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1 Executive Summary When you hear the term portfolio management, ‘what do you think of? Chances are that the images that spring to mind depend greatly on your financial situation and your educational and professional background. Some people will think of mutual fund managers, while others will think of richly paneled conference rooms and wealthy individuals strategizing with their financial advisors. The reality of the current world of financial planning is that every adult should be somewhat conversant with concepts of portfolio management. Most working adults will ultimately be responsible for making sure that their future non-wage income is sufficient to meet their needs. In the old world of pension plans, your pension plan provider carried all the risks of being able to invest properly so as to fund a guaranteed future income to you. In today‘s world, the funds you have available for future income will be largely (if not wholly) determined by what you save and how you manage your total portfolio. For a quick definition, I describe portfolio management as the process of planning and executing a portfolio of investments in order to generate a desired future income stream. This means that portfolio management starts with looking at what you are investing for, and how far into the future you are looking. The next stage is to look at how much you need to invest, how you allocate those investments to meet your goals with reasonable certainty, and how much uncertainty you are willing to bear. Finally, portfolio management is an ongoing process of reviewing your plans and altering those plans as time goes on. For many people, these concepts will sound pretty abstract. If you ask people what ‗tools‘they use in their managing their personal portfolios, you are likely to get some fairly blank looks back, even if you are talking to people with substantial investments.

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Executive Summary

When you hear the term portfolio management, ‘what do you think of? Chances are

that the images that spring to mind depend greatly on your financial situation and your

educational and professional background. Some people will think of mutual fund

managers, while others will think of richly paneled conference rooms and wealthy

individuals strategizing with their financial advisors. The reality of the current world

of financial planning is that every adult should be somewhat conversant with concepts

of portfolio management. Most working adults will ultimately be responsible for

making sure that their future non-wage income is sufficient to meet their needs. In the

old world of pension plans, your pension plan provider carried all the risks of being

able to invest properly so as to fund a guaranteed future income to you.

In today‘s world, the funds you have available for future income will be largely (if not

wholly) determined by what you save and how you manage your total portfolio.

For a quick definition, I describe portfolio management as the process of planning and

executing a portfolio of investments in order to generate a desired future income

stream. This means that portfolio management starts with looking at what you are

investing for, and how far into the future you are looking. The next stage is to look at

how much you need to invest, how you allocate those investments to meet your goals

with reasonable certainty, and how much uncertainty you are willing to bear. Finally,

portfolio management is an ongoing process of reviewing your plans and altering

those plans as time goes on.

For many people, these concepts will sound pretty abstract. If you ask people what

‗tools‘they use in their managing their personal portfolios, you are likely to get some

fairly blank looks back, even if you are talking to people with substantial investments.

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Many (if not most) financial advisors still use fairly simplistic tools for portfolio

planning and have no way to estimate the optimal portfolio balance of risk and return

to meet a client‘s personal goals. The good news is that there are standard financial

techniques that can dramatically assist individuals in portfolio management.

These financial techniques, embedded in software, will show you your financial

portfolio in ways that you have not considered previously and will enable you to make

far better portfolio management decisions.

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INTRODUCTION

Investing in securities such as shares, debentures, and bonds is profitable as well as

exciting. It is indeed rewarding, but involves a great deal of risk and calls for

scientific knowledge as well artistic skill. In such investments both rationale and

emotional responses are involved. Investing in financial securities is now considered

to be one of the best avenues for investing one savings while it is acknowledged to be

one of the best avenues for investing one saving while it is acknowledged to be one of

the most risky avenues of investment.

“It is rare to find investors investing their entire savings in a single security. Instead,

they tend to invest in a group of securities. Such a group of securities is called

portfolio.” Creation of a portfolio helps to reduce risk, without sacrificing returns.

Portfolio management deals with the analysis of individual securities as well as with

the theory and practice of optimally combining securities into portfolios. An investor

who understands the fundamental principles and analytical aspects of portfolio

management has a better chance of success.

Portfolio management is all about strengths, weaknesses, opportunities and threats in

the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many

other tradeoffs encountered in the attempt to maximize return at a given appetite for

risk.

WHAT IS PORTFOLIO MANAGEMENT?

An investor considering investment in securities is faced with the problem of

choosing from among a large number of securities and how to allocate his funds over

this group of securities. Again he is faced with problem of deciding which securities

to hold and how much to invest in each. The risk and return are the characteristics of

portfolios. The investor tries to choose the optimal portfolio taking into consideration

the risk return characteristics of all possible portfolios.

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An investor invests his funds in a portfolio expecting to get good returns 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 specifically with the security

analysis, portfolio analysis, portfolio selection, portfolio revision & portfolio

evaluation. Portfolio management makes use of analytical techniques of analysis and

conceptual theories regarding rational allocation of funds. Portfolio management is a

complex process which tries to make investment activity more rewarding and less

risky.

Portfolio management is the on-going process of constructing portfolios that balance

an investor's ever changing goals with the portfolio manager's assumptions about the

future.

OBJECTIVES OF PORTFOLIO MANAGEMENT

The basic objective of Portfolio Management is to maximize yield and minimize risk.

The other objectives are as follows:

Stability of Income:

An investor considers stability of income from his investment. He also considers

the stability of purchasing power of income.

Capital Growth:

Capital appreciation has become an important investment principle. Investors seek

growth stocks which provide a very large capital appreciation by way of rights,

bonus and appreciation in the market price of a share.

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Liquidity:

An investment is a liquid asset. It can be converted into cash with the help of a

stock exchange. Investment should be liquid as well as marketable. The portfolio

should contain a planned proportion of high-grade and readily salvable

investment.

Safety:

Safety means protection for investment against loss under reasonably variations.

In order to provide safety, a careful review of economic and industry trends is

necessary. In other words, errors in portfolio are unavoidable and it requires

extensive diversification.

Tax Incentives:

Investors try to minimize their tax liabilities from the investments. The portfolio

manager has to keep a list of such investment avenues along with the return risk,

profile, tax implications, yields and other returns.

SELECTION OF PORTFOLIO

The selection of portfolio depends upon the objectives of the investor. The selection

of portfolio under different objectives are dealt subsequently

Objectives and asset mix:

If the main objective is getting adequate amount of current income, sixty percent of

the investment is made in debt instruments and remaining in equity. Proportion varies

according to individual preference.

Growth of income and asset mix:

Here the investor requires a certain percentage of growth as the income from the

capital he has invested. The proportion of equity varies from 60 to 100 % and that of

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debt from 0 to 40 %. The debt may be included to minimize risk and to get tax

exemption.

Capital appreciation and Asset Mix:

It means that value of the investment made increases over the year. Investment in real

estate can give faster capital appreciation but the problem is of liquidity. In the capital

market, the value of the shares is much higher than the original issue price. Safety of

principle and asset mix: Usually, the risk adverse investors are very particular about

the stability of principal. Generally old people are more sensitive towards safety.

Risk and return analysis:

An investor wants higher returns at the lower risk. But the rule of the game is that

more risk, more return. So while making a portfolio the investor must judge the risk

taking capability and the returns desired.

Diversification:

Once the asset mix is determined and risk – return relationship is analyzed the next

step is to diversify the portfolio. The main advantage of diversification is that the

unsystematic risk is minimized.

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PORTFOLIO MANAGEMENT PROCESS

The portfolio management process is the process an investor takes to aid him in

meeting his investment goals.

The procedure is as follows:

Create a Policy Statement -A policy statement is the statement that contains

the investor's goals and constraints as it relates to his investments.

Develop an Investment Strategy - This entails creating a strategy that

combines the investor's goals and objectives with current financial market and

economic conditions.

Implement the Plan Created -This entails putting the investment strategy to

work, investing in a portfolio that meets the client's goals and constraint

requirements.

Monitor and Update the Plan -Both markets and investors' needs change as

time changes. As such, it is important to monitor for these changes as they

occur and to update the plan to adjust for the changes that have occurred.

PORTFOLIO MANAGER

Portfolio Manager is a professional who manages the portfolio of an investor with

the objective of profitability, growth and risk minimization.

According to SEBI, Any person who pursuant to a contract or arrangement with a

client, advises or directs or undertakes on behalf of the client the management or

administration of a portfolio of securities or the funds of the client, as the case

may be is a portfolio manager.

He is expected to manage the investor‘s assets prudently and choose particular

investment avenues appropriate for particular times aiming at maximization of

profit. He tracks and monitors all your investments, cash flow and assets, through

live price updates. The manager has to balance the parameters which defines a

good investment i.e. security, liquidity and return. The goal is to obtain the highest

return for the client of the managed portfolio.

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There are two types of portfolio manager known as Discretionary Portfolio

Manager and Non Discretionary Portfolio Manager. Discretionary portfolio

manager is the one who individually and independently manages the funds of each

client in accordance with the needs of the client and non- discretionary portfolio

manager is the one who manages the funds in accordance with the directions of

the client.

GENERAL RESPONSIBILITIES OF A PORTFOLIO MANAGER

Following are some of the responsibilities of a Portfolio Manager:

The portfolio manager shall act in a fiduciary capacity with regard to the client's

funds.

The portfolio manager shall transact the securities within the limitations placed by

the client.

The portfolio manager shall not derive any direct or indirect benefit out of the

client's funds or securities.

The portfolio manager shall not borrow funds or securities on behalf of the client.

The portfolio manager shall ensure proper and timely handling of complaints from

his clients and take appropriate action immediately

The portfolio manager shall not lend securities held on behalf of clients to a third

person except as provided under these regulations.

CODE OF CONDUCT OF A PORTFOLIO MANAGER

Every portfolio manager in India as per the regulation 13 of SEBI shall follow the

following Code of Conduct:

A portfolio manager shall maintain a high standard of integrity

fairness.

The client‘s funds should be deployed as soon as he receives.

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A Portfolio manager shall render all time’s high standards and

unbiased service.

A portfolio manager shall not make any statement that is likely to be

harmful to the integration of other portfolio manager.

A portfolio manager shall not make any exaggerated statement.

A portfolio manager shall not disclose to any client or press any

confidential information about his client, which has come to his

knowledge.

A portfolio manager shall always provide true and adequate

information.

A portfolio manager should render the best pose advice to the client.

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:

The nature of portfolio management service shall be investment consultant.

The portfolio manager shall not guarantee any return to his client.

Client‘s funds will be kept in a separate bank account.

The portfolio manager shall act as trustee of client‘s funds.

The portfolio manager can invest in money or capital market.

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

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POWERS OF SEBI

SEBI has the following powers to control and manage the portfolio managers:

The portfolio manager shall submit to SEBI such reports, returns and

documents as may be prescribed.

SEBI may investigate the affairs of a portfolio manager such as

inspection of books of accounts, records, etc.,

SEBI has full authority in the event of violation of any provision to

suspend or cancel the license.

No exemptions will be given under any circumstances to portfolio

manager.

TYPES OF INVESTMENT RISK

There are many types of risk that are caused by different factors, or which affect

different investments to varying extents. Some factors affect most investments and are

called systematic risks. Some risks are specific to a business or asset, and are called

non-systematic risks, or diversifiable risks, because such risks can be lowered by

diversified investments.

1. Inflation risk is a systematic risk that lessens real returns due to the decreasing

purchasing power of the returns. Although inflation negatively affects most

investment returns, in some cases, currency inflation can yield higher returns, such as

when it is sold short in a currency transaction.

2. Interest rate risk is a risk that lowers yields or returns due to changes in the

prevailing interest rate. Interest rate risk can affect different securities in different

ways. The price of bonds in the secondary market, for instance, varies inversely to

interest rates—when interest rates rise, the price of bonds drops, and vice versa.

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3. Business risk is any risk that can lower a business‘s net assets or net income that

could, in turn, lower the return of any security based on it. Higher mortgage rates can

increase the business risk for real estate or construction companies, for instance.

4. Financial risk is the risk that a business will not be able to make payments due to

its debt load. Interest and principal must be paid on borrowed money—failure to make

payments can force the business into bankruptcy.

5. Tax risk is the risk that a taxing authority will change tax laws that will affect an

investment negatively. Higher taxes on investment income reduce real returns and can

lower the prices of investments in the secondary markets. Higher taxes on businesses

will lower their net income, which will usually lower its stock price.

6. Market risk is the risk that market conditions can negatively impact investment

returns. For instance, the prices of securities are dependent on general supply and

demand that fluctuates independently of any security in particular. Market risk is

generally dependent on economic conditions, such as inflation, consumer sentiment,

or credit availability.

7. Liquidity risk, which is the risk that an investment cannot be sold quickly for a

reasonable price. Real estate, for instance, is an illiquid investment because it takes

considerable time to sell unless it is sold below market value. These are the general

risks that affect virtually every investment.

IDEAL PORTFOLIO DESIGNED FOR VARIOUS KINDS OF PEOPLE

PORTFOLIO DESIGNED FOR A CONSERVATIVE PERSON:

Share market- 35% [Rs. 35 lakhs]

Mutual Funds- 35% [Rs. 35 lakhs]

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Fixed deposits- 10% [Rs. 10 lakhs]

Money market- 10% [Rs. 10 lakhs]

Commodity- 5% [Rs. 5 lakhs] [Not for trading]

Banks Saving- 5% [Rs. 5 lakhs]

Assumption & Explanation:

Conservative persons are mostly from Conservative family background or with more

no. of persons depending on him or he may be a retired/ aged person, who is worried

about their near future. So, their risk appetite is very low. They invest money into

some investment instrument from where they will get fixed returns which will be very

useful. When designing portfolio for these people, very less amount is be assigned in

share market where risk is high. So, we have assigned 35% for share market wherein

we can have diversified portfolio like investing largely into large cap, who perform

well with less risk. In those 35 lacs, we can have 60% for large cap, 40% for mid cap

companies.

As mutual funds are having low risk, money can be allocated to this asset class also.

Other forms of investment like fixed deposits, money market are always having low

risk. Bank savings are very necessary as day to day expenses can be met by this

investment. Commodity can be purchased for safe investment as every family does it.

Commodities like Gold and silver are traditional form of investment from long time.

They help in killing inflation. Assuming that person of any age and conservative can

purchase real estate for his own family from the returns he gets from fixed returns

investment. He will not think of others asset classes like Art.

PORTFOLIO DESIGNED FOR A MODERATE PERSON:

Share market- 50% [Rs. 50 lakhs]

Mutual funds- 25% [Rs. 25 lakhs]

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Fixed deposits- 10% [Rs. 10 lakhs]

Money market- 10% [Rs. 10 lakhs]

Bank savings- 3% [Rs. 3 lakhs]

Commodity- 2% [Rs. 2 lakhs] [Not for trading]

Assumption & Explanation:

These types of people are having moderate risk taking capability. But, still they don‘t

prefer other type of asset classes where returns are very low. In share market also,

they go for small cap companies with very little investment; so that even if they don‘t

get expected returns, they are not worse off. Considering this, we have allocated 50%

investment to share market i.e. 50 lakhs. In this asset classes, person can choose

between large cap, mid cap & small cap companies or sector wise companies who are

performing good. Lots of options are available with the person to choose. Out of those

50 lakhs, 50% for large cap, 30% for mid cap, 20% for small cap companies can be

allocated.

Mutual funds are also having lots of schemes, having good returns. Mutual fund

companies are having lots of schemes for different levels with different allocation for

different sectors. In this case, person can invest into fixed deposits with good returns

for limited period of time say up to 3 years. Then, he can divert his money from one

asset class to another depending upon performance of the other class. As time passes

if person can think of trading in commodity if he can generate high risk appetite for

him for certain amount of money. He also can go for another asset class like

insurance, if he thinks there is a need for that.

In case of moderate risk taking people, they keep less amount of money in their bank

accounts as their vision is too invest more and get more returns and keep doing that.

They like to mostly get the experience in share market and new asset classes like

commodity trading.

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PORTFOLIO DESIGNED FOR AN AGGRESSIVE PERSON:

Share market- 65% [Rs. 65 lakhs]

Mutual funds- 15% [Rs. 15 lakhs]

Fixed deposits- 10% [Rs. 10 lakhs]

Bank savings- 3% [Rs. 3 lakhs]

Commodity- 2% [Rs. 2 lakhs] [Not for trading]

Assumptions & Explanation:

Aggressive, high risk taking people are mostly young people between 25-35 years or

people who are HNIs (High Net worth Individual). These people always trade in

share market in different sectors. Therefore, we have allocated 65% i.e. 65 lakhs for

share market. Out of that, 40% for large cap and 30% for mid cap and small cap

companies each. Whoever may be the person on the earth, he will never take 100%

risk of putting whole amount into sector which is risky. Therefore, diversified

portfolio comes into picture.

These people mostly never look at Money market as asset class because they believe

in high liquidity. They are always on look-out of with sector performing well, so that

they can pool their money from one asset class to another and get good returns.

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PORTFOLIO MANAGEMENT PAYMENT CRITERIA

There are types of payment criteria offered by portfolio managers to their client, such

as:

Fixed-linked management fee.

Performance-linked management fee.

In fixed-linked management fee the client usually pays between 2-2.5% of the

portfolio value calculated on a weighted average method.

In performance-linked management fee the client pays a flat fee ranging between

0.5-1.5percent based on the performance of portfolio managers.

The profits are calculated on the basis of 'high watermarking' concept. This means,

that the fee is paid only on the basis of positive returns on the investment. In addition

to these criteria, the manager also gets around 15-20% of the total profit earned by the

client. The portfolio managers can also claim some separate charges gained from

brokerage, custodial services, and tax payments.

MEASURING PORTFOLIO RETURNS

Portfolio returns come in the form of current income and capital gains. Current

income includes dividends on stocks and interest payments on bonds. A capital gain

or capital loss results when a security is sold, and is equal to the amount of the sale

price minus the purchase price. The return of the portfolio is equal to the net of the

capital gains or losses plus the current income for the holding period. Unrealized

capital gains or losses on securities still held are also added to the return to evaluate

the holding period return of the portfolio. The portfolio return is adjusted for the

addition of funds and the withdrawal of funds to the portfolio, and is time-weighted

according to the number of months that the funds were in the portfolio.

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Below is the formula for calculating the

portfolio return for 1 year: Portfolio Return =

Dividends + Interest + Realized Gains or

Losses + Unrealized Gains or Losses / Initial

Investment + (Added Funds x Number of

Months in Portfolio / 12) - (Withdrawn Funds

x Number of Months Withdrawn from

Portfolio / 12)

Realized gains (or losses) are gains or losses actualized by the selling of the securities,

whereas unrealized gains or losses are securities that are still owned but are marked to

market to determine the portfolio's return.

Comparing Portfolio Returns:

There are several ways of comparing portfolio returns with each other and with the

market in general. A simple comparison is to simply compare their returns. However,

returns by themselves do not account for the risk taken. If 2 portfolios have the same

return, but one has lower risk, then that would be the preferable, more efficient

portfolio. There are 3 common ratios that measure a portfolio‘s risk-return trade-off:

Sharpe’s ratio

Treynor’s ratio

Jensen’s Alpha

Sharpe Ratio:

The Sharpe ratio (aka Sharpe’s measure), developed by William F. Sharpe, is the

ratio of a portfolio‘s total return minus the risk-free rate divided by the standard

deviation of the portfolio, which is a measure of its risk. The Sharpe ratio is simply

the risk premium per unit of risk, which is quantified by the standard deviation of the

portfolio.

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Risk Premium = Total Portfolio Return – Risk-free Rate Sharpe Ratio = Risk

Premium / Standard Deviation of Portfolio

The risk-free rate is subtracted from the portfolio return because a risk-free asset has

no risk premium since the return of a risk-free asset is certain. Therefore, if a

portfolio‘s return is equal to or less than the risk-free rate, then it makes no sense to

invest in the risky assets.

Hence, the Sharpe ratio is a measure of the performance of the portfolio compared to

the risk taken—the higher the Sharpe ratio, the better the performance and the greater

the profits for taking on additional risk.

Example—Calculating the Sharpe Ratio if a fund has a return of 12% and a

standard deviation of 15% and if the risk-free rate is 2%, then what is its Sharpe

ratio? Solution: Sharpe Ratio = (12% – 2%) / 15% = 10% / 15% = 66.7% (rounded)

Treynor Ratio :

While the Sharpe ratio measures the risk premium of the portfolio over the portfolio

risk, or its standard deviation, Treynor‘s ratio, popularized by Jack L. Treynor,

compares the portfolio risk premium to the diversifiable risk of the portfolio as

measured by its beta.

Treynor Ratio = Total Portfolio Return – Risk Free Rate

/Portfolio Beta

Note that since the beta of the general market is defined to be 1, the Treynor Ratio of

the market would be equal to its return minus the risk-free rate.

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Example—Calculating the Treynor Ratio If a portfolio has a return of 12% and a

beta of 1.4, and if the risk-free rate is 2%, then what is its Treynor ratio?

Solution: Treynor Ratio = (12 – 2) / 1.4 = 10 / 1.4 = 7.14 (rounded)

Note that here we used whole numbers for the return and risk-free rate because it

simplifies the math and because it makes no difference when comparing portfolios if

the same method is used consistently.

Jensen's Alpha (Aka Jensen Index):

Alpha is a coefficient that is proportional to the excess return of a portfolio over its

required return, or its expected return, for its expected risk as measured by its beta.

Hence, alpha is determined by the fundamental values of the company in contrast to

beta, which measures the return due to its volatility. Jensen‘s alpha (aka Jensen

index), developed by Michael C. Jensen, uses the capital asset pricing model (CAPM)

to determine the amount of the return that is firm-specific over that which is due to

market risk, which causes market volatility as measured by the firm‘s beta.

Jensen’s Alpha = Total Portfolio Return – Risk-Free Rate – [Portfolio Beta x

(Market Return – Risk-Free Rate)] Jensen‘s alpha can be positive, negative, or zero

Jensen‘s alpha can be positive, negative, or zero. Note that, by definition, Jensen‘s

alpha of the market is zero. If the alpha is negative, then the portfolio is

underperforming the market. Formula investment plans are long-term investment

strategies based on a fixed formula of dollars to investments that is applied over a

period of time and does not involve security analysis or market timing. While easy to

implement, their main drawback is that profits will probably be less than that resulting

from active analysis and management. There is potentially an infinite number of

formula plans, or variations of them, but the most common formula plans are: dollar-

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cost averaging, constant-dollar investment, constant-ratio investment, and variable-

ratio investment.

Summary How successful any of these plans are in actuality will depend on the

specific details of the plans and the investment horizon. However, they are more

likely to be successful the longer the investment horizon, especially if a large part

of the portfolio is invested in risky assets.

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CURRENT STATUS OF PORTFOLIO MANAGEMENT IN

INDIA:

Now-a-days, portfolio management is very popular concept because every investor

wants to increase his investment. In the earlier days, it was not so good. People make

optimize profits but now investors are taking the help of the professionals and they

help them in various decisions. Select the right blend of projects that can increase

ROI, market share and achieve a sustainable growth portfolio.

They apply an investment plan to maintain a balance between investment risk and

return. They follow certain rules to allocate the major portion of resources to invest

whether in extremely volatile markets like share and equity market or in treasury

notes, money market funds. They provide a good investment option, excellent return

at manageable risk. So any individuals, a beginner or an experienced investor or a

monthly earner for living can take the advantages of portfolio management service.

With the considerable investments required to expand new products and the risks

involved, portfolio Management in India is becoming a progressively more important

tool to make strategic decisions about product development and the investment of

company reserves.

All professionals and business leaders in the investment services have become

mindful that only right technologies and active financial management can achieve

financial goals. Portfolio management in India has provided the vital insights to

expand competitive initiation in this complex financial market. The portfolio

management team involves managers who try to increase the market return by

actively managing financial portfolio through investment decisions based on research

and individual investment choices. They actively manage closed-end funds because

they have years of actual daily trading experience. These managers are highly skilful

and adept at carrying on profound research. They can perform with passion and

innovation in investment services. So they can give fruitful financial advice to expand

financial gains.

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Investment services involve different financial instruments such as pension fund,

mutual fund, equity and share, investment on property, commodity, IT, stock, and

bond, financial derivatives. These instruments have a certain level of risk and give

returns in the long run. The returns can be positive only when it is invested

professionally. Many Companies dealing in Portfolio Management are Kotak

Securities, Unicon Portfolio Management, UTI, Karvy, Reliance etc.

FUTURE PROSPECTUS OF THE PORTFOLIO MANAGEMENT SERVICES

IN INDIA

Now, if we talk about the future prospective of portfolio services, then we see every

investor want to see growth in its investment and returns. He/ she want higher return

than risk. They want their investments are diversified in such a manner so that the risk

of one may compensated by another and for this they have to take the services of the

experts. So, we can say that the future of the portfolio management is very bright

because in today‘s world everyone wants to invest in a wisely manner and so that it

may reduce their risk. So, on the every step they have to take the help of the

professionals or experts.

In Mutual fund, there are also the experts who manage the asset mix of the investors

but there are some shortcomings in the mutual fund like flexibility is not there. So

portfolio managers provide these facilities to their clients and they feel satisfied from

their managers. Moreover, many companies are providing the facilities of portfolio

management and many other are entering into these services. So, we can say that in

the near future, portfolio management services will grow very fast and from this many

investors are taking benefits from this.

There are specialised portfolio managers who are taking care for it and charges

commission for their services and many other companies are entering for providing

better services to the investors. So, in the near future it will definitely increase.

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CASE STUDY

Kotak Securities: Portfolio Management Services

Kotak Securities is one of India‘s oldest portfolio management companies with over a

decade of experience. It is also one of the largest, with Assets under Management of

over Rs. 3300 Crores. Kotak Portfolio Management from Kotak Securities comes as

an answer to those who would like to grow exponentially on the crest of the stock

market, with the backing of an expert.

Kotak Securities is a SEBI registered Portfolio Manager for providing both

Discretionary as well as Non Discretionary portfolio management service. Kotak

Securities is a depository participant with National Securities Depository Limited

(NSDL) and Central Depository Services Limited (CDSL). Unlike many other

companies, Kotak Securities Ltd. has a Centralised Risk Management System and an

in-house Research Team which allows it to offer the same levels of service to

customers across all locations. Kotak Securities was awarded as the most customer

responsive company in the Financial Institution sector by AVAYA Global Connect

Award both in 2006 and 2007. Kotak Portfolio Management offers various schemes

to suit individual investment objectives.

Following are the products offered by Kotak Securities –

GUARDIAN PORTFOLIO

With the Guardian Portfolio Kotak Securities invests in both gold and equity. At any

point of time around 20 per cent of the assets will be invested in the gold. The

allocation to gold may go up to 50 per cent depending upon the market condition and

the rest will be invested in the equity market. The minimum investment is Rs 10

lakhs.

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BEP – Large cap focus portfolio

In the BEP – Large cap focus portfolio, investments will be made in mis-priced large

cap stocks that have a high growth potential and can withstand macro level risks to

sustain in an adverse environment. Large Caps are dominant players in their

respective sectors, and hence have the strength and the ability to maintain margins in

a tough operating environment.

GEMS PORTFOLIO

GEMS are a 30-month closed-end product. The scheme intends to create a focused

portfolio of stocks from across sectors and market capitalization ranges. Its main

feature is its special mandate to participate in the pre-FPO (follow-on public offer)

placements and private placements of listed companies. Investments of up to 30 per

cent of the overall assets can be made in such opportunities.

ORIGIN

Origin portfolio aims to invest in growth oriented companies with sustainable

business models backed by strong management capabilities with emphasis on smaller

capitalized companies with a market capitalization not exceeding Rs. 2500 crore at

the time of investment.

INVEST GUARD PORTFOLIO

The Invest guard Plan is a ‗CPPI Model‘which invests across shares and fixed

income products, moving from shares into fixed interest investments when the fund‘s

value drops below a predetermined ―floor‖. When markets start to move up, the

product increases its holdings in shares, tapping into these growth opportunities.

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CORE PORTFOLIO

Core Portfolio aims to capture the long term upside of the India Growth Story by

diversifying across the major themes. The investments are in all equity and equity

related instruments with emphasis on companies in the business areas driven by

consumerism, outsourcing, real estate and core infrastructure players and is essentially

a mix of small, medium and large capitalization companies.

The Portfolio Management Service combines competent fund management, dedicated

research and technology to ensure a rewarding experience for its clients. Special

relationship managers are appointed to manage your investments in the best possible

manner and make sure that you get maximum returns of your investments.

Kotak PMS has a dedicated fund management and research team that frequently

meets management of companies and is well-placed to spot such opportunities.

BENEFITS OF CHOOSING PORTFOLIO MANAGEMENT SERVICES

(PMS) INSTEAD OF MUTUAL FUNDS:

While selecting Portfolio management service (PMS) over mutual funds services it

is found that portfolio managers offer some very services which are better than the

standardized product services offered by mutual funds managers. Such as:

Asset Allocation:

Asset allocation plan offered by Portfolio management service helps in allocating

savings of a client in terms of stocks, bonds or equity funds. The plan is tailor made

and is designed after the detailed analysis of client's investment goals, saving pattern,

and risk taking capacity.

Timing:

Portfolio managers preserve client's money on time. Portfolio management service

(PMS) help in allocating right amount of money in right type of saving plan at right

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time. This means, portfolio manager provides their expert advice on when his client

should invest his money in equities or bonds and when he should take his money out

of a particular saving plan. Portfolio manager analyzes the market and provides his

expert advice to the client regarding the amount of cash he should take out at the time

of big risk in stock market.

Flexibility:

Portfolio Managers plan saving of his client according to their need and preferences.

But sometimes, portfolio managers can invest client's money according to his

preference because they know the market very well than his client. It is his client's

duty to provide him a level of flexibility so that he can manage the investment with

full efficiency and effectiveness. In comparison to mutual funds, portfolio managers

do not need to follow any rigid rules of investing a particular amount of money in a

particular mode of investment.

Mutual fund managers need to work according to the regulations set up by financial

authorities of their country. Like in India, they have to follow rules set up by SEBI.

CASE STUDY: FINANCIAL PLANNING INTERRUPTED

Any financial planner worth his salt will vouch for the importance of diversification

while building a portfolio. Furthermore, the diversification needs to work at various

levels. For example, within each asset class, it is pertinent to be invested across

multiple instruments; similarly, the portfolio should be diversified across various asset

classes as well.

We have taken a case study of a client whose portfolio was anything but diversified.

And this wasn't his only problem. To make matters worse, he seemed to have

contravened every basic tenet of financial planning, making his portfolio an ideal

candidate for a makeover.

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The facts of the case:

The client is 40 years of age, and the sole earning member in his family.

His wife is a homemaker and his sons are aged 10 and 5 respectively.

He is employed with a multinational corporation and his salary income more

than makes up for his expenses i.e. the monthly cash inflows outweigh

outflows.

The client's investments/financials are as follows:

He has invested in 3 properties (including the one in which he resides), which

account for 83% of his assets.

Equities (stocks and investments in only 2 diversified equity funds) account for

16% of assets.

The balance (1%) is held in cash/savings bank accounts.

He has opted for 2 child ULIPs (unit linked insurance plans), the total annual

premium for which is Rs 120,000

On the liabilities front, he has an outstanding home loan and also a loan against his

mutual fund investment.

As can be seen, property i.e. real estate as an asset class accounts for a

disproportionately high portion of the asset portfolio.

Furthermore, all the properties are in the same city, depriving the client of any

diversification opportunity.

While it is important to have property in one's portfolio, it certainly shouldn't account

for such a high proportion. Also given that property as an asset class tends to be rather

illiquid (a distress sale when liquidity needs are urgent could lead to a loss-making

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proposition), only accentuates the unenviable situation. A downturn in property prices

could spell disaster for the client.

How much should property account for in your portfolio?

The remedy for this situation lies in introducing other assets like equities into the

portfolio and thereby converting the portfolio into a more balanced one. Studies have

shown that equities as an asset class (if invested smartly) can outperform others like

real estate, gold and fixed income instruments over longer time frames. Considering

that the client's needs (planning for retirement and providing for children's education)

are long-term in nature, the presence of a higher equity component should be treated

as vital.

The solution - put on hold any plans to buy more property. With 3 properties, the

client has adequately taken care of that.

The surplus cash inflows should now be utilized to beef up the portfolio's equity

component. But the same needs to be done in a planned manner. Sadly, the client has

not even set himself any concrete objective in terms of planning for retirement or

providing for children's education. In other words, it's yet another case of investing

randomly without setting any objectives. To complicate matters, the client has erred

by investing nearly Rs 3 m in just 2 diversified equity funds, again pointing to lack of

diversification.

Identify your financial goals at the outset the solution –

Set tangible objectives (in monetary terms) and then invests in well-managed equity

funds in a disciplined manner for achieving the same. This will help on various levels.

First, the enhanced equity component will ensure that the portfolio becomes well-

diversified across asset classes. Second, it will make the equity investments

diversified across multiple schemes. Finally, it will aid in gainfully utilizing the

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surplus monies. On the insurance front, the client is woefully underinsured.

Considering that he is the sole earning member in the family, the ideal choice would

have been to opt for a term plan. Term plans are pure risk cover plans; they offer the

opportunity to obtain a high insurance cover at relatively lower premiums. After

getting himself adequately insured, savings-based products like ULIPs should have

found place in the portfolio. The client should rectify the anomaly by buying a term

plan and fortifying his insurance portfolio.

Term Plans - Comparative premium chart

The liability side could do with some rework as well. While the home loan can aid in

tax-planning (interest and principal repayments qualify for deduction from gross total

income), we aren't quite convinced about the loan against mutual fund investment.

The client is sufficiently liquid and certainly doesn't need to shoulder the burden of a

redundant loan repayment. He would be better off paying off the loan at the earliest.

The client's financial status and condition make rather interesting reading. On the

surface, we have an individual, whose income streams more than make up for his

expenses, whose asset portfolio seems rather well-stocked. In other words, it's a

seemingly picture perfect situation. But scratch the surface, and a radically different

picture emerges.

The investments are lop-sided in favor of a single asset class (i.e. property). Despite

the needs being long-term in nature, the client is virtually unprepared to meet those

needs; in fact, he hasn't even quantified his needs - which should be the starting point

for the exercise. He doesn't have an adequate insurance cover and has in his books

avoidable liabilities. The case only underscores the difference between ―having

finances‖ and ―being financially sound‖. And missing out on the latter could well

mean that one is headed for a financial disaster.

Source: Yahoo Finance

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CONCLUSION

From the above discussion it is clear that portfolio functioning is based on market

risk, so one can get the help from the professional portfolio manager or the Merchant

banker if required before investment. Because applicability of practical knowledge

through technical analysis can help an investor to reduce risk.

Casino make money on a roulette wheel, not by knowing what number will come up

next, but by slightly improving their odds with the addition of a “0” and “00”. Yet

many investors buy securities without attempting to control the odds. If we believe

that this dealing is not a ‗Gambling‖ we have to start up it with intelligent way.

Through it is basically a future estimation or expectation, one should know the

standard norms and related rules for lowering the risk.

After the overall study about this topic it shows that portfolio management is a

dynamic and flexible concept which involves regular and systematic analysis, proper

management, judgment, and actions and also that the service which was not so

popular earlier as other services has become a booming sector as on today and is yet

to gain more importance and popularity in future as people are slowly and steadily

coming to know about this concept and its importance.

It also helps both an individual the investor and FII to manage their portfolio by

expert portfolio managers. It protects the investor‘s portfolio of funds very crucially.

Portfolio management service is very important and effective investment tool as on

today for managing investible funds with a surety to secure it. As and how

development is done every sector will gain its place in this world of investment. It can

be concluded, that future of portfolio management is bright provided proper

regulations prevail and investor‘s needs are satisfied by providing variety of schemes.

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BIBLIOGRAPHY

PRASANNA CHANDRA - SECURITY ANLYSIS AND PORTFOLIO

MANAGEMENT.

V.A. AVADHANI - SECURITY ANLYSIS AND PORTFOLIO

MANAGEMENT.

GORDON AND NATRAJAN - FINANCIAL SERVICES AND MARKETS.

IGNOU - MBA COURSE MATERIAL

WEBLIOGRAPHY

www.npd-solutions.com

www.kotaksecurities.com

www.botinternational.com

www.uniconindia.in

www.investopedia.com

moneycontrol.com