40 20) x 1.5

= 50%

For portfolio II:

RMI = 34%, Rf = 20%, = 1.1

Rp = 20 + (34 20) x 1.1 = 35.4%


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For portfolio III:

RMI = 46%, Rf = 20%, = 1.8

Rp

= 20 + (46 20) x 1.8

=66.8%

The measure of performance = Actual estimated

I = 50% - 40% = 10%

II = 35.4% - 34% = 1.4%

III = 66.8% - 46% = 20.8%

Here, the portfolio III is better perform then other two

(G) PORTFOLIO CONSTRUCTION:-

Portfolio construction refers to the allocation of funds among a variety of financial assets

open for investment. Portfolio theory concerns itself with the principles governi ng such allocation.

The objective of the theory is to elaborate the principles in which the risk can be minimized subjectto desired level of return on the portfolio or maximize the return, subject to the constraint of a

tolerate level of risk.

Thus, the basic objective of portfolio management is to maximize yield and minimize risk.

The other ancillary objectives are as per the needs of investors, namely:6

Safety of the investment

Stable current Returns

Appreciation in the value of capital

Marketability and Liquidity

Minimizing of tax liability.

In pursuit of these objectives, the portfolio manager has to set out all the various alternative

investment along with their projected return and risk and choose investment with safety the


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requirement of the individual investor and cater to his preferences. The manager has to keep a list

of such investment avenues along with return-risk profile, tax implications, yield and other return

such as convertible options, bonus, rights etc. A ready reckoned giving out the analysis of the risk

involved in each investment and the corresponding return should be kept.

The portfolio construction, as referred to earlier, be made on the basis of the investment

strategy, set out for each investor. Through choice of asset classis, i nstrument of investment and

the specific scripts, save of bond or equity of different risk and return characteristics, the choice of

tax characteristics, risk level and other feature of investment, are decided upon.

Portfolio Investment Process:-

The ultimate aim of the portfolio manager is to reduce the risk and increase the return to

the investor in order to reach the investment objectives of an investor. The manager must be aware

of the investment process. The process of portfolio management involves many logical steps like

portfolio planning, portfolio implementation and monitoring. The portfolio investment process

applies to different situation. Portfolio is owned by different individuals and organizations with

different requirements. Investors should buy when prices are very low and sell when prices rise to

levels higher that their normal fluctuation.

The process used to manage a security portfolio is conceptually the same as that used in any

managerial decision. One should (1) Panning, (2) Implement the plan; and (3) Monitor the result.

This portfolio investment process is displayed schematically as follow:


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The Portfolio Investment Process

Applying the different steps for portfolio investment process can be complex and opinions

are divided for maximization of wealth to the investor. Many differences exist between present

investment theory and empirical result and which have often contradictory result the following

some basic principles should be applied to all portfolio decisions.

1. The quantum of risk to be acceptable.

2. The profits will vary along with variability of risk.

Planning:

1. Investor s situation2. Market Condition3. Speculative policies4. Strategic asset allocation

Monitoring:

1. Evaluate Statement of Investment Policy2. Evaluate Investment Performance

Implementation:

1. Rebalance Strategic Asset Allocation2. Tactical Asset Allocation3. Security Selection


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3. Individual securities affect the aggregate portfolio.

4. Portfolio should provide a sound liquidity position.

5. Diversification of a portfolio may decrease the risk level.

6.

Portfolio should be tailored to the needs of investors.7. Follow the passive investment strategy or an activity speculative strategy.

Portfolio investment process is an important step to meet the needs and convenience of

investors. The portfolio investment process involves the following steps:

1. Planning of portfolio

2. Implementation of portfolio plan.

3. Monitoring the performance of portfolio.

1) PLANNING OF PORTFOLIO:

Planning is the most important element in a proper portfolio management. The success of

the portfolio management will depend upon the careful planning. While making the plan, due

consideration will be given to the investor s financial capability and current capital market situation.

After taking into consideration a set of investment and speculative policies will be prepared in thewritten form. It is called as statement of investment policy. The document must contain (1) The

portfolio objective (2) Applicable strategies (3) Investment and speculative constraints. The

planning document must clearly define the asset allocation. It means an opt imal combination of

various assets in an efficient market. The portfolio manager must keep in mind about the difference

between basic pure investment portfolio and actual portfolio returns. The statement of investment

policy may contain these elements. Theportfolio planning comprises the following situation for its

better performance:


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(A) Investor Conditions: -

The first question which must be answered is this What is the purpose of the security

portfolio? While this question might seem obvious, it istoo often overlooked, giving way insteadto the excitement of selecting the securities which are to be held. Understanding the purpose for

trading in financial securities will help to: (1) define the expected portfolio liquidation, (2) aid in

determining an acceptable level or risk, and (3) indicate whether future consumption (liability

needs) are to be paid in nominal or real money, etc. For example: a 60 year old woman with small

to moderate saving probably (1) has a short investment horizon, (2) can accept little investment

risk, and (3) needs protection against short term inflation. In contrast, a young couple investing

couple investing for retirement in 30 years has (1) a very long investment horizon, (2) an ability to

accept moderate to large investment risk because they can diversify over time, and (3) a need for

protection against long-term inflation. This suggests that the 60 year old woman should invest

solely in low-default risk money market securities. The young couple could invest in many other

asset classes for diversification and accept greater investment risks. In short, knowing the eventual

purpose of the portfolio investment makes it possible to begin sketching out appropriate

investment / speculative policies.

(B) Market Condition: -

The portfolio owner must known the latest developments in the market. He may be in a

position to assess the potential of future return on various capital market instruments. The

investors expectation may be two types, long term expectations and short term expect ations. The

most important investment decision in portfolio construction is asset allocation. Asset allocation

means the investment in different financial instruments at a percentage in portfolio. Some

investment strategies are static. The portfolio requires changes according to investor s needs andknowledge. A continues changes in portfolio leads to higher operating cost. Generally the potential

volatility of equity and debt market is 2 to 3 years. The another type of rebalancing strategy focuses

on the level of prices of a given financial asset.


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(C) Speculative Policies:

The portfolio owner may accept the speculative strategies in order to reach his goals of

earning to maximum extant. If no speculative strategies are used the management of the portfolio

is relatively easy. Speculative strategies may be categorized as asset allocation timing decision or

security selection decision. Small investors can do by purchasing mutual funds which are indexed to

a stock. Organization with large capital can employ investment management firms to make their

speculative trading decisions.

(D)

Strategic Asset Allocation:-The most important investment decision which the owner of a portfolio must make is the

portfolio s asset allocation. Asset allocation refers to the percentageinvested in various security

classes. Security classes are simply the type of securities: (1) Money Market Investment, (2) Fixed

Income obligations; (3) Equity Shares, (4) Real Estate Investment, (5) International securities.

Strategic asset allocation represents the asset allocation which would be optimal for the

investor if all security prices trade at their long-term equilibrium values that is, if the markets are

efficiency priced.

2) IMPLEMENTATION:-

In the implementation stage, three decisions to be made, if the percentage holdings of

various assets classes are currently different from the desired holdings as in the SIP, the portfolio

should be rebalances to the desired SAA (Strategic Asset Allocation). If the statement of investment

policy requires a pure investment strategy, this is the only thing, which is done in theimplementation stage. However, many portfolio owners engage in speculative transaction in the

belief that such transactions will generate excess risk-adjusted returns. Such speculative

transactions are usually classified as timing or selection decisions. Timing decisions over or

under weight various assets classes, industries, or economic sectors from the strategic asset


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allocation. Such timing decision deal with securities within a given asset class, industry group, or

economic sector and attempt to determine which securities should be over or under -weighted.

(A) Tactical Asset Allocation:-

If one believes that the price levels of certain asset classes, industry, or economic sectors

are temporarily too high or too low, actual portfolio holdings should depart from the asset mix

called for in the strategic asset allocation. Such timing decision is preferred to as tactical asset

allocation. As noted, TAA decisions could be made across aggregate asset classes, industry

classifications (steel, food), or various broad economic sectors (basic manufacturing, interest -

sensitive, consumer durables).

Traditionally, most tactical assets allocation has involved timing across aggregate asset

classes. For example, if equity prices are believes to be too high, one would reduce the portfolio s

equity allocation and increase allocation to, say, risk-free securities. If one is indeed successful at

tactical asset allocation, the abnormal returns, which would be earned, are certainly entering.

(B) Security Selection:-

The second type of active speculation involves the selection of securities within a given

assets class, industry, or economic sector. The strategic asset allocation policy would call for broad

diversification through an indexed holding of virtually all securities in the asset in the class. For

example, if the total market value of HPS Corporation share currently represents 1% of all issued

equity capital, than 1% of the investor s portfolio allocated to equity would be held in HPS

corporation shares. The only reason to overweight or underweight particular securities in the

strategic asset allocation would be to off set risks the investors faces in other assets and liabilities

outside the marketable security portfolio. Security selection, however, actively overweight andunderweight holding of particular securities in the belief that they are temporarily mispriced.


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(3) PORTFOLIO MONITORING: -

Portfolio monitoring is a continuous and on going assessment of present portfolio and the

portfolio manger shall incorporate the latest development which occurred in capital market. The

portfolio manager should take into consideration of investor s preferences, capital market

condition and expectations. Monitoring the portfolio is up-grading activity in asset composition to

take the advantage of economic, industry and market conditions. The market conditions are

depending upon the Government policy. Any change in Government policy would reflect the stock

market, which in turn affects the portfolio. The continues revision of a portfolio depends upon the

following factors:

i. Change in Government policy.

ii. Shifting from one industry to other

iii.

Shifting from one company scrip to another company scrip.iv. Shifting from one financial instrument to another.

v. The half yearly / yearly results of the corporate sector

Risk reduction is an important factor in portfolio. It will be achieved by a diversification of

the portfolio, changes in market prices may have necessitated in asset composition. The

composition has to be changed to maximize the returns to reach the goals of investor.


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RISK & RETURN IN PORTFOLIO

Return:- ` The typical objective of investment is to make current income from the investment in the

form of dividends and interest income. Suitable securities are those whose prices are relatively

stable but still pay reasonable dividends or interest, such as blue chip companies. The investment

should earn reasonable and expected return on the investments. Before the selection of

investment the investor should keep in mind that certain investment like, Bank deposits, Public

deposits, Debenture, Bonds, etc. will carry fixed rate of return payable periodically. On i nvestments

made in shares of companies, the periodical payments are not assured but it may ensure higher

returns from fixed income securities. But these instruments carry higher risk than fixed income

instruments.

Risk:-

The Webster s New Collegiate Dictionary definition of risk includes the following meanings:

. Possibility of loss or injury .. the degree or probability of such loss . This conforms to the

connotations put on the term by most investors. Professional often speaks of downside risk andupside potential . The idea is straightforward enough: Risk has to do with bad outcomes, potential

with good ones.

In considering economic and political factors, investors commonly identify five kinds of

hazards to which their investments are exposed. Thefollowing tables show components of risk:

(A) SYSTEMATIC RISK:

1. Market Risk

2. Interest Rate Risk

3. Purchasing power Risk


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(B) UNSYSTEMATIC RISK:

1. Business Risk

2. Financial Risk

(A) SYSTEMATIC RISK:

Systematic risk refers to the portion of total variability in return caused by factors affecting

the prices of all securities. Economic, Political and Sociological charges are sources of systematic

risk. Their effect is to cause prices of nearly all individual common stocks or security to movetogether in the same manner. For example; if the Economy is moving toward a recession &

corporate profits shift downward, stock prices may decline across a broad front. Nearly all stocks

listed on the BSE / NSE move in the same direction as the BSE / NSE index.

Systematic risk is also called non-diversified risk. If is unavoidable. In short, the variability in

a securities total return in directly associated with the overall movements in the general market or

Economy is called systematic risk. Systematic risk covers market risk, Interest rate risk & Purchasing

power risk

1. Market Risk:

Market risk is referred to as stock / security variability due to changes in investor s reaction

towards tangible & intangible events is the chief cause affecting market risk. The first set that is the

tangible events, has a real basis but the intangible events are based on psychological basis.

Here, Real Events, comprising of political, social or Economic reason. Intangible Events arerelated to psychology of investors or say emotional intangibility of investors. The initial decline or

rise in market price will create an emotional instability of investors and cause a fear of loss or

create an undue confidence, relating possibility of profit. The reaction to loss will reduce selling &

purchasing prices down & the reaction to gain will bring in the activity of active buying of securities.


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2. Interest Rate Risk:

The price of all securities rise or fall depending on the change in interest rate, Interest rate

risk is the difference between the Expected interest rates & the current market interest rate. The

markets will have different interest rate fluctuations, according to market situation, supply and

demand position of cash or credit. The degree of interest rate risk is related to the length of time to

maturity of the security. If the maturity period is long, the market value of the security may

fluctuate widely. Further, the market activity & investor perceptions change with the change in the

interest rates & interest rates also depend upon the nature of instruments such as bonds,

debentures, loans and maturity period, credit worthiness of the security issues.

3. Purchasing Power Risk:

Purchasing power risk is also known as inflation risk. This risks arises out of change in the

prices of goods & services & technically it covers both inflation & deflation period. Purchasing

power risk is more relevant in case of fixed income securities; shares are regarded as hedge against

inflation. There is always a chance that the purchasing power of invested money will decline or the

real return will decline due to inflation.

The behaviour of purchasing power risk can in some way be compared to interest rate risk.

They have a systematic influence on the prices of both stocks & bonds. If the consumer price index

in a country shows a constant increase of 4% & suddenly jump to 5% in the next. Year, the required

rate of return will have to be adjusted with upward revision. Such a change in process will affect

government securities, corporate bonds & common stocks.

(B) UNSYSTEMATIC RISK:-

The risk arises out of the uncertainty surrounding a particular firm or industry due to factors

like labour Strike, Consumer preference & management policies are called Unsystematic risk. These

uncertainties directly affect the financing & operating environment of the firm. Unsystematic risk is


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also called Diversifiable risk . It is avoidable. Unsystematic risk can be minimized or Eliminated

through diversification of security holding. Unsystematic risk covers Business risk and Financial risk

1. Business Risk:

Business risk arises due to the uncertainty of return which depend upon the nature of

business. It relates to the variability of the business, sales, income, expenses & profits. It depends

upon the market conditions for the product mix, input supplies, strength of the competitor etc. The

business risk may be classified into two kind viz. internal risk and External risk.

Internal risk is related to the operating efficiency of the firm. This is manageable by the firm.

Interest Business risk loads to fall in revenue & profit of the companies.

External risk refers to the policies of government or strategic of competitors or unforeseen

situation in market. This risk may not be controlled & corrected by the firm.

2. Financial Risk:

Financial risk is associated with the way in which a company finances its activities. Generally,

financial risk is related to capital structure of a firm. The presence of borrowed money or debt in

capital structure creates fixed payments in the form of interest thatmust be sustained by the firm.

The presence of these interest commitments fixed interest payments due to debt or fixed

dividend payments on preference share causes the amount of retained earning availability for

equity share dividends to be more variable than if no interest payments were required. Financial

risk is avoidable risk to the extent that management has the freedom to decline to borrow or not to

borrow funds. A firm with no debt financing has no financial risk. One positive point for using debt


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instruments is that it provides a low cost source of funds to a company at the same time providing

financial leverage for the equity shareholders & as long as the earning of company are higher than

cost of borrowed funds, the earning per share of equityshare are increased.

Risk - Return Relationship:-

The entire scenario of security analysis is built on two concepts of security: Return and risk.

The risk and return constitute the framework for taking investment decision. Return from equity

comprises dividend and capital appreciation. To earn return on investment, that is, to earn dividend

and to get capital appreciation, investment has to be made for some period which in turn implies

passage of time. Dealing with the return to be achieved requires estimated of the return on

investment over the time period. Risk denotes deviation of actual return from the estimated return.

This deviation of actual return from expected return may be on either side both above and below

the expected return. However, investors are more concerned with the downside risk.

The risk in holding security deviation of return deviation of dividend and capital appreciation

from the expected return may arise due to internal and external forces. That part of the risk which

is internal that in unique and related to the firm and industry is called unsystematic risk . That part

of the risk which is external and which affects all securities and is broad in its effect is called

systematic risk .

The fact that investors do not hold a singlesecurity which they consider most profitable is

enough to say that they are not only interested in the maximization of return, but also minimization

of risks. The unsystematic risk is eliminated through holding more diversified securities. Systematic

risk is also known as non-diversifiable risk as this can not be eliminated through more securities and

is also called market risk . Therefore, diversification leads to risk reduction but only to the

minimum level of market risk.

The investors increase their required return as perceived uncertainty increases. The rate of

return differs substantially among alternative investments, and because the required return on

specific investments change over time, the factors that influence the required rate of return mus t

be considered.


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Different Types of Investment in India and Risk Return Associated With It:-

1) Life Insurance Policy:-

In India the life insurance corporation offers different types of policies tailor made to suit

the varied age group in society. The WholeLife Policies, Limited Payment Life Policy, ConvertibleWhole Life Assurance Policy, Endowment Assurance Policy, Jeevan Mitra, The Special Endowment

Plan with Profits, Jeevan Saathi, The New Money Back Plan, Marriage Endowment, Children s

Differed Endowment Assurance Policy, Jeevan Dhara have gained immense popularity among all

classes of people. In LIC there is some scheme have eligible for exemption from tax under section

80C of the Income Tax Act, 1961. Risk associated with Insurance Corporation is asfollow:

High

R

I

S Moderate

K

Low

Low Moderate High

RETURN

2) Bank Deposits:-


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Commercial Bank has been extending deposits facilities to the public and has been the

Indian investor s greatest investment opportunity. The various schemes offered by commercial

Banks are in the categories of saving accounts. Fixed Deposits, recurring deposits, monthly re -

payment plan, cash certificates, children s deposits schemes and retirement plans. The savingaccount offers an interest rate of 4% per annum. One fixed deposits the banks give a rate of 6.5%

per annum.

High

R

I

S Moderate

K

Low

Low Moderate High

RETURN

3) Provident Funds:-


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Many employers offer recognized provident Fund schemes for the benefit of their

employees. In general employees are obliged to contribute a minimum of 8.33% of their salary

every month to the PPF, however, they may in certain cases contribute up to a maximum of 30% of

their salary, Whatever, may be the employee s contribution, the employer s contribution isgenerally restricted to 8.33% only. Employees own contribution can be claimed as a deduction form

his total income under section 80C of income Tax Act. The interest on Provi dent Funds is now 10 %

per annum. The prime benefit of the provident fund is the facility of loan up to 755 of the sum

contributed.

High

R

I

S Moderate

K

Low

Low Moderate High

RETURN

The SBI and its subsidiaries operate the public provident funds schemes. It is a 15 year

scheme. A minimum sum of Rs. 100/- has to be deposited every year in this fund; the maximum


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amount which can be deposited in this fund, is Rs.20,000/- in one year. The rate of interest on the

PPF is 12% per annum. The PPF scheme offers both income Tax and Wealth Tax benefits. The

deposits made every year qualify for deduction under section 80C and the interest is completely tax

free, in addition, loans can also be taken after one year from the close of the year in which theaccount was opened.

4) Equity Shares: -

The investment in equity share has a number of positive aspect associated with it. These are

Capital Appreciation as a hedge against inflation, bonus shares, Right shares, voting rights,

marketability, annual dividends and fringe benefits etc. Income tax and wealth tax benefits are also

available to investment in equity share, 50% of the contribution made by investors in shares of new

companies qualifies for deduction under section 80CC. No deduction is available in under section

80CCA with effect from 1993-94 except rebate of Section 88.

High

R

I

S Moderate

K

Low

Low Moderate High


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RETURN

5) Government Bonds:-

The government bond, there is two categories of these bonds, namely, tax-free and taxable.

The tax-free bonds are 9 to 10% bonds issued for Rs.1000; interest compounded half -yearly and

payable half-yearly. They have a maturity period of 7 to 10 years with the facility for buy-back

sometimes provided to small investors up to certain limits. The taxable bonds yield 13% or above,

compounded half-yearly and payable half-yearly. They have normally a face value of Rs.1000/- and

have buy-back facilities similar to taxable bonds. Income from these bonds is tax exempt up to

Rs.12, 000/- under section 80L.

High

R

I

S Moderate

K

Low

Low Moderate High


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RETURN

6) Fixed Deposits with Companies:-

Fixed Deposits are invited from the public by different private sector companies. Their major

selling point is the high rates of interest, which they offer. Some of these companies offer even up

to 16% return per annum on deposits; the risk element is high in fi xed deposits since they are

absolutely unsecured. In addition, there are no tax benefits, An example, may be cited of a well

known company. Orkay Silk Mills, The Company delayed the payment of quarterly interest by two

months and the matured amount has notbeen returned to the depositors.

High

R

I

S Moderate

K

Low

Low Moderate High

RETURN


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Low Moderate High

7) Debentures:-

A debenture is just a loan bond. Debenture holders are lenders but not owners of the

company. They don t enjoy any voting rights. Usually Debentures are of the face value of Rs.100/ -

each. They carry a fixed rate of interest. The ruling rate in the market for debentures is 10% to 14%.

There are no income tax or wealth tax benefits for an investment in Debenture.

High

R

I

S Moderate

K

Low


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RETURN

Chapter 3

Types of Mutual Funds

What is investment?

Investment may be defined as the purchase by an individual or institutional investor of a

financial or real asset that produces a return proportional to the risk assumed over some future

investment period.

- F. Amling

Investment defined as commitment of funds made in the expectation of some positive rate

of return. If the investment is properly undertaken, the return will commensurate with the risk the

investor assumes.

- Fisher & Jordan

Investment refers to acquisition of some assets. It also meansthe conversion of money into

claims on money and use of funds for productive income earnings assets. In essence, it means the

use of funds for productive purpose, for securing some objectives like, income, appreciation of

capital or capital gains, or for further production of goods and services with the objective of

securing yield


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Financial and Economic Meaning of Investment:

Financial investment involves of funds in various assets, such as stock, Bond, Real Estate,

Mortgages etc. Investment is the employment of funds with the aim of achieving additional incomeor growth in value. It involves the commitment of resources which have been saved or put away

from current consumption in the hope some benefits will accrue in future. Investment involves long

term commitment of funds and waiting for a reward in the future.

From the point of view people who invest their finds, they are the supplier of Capital and in

their view investment is a commitment of a person s funds to derive future income in the form of

interest, dividend, rent, premiums, pension benefits or the appreciation of the value of their

principle capital. To the financial investor it is not important whether money is invested for aproductive use or for the purchase of secondhand instruments such as existing shares and stocks

listed on the stock exchange. Most investments are considered to be transfers of financial assets

from one person to another.

Economic investment means the net additions to the capital stock of the society which

consists of goods and services that are used in the production of other goods and services. Addition

to the capital stock means an increase in building, plants, equipment and inventories over the

amount of goods and services that existed.

The financial and economic meanings are related to each other because investment is a part

of the savings of individuals which flow into the capital market either directly or through

institutions, divided in new and secondhand capital financing. Investors as suppliers and

investors as users of long-term funds find a meeting place in the market.

So from above we know the term investment. The savers become the investors in the

following term and invest in unique asset


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Open-ended schemesThese funds do not have a fixed maturity and one can invest in such funds on any working day,during business hours. Investors can buy or sell units of open-ended schemes directly from the fundhouse at NAV related prices.

Close-ended schemesSuch funds have a fixed maturity period and are open for subscription only for a specified period.After the expiry of this period, investors can buy or sell the units on the stock exchanges wheresuch funds are listed. Some funds also have the option of periodic repurchase, whereby investorscan sell back their units to the fund at NAV related prices.


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Interval schemesInterval schemes are a combination of both open and close-ended schemes. Investors can purchaseor redeem their shares from the fund house at pre-determined intervals at NAV related prices

Growth schemesSuch funds are aimed at capital appreciation over the medium to long term. Usually, such fundsinvest a major portion of the portfolio in equities.

Balanced schemesSuch funds have a balanced portfolioand invest in equity and preference shares in addition to fixedincome securities. The aim of such funds is to provide both income and capital appreciation over along-term.

Income schemesThese schemes invest primarily in fixed income instruments issued by the government, banks,financial institutions and private companies. The main objective of income schemes is preservationof capital and to provide fixed income over the medium to long term.

Money market schemesMoney market schemes invest in short-term debt instruments, which earn interest and have highliquidity. Though these are considered to be the safest investment option, such funds are subject to

fluctuations in the rates of interest.

Tax saving schemesSuch schemes are aimed at offering tax rebates to investors under specific provisions of the IncomeTax Act, 1961. For instance, investors of Equity Linked Savings Schemes (ELSS) and Pension Schemesare applicable for deduction u/s 88 of the Income Tax Act, 1961.

Index schemesSuch funds strive to mirror the performance of specific market indices, such as the BSE SENSEX, CNX

Nifty, etc which are called the base index. Investments in such funds are made in the same stocks asthe base index and in similar proportion.

Sector-specific schemesSuch funds invest in a specific industry or sector. The investments could be in a particular industry(Banking, Pharmaceuticals, Infrastructure, etc) or a group of industries, or various segments (like AGroup shares).


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Exchange-traded fundsSuch funds are listed and traded on the stock exchange in a similar manner as stocks. Such fundsinvest in a basket of stocks and aim at replicating an index (S&P CNX Nifty, BSE Sensex) or aparticular industry (banking, information technology) or commodity (gold, crude oil, petroleum).

Capital protection fundsThese funds are designed to safeguard the capital invested therein, by investing in suitablesecurities.

Fund HouseIncorpDate

Fund TypeNo of Schemes(Open)

No of Schemes(Close)

Total Assets (Rs. in Cr)

Reliance Mutual FundFeb 241995

Indian Private 52 25 101320.00

HDFC Mutual FundDec 101999

Joint VentureIndian 38 31 86648.10

ICICI Prudential MutualFund Jun 221993 Joint VentureIndian 77 53 73822.40

UTI Mutual Fund Nov 142002

Others 49 28 64445.70

Birla Sun Life MutualFund

Sep 51994

Joint VentureIndian

68 30 63139.30

Franklin TempletonMutual Fund

Oct 61995

Foreign 50 22 35481.40

SBI Mutual FundFeb 71992

Joint VentureIndian

42 11 33727.90

LIC Mutual FundApr 201994 Institutions 19 4 30049.40

Kotak MahindraMutual Fund

Aug 51994 Indian Private 27 20 28636.90

IDFC Mutual FundDec 201999


DSP BlackRock MutualFund

May 131996

Joint VentureIndian 36 6 21415.80


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Tata Mutual Fund Mar 151994


Sundaram BNP ParibasMutual Fund

Feb 261996

Joint VentureIndian

34 24 12717.50

Religare Mutual FundMay 202005 Indian Private 24 13 10918.50

Deutsche Mutual Fund Mar 212002


Canara Robeco MutualFund

Mar 21993

Joint VentureIndian

21 5 8533.44

Fidelity Mutual Fund Jul 2 2004 Foreign 14 6 8000.45

PRINCIPAL MutualFund

Nov 201991

Joint VentureForeign 26 3 6827.97

JM Financial MutualFund

Jun 91994


HSBC Mutual Fund Dec 122001

Joint VentureForeign

21 3 5353.19

Fortis Mutual FundNov 42003 Foreign 14 13 5162.39

JPMorgan Mutual FundSep 202006


8 0 4030.79

L&T Mutual Fund Apr 301996


Baroda Pioneer MutualFund

Nov 51992


11 0 3075.20

Taurus Mutual Fund Jul 271993


Morgan StanleyMutual Fund

Oct 121993


4 0 2256.80

Benchmark MutualFund

Oct 162000 Indian Private 12 0 2250.37

ING Mutual FundApr 61998

Joint VentureForeign 38 4 1544.36

AIG Global InvestmentGroup Mutual Fund

Oct 132006

Foreign 8 0 1014.66

Peerless Mutual FundJun 42009 Indian Private 7 0 921.26

Sahara Mutual FundAug 311995


Bharti AXA MutualFund

Aug 132007


11 1 693.37

Edelweiss Mutual Fund Aug 232007



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Shinsei Mutual Fund May 12007


3 0 273.08

Mirae Asset MutualFund

Nov 202006

Foreign 13 0 252.13

Escorts Mutual FundDec 11995 Indian Private 13 1 195.50

Quantum Mutual Fund Sep 192005



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Chapter 4

Health Insurance Plans Types and details

Companies offering health plans :-

National Insurance

Bajaj Alliance General Insurance

ICICI Lombard General Insurance

Star health and Allied Insurance

Oriental Insurance

HDFC ERGO General Insurance

Apollo Munich Health Insurance

IFFCO Tokio General Insurance

Reliance General Insurance

Royal Sundaram Alliance Insurance

Cholamandalam MS General Insurance

United India Insurance

The New India Insurance

Tata AIG General Insurance

Decoding Health Insurance :-

The possibility of one undergoing some kind of expensive health treatment during the lifetime ismuch more than a sudden demise. Given the cost of treatment at private healthcare facilities, itsalmost beyond reach for the middle and lower income class to meet such expenses. Despite that,the penetration of health insurance in our country is extremely low. Only 2% of India s population iscovered under medical insurance.


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This is partly because of a lack of understanding of various products and the nee

Documents

Portfolio management of various funds