Portfolio Management Karvy 2013

8/11/2019 Portfolio Management Karvy 2013

1/84

A PROJECT ON PORTFOLIO MANAGEMENT

By

Vunnava Niharika

For

M.B.A in Finance (2012-2014)

From

Affliated to


2/84

2

CHAPTER-I

INTRODUCTION


3/84

3

INTRODUCTION

Portfolio management and investment decision as a concept came to be familiar

with the conclusion of second world war when thing can be in the stock market can be

liberally ruined the fortune of individual, companies ,even government s it was thendiscovered that the investing in various scripts instead of putting all the money in a single

securities yielded weather return with low risk percentage, it goes to the credit of

HARYMERKOWITZ, 1991 noble laurelled to have pioneered the concept of

combining high yielded securities with these low but steady yielding securities to achieve

optimum correlation coefficient of shares.

Portfolio management refers to the management of portfolios for others by

professional investment managers it refers to the management of an individual investors

portfolio by professionally qualified person ranging from merchant banker to specified

portfolio company.

Definition by SEBI :

A portfolio management is the total holdings of securities belonging to any person.

Portfolio is a combination of securities that have returns and risk characteristics of their

own port folio may not take on the aggregate characteristics of their individual parts.

Thus a portfolio is a combination of various assets and or instruments of

investments.

Combination may have different features of risk and return separate from those

of the components. The portfolio is also built up of the wealth or income of the investor

over a period of time with a view to suit is return or risk preference to that of the port

folio that he holds. The portfolio analysis is thus an analysis is thus an analysis of risk

return characteristics of individual securities in the portfolio and changes that may take

place in combination with other securities due interaction among them and impact of

each on others.


4/84

4

Security analysis is only a tool for efficient portfolio management; both of them together

and cannot be dissociated. Portfolios are combination of assets held by the investors.

These combination may be various assets classed like equity and debt or of

different issues like Govt. bonds and corporate debts are of various instruments like

discount bonds, debentures and blue chip equity nor scripts of emerging Blue chip

companies.

Portfolio analysis includes portfolio construction, selection of securities revision

of portfolio evaluation and monitoring of the performance of the portfolio. All these are

part of the portfolio management

The traditional portfoliotheory aims at the selection of such securities that would fit in

will with the asset preferences, needs and choices of the investors. Thus, retired executive

invests in fixed income securities for a regular and fixed return. A business executive or a

young aggressive investor on the other hand invests in and rowing companies and in risky

ventures.

The modern portfoliotheory postulates that maximization of returns and minimization of

risk will yield optional returns and the choice and attitudes of investors are only a starting

point for investment decisions and that vigorous risk returns analysis is necessary for

optimization of returns. Portfolio analysis includes portfolio construction, selection of

securities, and revision of portfolio evaluation and monitoring of the performance of the

portfolio. All these are part of the portfolio management.


5/84

5

NEED & IMPORTANCE OF STUDY

Portfolio management or investment helps investors in effective and efficient

management of their investment to achieve this goal. The rapid growth of capital marketsin India has opened up new investment avenues for investors.

The stock markets have become attractive investment options for the common man. But

the need is to be able to effectively and efficiently manage investments in order to keep

maximum returns with minimum risk.

Hence this study on PORTFOLIO MANAGEMENT to examine the role process and

merits of effective investment management and decision.

SCOPE OF STUDY:

This study covers the Markowitz model. The study covers the calculation of correlations

between the different securities in order to find out at what percentage funds should be invested

among the companies in the portfolio. Also the study includes the calculation of individual

Standard Deviation of securities and ends at the calculation of weights of individual securities

involved in the portfolio. These percentages help in allocating the funds available for investmen

based on risky portfolios.

OBJECTIVES:

To study the investment decision process.

To analysis the risk return characteristics of sample scripts.

Ascertain portfolio weights.

To construct an effective portfolio which offers the maximum return for minimum

risk


6/84

6

METHODOLOGY:

Primary source

Information gathered from interacting with employees in the organization. And the data

from the textbooks and other magazines.

Secondary source

Daily prices of scripts from news papers

LIMITATION:

Construction of Portfolio is restricted to two companies based on Markowitz model.

Very few and randomly selected scripts / companies are analyzed from BSE listings.

Data collection was strictly confined to secondary source. No primary data is associated with

the project.

Detailed study of the topic was not possible due to limited size of the project.

There was a constraint with regard to time allocation for the research study i.e. for a period of

two months.

Only two samples have been selected for constructing a portfolio.

Share prices of scripts of 5 years period was taken.

Duration Period 2 months

Sample size : 5 years

To ascertain risk, return and weights.


7/84

7

CHAPTER-II

INDUSTRY PROFILE

&

COMPANY PROFILE


8/84

8

For the Indian investors, the year belonged to stock markets, which have been

shining bright when it comes to generating wealth, while the glitter of gold and silver

faded for the second straight year in 2013.

Measured byBSE Sensex, stock market has generated a positive return of about 9 per

cent for investors in 2013, while gold prices fell by about three per cent and its poorer

cousin silver plummeted close to 24 per cent.

After outperforming stock market for more than a decade, gold has been on back foot for

two consecutive years now vis-a-vis equities, shows an analysis of their price

movements.

"Gold's under-performance was mainly due to prices falling in dollar terms amid

anticipated tapering over last several months combined with FII investment in Indian

stocks.

"This movement has been equally true for global markets as 2013 saw gold losing its

shine and markets coming back with a bang," said Jayant Manglik, President Retail

Distribution, Religare Securities.

"As always, gold and stock prices follow opposite trends and this year was no different

except that both changed direction," he said.

Improvement in the world economy has brought the risk appetite back amongst retail

investors and this has drenched the liquidity from safe havens such as gold leading to its

under-performance, an expert said.

In 2012, the Sensex had gained over 25 per cent, which was nearly double the gain of

about 12.95 per cent in gold. The appreciation in silver was at about 12.84 per last year.

According to Hiren Dhakan, Associate Fund Manager, Bonanza Portfolio, "Markets have

particularly shown great strength post July-August 2013 when RBI took some strong

measures to control the steeply depreciating rupee."

"When the US Fed gave indications that it might taper its stimulus programme given the

economy shows improvement, a knee-jerk correction was seen in most risky assets,

including stocks in Indian markets. However, assurance by the Fed about planned and

staggered tapering in stimulus once again proved to be a catalyst for the markets."
http://www.financialexpress.com/indexcharts.php?EXCHNG=BSEhttp://www.financialexpress.com/indexcharts.php?EXCHNG=BSE


9/84

9

"External factors affecting Indian stocks seem to be negative for the first half of 2014 due

to continued strength of the US dollar and benign in the second half. By that time,

elections too would have taken place. A combination of domestic and international

factors point to a bumper closing of Indian markets in 2014 with double-digit percentage

growth," he said.

Stock market segment mid-cap and small-cap indices have fallen by about 10 per cent

and 16 per cent, respectively, in 2013.

Foreign Institutional Investors have bought shares worth over Rs 1.1 lakh crore (nearly

USD 20 billion) till December 19. In 2012, they had pumped in Rs 1.28 lakh crore (USD

24.37 billion).

Evolution

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meager and obscure. The

East India Company was the dominant institution in those days and business in its loan

securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place

in Bombay. Though the trading list was broader in 1839, there were only half a dozenbrokers recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage

business attracted many men into the field and by 1860 the number of brokers increased

into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers

increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a

disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850

could only be sold at Rs. 87).


10/84

10

At the end of the American Civil War, the brokers who thrived out of Civil War

in 1874, found a place in a street (now appropriately called as Dalal Street) where they

would conveniently assemble and transact business. In 1887, they formally established in

Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively

known as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in

the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was

consolidated.

Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile

industry. After 1880, many mills originated from Ahmadabad and rapidly forged ahead.

As new mills were floated, the need for a Stock Exchange at Ahmadabad was realized

and in 1894 the brokers formed "The Ahmadabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry

was to Calcutta. Also tea and coal industries were the other major industrial groups in

Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute

shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal

boom between 1904 and 1908. On June 1908, some leading brokers formed "TheCalcutta Stock Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on the way in

India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel

Company Limited in 1907, an important stage in industrial advancement under Indian

enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies

generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

functioning in its midst, under the name and style of "The Madras Stock Exchange" with


11/84

11

100 members. However, when boom faded, the number of members stood reduced from

100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a

rapid increase in the number of textile mills and many plantation companies were floated.

In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange

Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange

Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with

the Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a

slump. But, in 1943, the situation changed radically, when India was fully mobilized as a

supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities,

those dealing in them found in the stock market as the only outlet for their activities.

They were anxious to join the trade and their number was swelled by numerous others.

Many new associations were constituted for the purpose and Stock Exchanges in all parts

of the country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and

the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,

amalgamated into the Delhi Stock Exchnage Association Limited.


12/84

12

Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression. Lahore

Exchange was closed during partition of the country and later migrated to Delhi and

merged with Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only

Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well

established exchanges, were recognized under the Act. Some of the members of the other

Associations were required to be admitted by the recognized stock exchanges on a

concessional basis, but acting on the principle of unitary control, all these pseudo stock

exchanges were refused recognition by the Government of India and they thereupon

ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India

(mentioned above). The number virtually remained unchanged, for nearly two decades.

During eighties, however, many stock exchanges were established: Cochin Stock

Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982),

and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association

Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange

Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986),

Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association

Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara

Stock Exchange Limited (at Baroda, 1990) and recently established exchanges -

Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock

exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI)

and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since

independence. It is quite evident from the Table that Indian stock markets have not only


13/84

13

grown just in number of exchanges, but also in number of listed companies and in capital

of listed companies. The remarkable growth after 1985 can be clearly seen from the

Table, and this was due to the favouring government policies towards security market

industry.

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges are limited to listed securities of public limited

companies. They are broadly divided into two categories, namely, specified securities

(forward list) and non-specified securities (cash list). Equity shares of dividend paying,

growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market

capitalization of atleast Rs.100 million and having more than 20,000 shareholders are,

normally, put in the specified group and the balance in non-specified group.

Two types of transactions can be carried out on the Indian stock exchanges: (a) spot

delivery transactions "for delivery and payment within the time or on the date stipulated

when entering into the contract which shall not be more than 14 days following the date

of the contract" : and (b) forward transactions "delivery and payment can be extended by

further period of 14 days each so that the overall period does not exceed 90 days from the

date of the contract". The latter is permitted only in the case of specified shares. Thebrokers who carry over the outstandings pay carry over charges (cantango or

backwardation) which are usually determined by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities

for his clients on a commission basis and also can act as a trader or dealer as a principal,

buy and sell securities on his own account and risk, in contrast with the practice

prevailing on New York and London Stock Exchanges, where a member can act as a

jobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of

face-to-face trading with bids and offers being made by open outcry. However, there is a

great amount of effort to modernize the Indian stock exchanges in the very recent times.


14/84

14

Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to

many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly

long settlement periods and benami transactions, which affected the small investors to a

great extent. To provide improved services to investors, the country's first ringless,

scripless, electronic stock exchange - OTCEI - was created in 1992 by country's premier

financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation

of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance

Corporation of India, General Insurance Corporation and its subsidiaries and CanBank

Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities traded on

the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the OTC

can be bought or sold at any OTC counter all over the country and they should not

be listed anywhere else

Permitted Securities - Certain shares and debentures listed on other exchanges and

units of mutual funds are allowed to be traded

Initiated debentures - Any equity holding atleast one lakh debentures of a

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,

certificates of listed securities and initiated debentures are not traded at OTC. The

original certificate will be safely with the custodian. But, a counter receipt is generated

out at the counter which substitutes the share certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional stock exchange.

The difference is that the delivery and payment procedure will be completed within 14

days.


15/84

15

Compared to the traditional Exchanges, OTC Exchange network has the following

advantages:

OTCEI has widely dispersed trading mechanism across the country which

provides greater liquidity and lesser risk of intermediary charges.

Greater transparency and accuracy of prices is obtained due to the screen-based

scripless trading.

Since the exact price of the transaction is shown on the computer screen, the

investor gets to know the exact price at which s/he is trading.

Faster settlement and transfer process compared to other exchanges.

In the case of an OTC issue (new issue), the allotment procedure is completed in a

month and trading commences after a month of the issue closure, whereas it takes

a longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency

investors are gradually becoming aware of the manifold advantages of the OTCEI.

National Stock Exchange (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the Indian

stock market trading system on par with the international standards. On the basis of the

recommendations of high powered Pherwani Committee, the National Stock Exchange

was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and

Investment Corporation of India, Industrial Finance Corporation of India, all Insurance

Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.


16/84

16

Wholesale debt market operations are similar to money market operations - institutions

and corporate bodies enter into high value transactions in financial instruments such as

government securities, treasury bills, public sector unit bonds, commercial paper,

certificate of deposit, etc.

There are two kinds of players in NSE:

(a) trading members and

(b) participants.

Recognized members of NSE are called trading members who trade on behalf of

themselves and their clients. Participants include trading members and large players likebanks who take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading mechanism

which adopts the principle of an order-driven market. Trading members can stay at their

offices and execute the trading, since they are linked through a communication network.

The prices at which the buyer and seller are willing to transact will appear on the screen.

When the prices match the transaction will be completed and a confirmation slip will be

printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

NSE brings an integrated stock market trading network across the nation.

Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

Delays in communication, late payments and the malpractices prevailing in the

traditional trading mechanism can be done away with greater operational

efficiency and informational transparency in the stock market operations, with the

support of total computerized network.


17/84

17

Unless stock markets provide professionalized service, small investors and foreign

investors will not be interested in capital market operations. And capital market being one

of the major source of long-term finance for industrial projects, India cannot afford to

damage the capital market path. In this regard NSE gains vital importance in the Indian

capital market system.

Preamble

Often, in the economic literature we find the terms development and growth are used

interchangeably. However, there is a difference. Economic growth refers to the sustained

increase in per capita or total income, while the term economic development implies

sustained structural change, including all the complex effects of economic growth. In

other words, growth is associated with free enterprise, where as development requires

some sort of control and regulation of the forces affecting development. Thus, economic

development is a process and growth is a phenomenon.

Economic planning is very critical for a nation, especially a developing country like India

to take the country in the path of economic development to attain economic growth.

Why Economic Planning for India?

One of the major objective of planning in India is to increase the rate of economic

development, implying that increasing the rate of capital formation by raising the levels

of income, saving and investment. However, increasing the rate of capital formation in

India is beset with a number of difficulties. People are poverty ridden. Their capacity to

save is extremely low due to low levels of income and high propensity to consume.

Therefor, the rate of investment is low which leads to capital deficiency and low

productivity. Low productivity means low income and the vicious circle continues. Thus,

to break this vicious economic circle, planning is inevitable for India.

The market mechanism works imperfectly in developing nations due to the ignorance and

unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is

very vital. In India, a large portion of the economy is non-monitised; the product, factors


18/84

18

of production, money and capital markets is not organized properly. Thus the prevailing

price mechanism fails to bring about adjustments between aggregate demand and supply

of goods and services. Thus, to improve the economy, market imperfections has to be

removed; available resources has to be mobilized and utilized efficiently; and structural

rigidities has to be overcome. These can be attained only through planning.

In India, capital is scarce; and unemployment and disguised unemployment is prevalent.

Thus, where capital was being scarce and labour being abundant, providing useful

employment opportunities to an increasing labour force is a difficult exercise. Only a

centralized planning model can solve this macro problem of India.

Further, in a country like India where agricultural dependence is very high, one cannot

ignore this segment in the process of economic development. Therefore, an economic

development model has to consider a balanced approach to link both agriculture and

industry and lead for a paralleled growth. Not to mention, both agriculture and industry

cannot develop without adequate infrastructural facilities which only the state can

provide and this is possible only through a well carved out planning strategy. The

governments role in providing infrastructure is unavoidable due to the fact that the role

of private sector in infrastructural development of India is very minimal since these

infrastructure projects are considered as unprofitable by the private sector.

Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce

the prevailing income inequalities. This is possible only through planning.

Planning History of India

The development of planning in India began prior to the first Five Year Plan of

independent India, long before independence even. The idea of central directions of

resources to overcome persistent poverty gradually, because one of the main policies

advocated by nationalists early in the century. The Congress Party worked out a program

for economic advancement during the 1920s, and 1930s and by the 1938 they formed a

National Planning Committee under the chairmanship of future Prime Minister Nehru.

The Committee had little time to do anything but prepare programs and reports before the


19/84

19

Second World War which put an end to it. But it was already more than an academic

exercise remote from administration. Provisional government had been elected in 1938,

and the Congress Party leaders held positions of responsibility. After the war, the Interim

government of the pre-independence years appointed an Advisory Planning Board. The

Board produced a number of somewhat disconnected Plans itself. But, more important in

the long run, it recommended the appointment of a Planning Commission.

The Planning Commission did not start work properly until 1950. During the first three

years of independent India, the state and economy scarcely had a stable structure at all,

while millions of refugees crossed the newly established borders of India and Pakistan,

and while ex-princely states (over 500 of them) were being merged into India or Pakistan.

The Planning Commission as it now exists, was not set up until the new India hadadopted its Constitution in January 1950.

Objectives of Indian Planning

The Planning Commission was set up the following Directive principles :

To make an assessment of the material, capital and human resources of the

country, including technical personnel, and investigate the possibilities of

augmenting such of these resources as are found to be deficient in relation to the

nations requirement.

To formulate a plan for the most effective and balanced use of the countrys

resources.

Having determined the priorities, to define the stages in which the plan should be

carried out, and propose the allocation of resources for the completion of each

stage.

To indicate the factors which are tending to retard economic development, and

determine the conditions which, in view of the current social and political

situation, should be established for the successful execution of the Plan.


20/84

20

To determine the nature of the machinery this will be necessary for securing the

successful implementation of each stage of Plan in all its aspects.

To appraise from time to time the progress achieved in the execution of each stage

of the Plan and recommend the adjustments of policy and measures that such

appraisals may show to be necessary.

To make such interim or auxiliary recommendations as appear to it to be

appropriate either for facilitating the discharge of the duties assigned to it or on a

consideration of the prevailing economic conditions, current policies, measures

and development programs; or on an examination of such specific problems as

may be referred to it for advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows:

Increasing National Income

Reducing inequalities in the distribution of income and wealth

Elimination of poverty

Providing additional employment; and

Alleviating bottlenecks in the areas of : agricultural production, manufacturing

capacity for producers goods and balance of payments.

Economic growth, as the primary objective has remained in focus in all Five Year Plans.

Approximately, economic growth has been targeted at a rate of five per cent per annum.

High priority to economic growth in Indian Plans looks very much justified in view of

long period of stagnation during the British rule


21/84

21

COMPANY PROFILEBackground:

Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely

towards attaining diverse goals of the customer through varied services. Creating a

plethora of opportunities for the customer by opening up investment vistas backed by

research-based advisory services. Here, growth knows no limits and success recognizes

no boundaries. Helping the customer create waves in his portfolio and empowering the

investor completely is the ultimate goal.

Stock Broking Services

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high

success rate as a wealth management and wealth accumulation option. The difference

between unpredictability and a safety anchor in the market is provided by in-depth

knowledge of market functioning and changing trends, planning with foresight and

choosing one's options with care. This is what we provide in our Stock Broking services.

We offer services that are beyond just a medium for buying and selling stocks and shares.

Instead we provide services which are multi dimensional and multi-focused in their

scope. There are several advantages in utilizing our Stock Broking services, which are thereasons why it is one of the best in the country.

We offer trading on a vast platform National Stock Exchange and Bombay Stock

Exchange. More importantly, we make trading safe to the maximum possible extent, by

accounting for several risk factors and planning accordingly. We are assisted in this task

by our in-depth research, constant feedback and sound advisory facilities. Our highly

skilled research team, comprising of technical analysts as well as fundamental specialists,

secure result-oriented information on market trends, market analysis and market

predictions. This crucial information is given as a constant feedback to our customers,

through daily reports delivered thrice daily ; The Pre-session Report, where market

scenario for the day is predicted, The Mid-session Report, timed to arrive during lunch

break , where the market forecast for the rest of the day is given and The Post-session


22/84

22

Report, the final report for the day, where the market and the report itself is reviewed. To

add to this repository of information, we publish a monthly magazine "Karvy The

Finapolis", which analyzes the latest stock market trends and takes a close look at the

various investment options, and products available in the market, while a weekly report,

called "Karvy Bazaar Baatein", keeps you more informed on the immediate trends in the

stock market. In addition, our specific industry reports give comprehensive information

on various industries. Besides this, we also offer special portfolio analysis packages that

provide daily technical advice on scrips for successful portfolio management and provide

customized advisory services to help you make the right financial moves that are

specifically suited to your portfolio.

Our Stock Broking services are widely networked across India, with the number of ourtrading terminals providing retail stock broking facilities. Our services have increasingly

offered customer oriented convenience, which we provide to a spectrum of investors,

high-networth or otherwise, with equal dedication and competence.

But true to our spirit, this success is not our final destination, but just a platform to launch

further enhanced quality services to provide you the latest in convenient, customer-

friendly stock management.

Over the years we have ensured that the trust of our customers is our biggest returns.

Factors such as our success in the Electronic custody business has helped build on our

tradition of trust even more. Consequentially our retail client base expanded very fast.

To empower the investor further we have made serious efforts to ensure that our research

calls are disseminated systematically to all our stock broking clients through various

delivery channels like email, chat, SMS, phone calls etc.

Our foray into commodities broking has been path breaking and we are in the process of

converting existing traders in commodities into the more organized mainstream of trading

in commodity futures, both as a trading and risk hedging mechanism.

In the future, our focus will be on the emerging businesses and to meet this objective, we


23/84

23

have enhanced our manpower and revitalized our knowledge base with enhances focus on

Futures and Options as well as the commodities business.

Depository Participants

The onset of the technology revolution in financial services Industry saw the emergence

of Karvy as an electronic custodian registered with National Securities Depository Ltd

(NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards

enabling further comfort to the investor by promoting paperless trading across the

country and emerged as the top 3 Depository Participants in the country in terms of

customer serviced.

Offering a wide trading platform with a dual membership at both NSDL and CDSL, we

are a powerful medium for trading and settlement of dematerialized shares. We have

established live DPMs, Internet access to accounts and an easier transaction process in

order to offer more convenience to individual and corporate investors. A team of

professional and the latest technological expertise allocated exclusively to our demat

division including technological enhancements like SPEED-e, make our response time

quick and our delivery impeccable. A wide national network makes our efficiencies

accessible to all.

Karvy Consultants Limited was started in the year 1981, with the vision and enterprise of

a small group of practicing Chartered Accountants. Initially it was started with consulting

and financial accounting automation, and carved inroads into the field of registry and

share accounting by 1985. Since then, it has utilized its experience and superlative

expertise to go from strength to strengthto better its services, to provide new ones, to

innovate, diversify and in the process, evolved as one of Indias premier integrated

financial service enterprise.

Today, Karvy has access to millions of Indian shareholders, besides companies,

banks, financial institutions and regulatory agencies. Over the past one and half decades,

Karvy has evolved as a veritable link between industry, finance and people. In January

1998, Karvy became the first Depository Participant in Andhra Pradesh. An ISO 9002


24/84

24

company, Karvy's commitment to quality and retail reach has made it an integrated

financial services company.

An Overview:

KARVY, is a premier integrated financial services provider, and ranked among the top

five in the country in all its business segments, services over 16 million individual

investors in various capacities, and provides investor services to over 300 corporates,

comprising the who is who of Corporate India. KARVY covers the entire spectrum of

financial services such as Stock broking, Depository Participants, Distribution of

financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,

Commodities Broking, Personal Finance Advisory Services, Merchant Banking &

Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional

management team and ranks among the best in technology, operations and research of

various industrial segments.

Today, Karvy service over 6.5 lakhs customer accounts spread across over 250

cities/towns in India and serves more than 85 million shareholders across 7500 corporate

clients and makes its presence felt in over 15 countries across 5 continents. All of Karvy

services are also backed by strong quality aspects, which have helped Karvy to be

certified as an ISO 9002 company by DNV.

ACHIEVEMENTS:

Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9001:2000 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations


25/84

25

First ISO-9002 Certified Registrars in India

Ranked as The Most Admired Registrar by MARG

Largest mobilize of funds as per PRIME DATABASE

First depository participant from Andhra Pradesh.

Handled over 500 public issues as Registrars.

Handling the Reliance account, which accounts for nearly 10 million account

holders?

Range of services:

Stock broking services

Distribution of Financial Products (investments & loan products)

Depository Participant services

IT enabled services

Personal financeAdvisory Services

Private Client Group

Debt market services

Insurance & merchant banking

Mutual Fund Services

Corporate Shareholder Services

Other global services

Besides these, they also offer special portfolio analysis packages that provide daily

technical advice on scrips for successful portfolio management and provide customized

advisory services to help customers make the right financial moves that are specifically

suited to their portfolio. They are continually engaged in designing the right investment

portfolio for each customer according to individual needs and budget considerations.
http://www.karvyglobal.com/alumni/KarvyGrpComp.asp#Distribution_of_Financial_Products#Distribution_of_Financial_Productshttp://www.karvyglobal.com/alumni/KarvyGrpComp.asp#Depository_Participants#Depository_Participantshttp://www.karvyglobal.com/alumni/KarvyGrpComp.asp#Advisory_Services#Advisory_Serviceshttp://www.karvyglobal.com/alumni/KarvyGrpComp.asp#Advisory_Services#Advisory_Serviceshttp://www.karvyglobal.com/alumni/KarvyGrpComp.asp#Depository_Participants#Depository_Participantshttp://www.karvyglobal.com/alumni/KarvyGrpComp.asp#Distribution_of_Financial_Products#Distribution_of_Financial_Products


26/84

26

Karvy Consultants limited deals in Registrar and Investment Services.Karvy is one of the

early entrants registered as Depository Participant with NSDL (National Securities

Depository Limited), the first Depository in the country and then with CDSL (Central

Depository Services Limited).

Karvy stock broking is a member of National Stock Exchange (NSE), The Bombay Stock

Exchange (BSE), and The Hyderabad Stock Exchange (HSE). The services provided are

multi dimensional and multi-focused in their scope: to analyze the latest stock market

trends and to take a close looks at the various investment options and products available

in the market. Besides this, they also offer special portfolio analysis packages.

The paradigm shift from pure selling to knowledge based selling drives the

business today. The monthly magazine, Finapolis, provides up-dated market information

on market trends, investment options, opinions etc. Thus empowering the investor to base

every financial move on rational thought and prudent analysis and embark on the path to

wealth creation.

Karvy is recognized as a leading merchant banker in the country, Karvy is registered with

SEBI as a Category I merchant banker. This reputation was built by capitalizing on

opportunities in corporate consolidations, mergers and acquisitions and corporate

restructuring.


27/84

27

Karvy has a tie up with the worlds largest transfer agent, the leading Australian

company, Computer share Limited. It has attained a position of immense strength as a

provider of across-the-board transfer agency services to AMCs, Distributors and

Investors. Besides providing the entire back office processing, it also provides the link

between various Mutual Funds and the investor.

Karvy global services limited covers Banking, Financial and Insurance Services

(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and

Healthcare sectors.

Karvy comtrade limited trades in all goods and products of agricultural and mineral

origin that include lucrative commodities like gold and silver and popular items like oil,

pulses and cotton through a well-systematized trading platform.

Karvy Insurance Broking Pvt. Ltd. provides both life and non-life insurance products

to retail individuals, high net-worth clients and corporates. With Indian markets seeing a

sea change, both in terms of investment pattern and attitude of investors, insurance is no

more seen as only a tax saving product but also as an investment product.


28/84

28

Karvy Inc. is located in New York to provide various financial products and

information on Indian equities to potential foreign institutional investors (FIIs) in the

region. This entity would extensively facilitate various businesses of Karvy viz., stock

broking (Indian equities), research and investment by QIBs in Indian markets for both

secondary and primary offerings.

.Quality Policy:

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide superior quality financial

services. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives

As per the Qual ity Policy, Karvy will :

Build in-house processes that will ensure transparent and harmonious relationships

with its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that

will help in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with

adequate knowledge & skills so as to respond to customer's needs.

Continue to uphold the values of honesty & integrity and strive to establish

unparalleled standards in business ethics.

Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and clients.

Strive to be a reliable source of value-added financial products and services and

constantly guide the individuals and institutions in making a judicious choice of

same.

Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and

regulatory authorities) proud and satisfied


29/84

29

CHAPTER-III

LITERATURE REVIEW


30/84

30

PORTFOLIO:

A portfolio is a collection of securities since it is really desirable to invest

The entire funds of an individual or an institution or a single security, it is essential that

Every security be viewed in a portfolio context. Thus it seems logical that the expected

return of the portfolio. Portfolio analysis considers the determine of future risk and return

in holding various blends of individual securities

Portfolio expected return is a weighted average of the expected return of the

individual securities but portfolio variance, in short contrast, can be something reduced

portfolio risk is because risk depends greatly on the co-variance among returns of

individual securities. Portfolios, which are combination of securities, may or may not

take on the aggregate characteristics of their individual parts.

Since portfolios expected return is a weighted average of the expected return of its

securities, the contribution of each security the portfolios expected returns depends on its

expected returns and its proportionate share of the initial portfolios market value. It

follows that an investor who simply wants the greatest possible expected return should

hold one security; the one which is considered to have a greatest expected return. Very

few investors do this, and very few investment advisors would counsel such and extreme

policy instead, investors should diversify, meaning that their portfolio should include

more than one security.

OBJECTIVES OF PORTFOLIOMANAGEMENT:

The main objective of investment portfolio management is to maximize

the returns from the investment and to minimize the risk involved in investment.

Moreover, risk in price or inflation erodes the value of money and hence investment must

provide a protection against inflation.


31/84

31

Secondary objectives:

The fol lowing are the other ancil lar y objectives:

Regular return.

Stable income.

Appreciation of capital.

More liquidity.

Safety of investment.

Tax benefits.

Portfolio management services helps investors to make a wise choice

between alternative investments with pit any post trading hassles this service renders

optimum returns to the investors by proper selection of continuous change of one plan to

another plane with in the same scheme, any portfolio management must specify the

objectives like maximum returns, and risk capital appreciation, safety etc in their offer.

Return F rom the angle of secur i ti es can be fixed income secur it ies such as:

(a) Debentures partly convertibles and non-convertibles debentures debt with tradable

Warrants.

(b) Preference shares

(c) Government securities and bonds

(d) Other debt instruments

(2) Variable income securities

(a) Equity shares

(b) Money market securities like treasury bills commercial papers etc.

Portfolio managers has to decide up on the mix of securities on

the basis of contract with the client and objectives of portfolio


32/84

32

NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in

assets and securities. It is a dynamic and flexible concept and involves regular and

systematic analysis, judgment and action. The objective of this service is to help the

unknown and investors with the expertise of professionals in investment portfolio

management. It involves construction of a portfolio based upon the investors objectives,

constraints, preferences for risk and returns and tax liability. The portfolio is reviewed

and adjusted from time to time in tune with the market conditions. The evaluation of

portfolio is to be done in terms of targets set for risk and returns. The changes in the

portfolio are to be effected to meet the changing condition.

Portfolio construction refers to the allocation of surplus funds in hand among a variety

of financial assets open for investment. Portfolio theory concerns itself with the

principles governing such allocation. The modern view of investment is oriented more go

towards the assembly of proper combination of individual securities to form investment

portfolio. A combination of securities held together will give a beneficial result if they

grouped in a manner to secure higher returns after taking into consideration the risk

elements.

The modern theory is the view that by diversification risk can be reduced.

Diversification can be made by the investor either by having a large number of shares of

companies in different regions, in different industries or those producing different types

of product lines. Modern theory believes in the perspective of combination of securities

under constraints of risk and returns

PORTFOLIO MANAGEMENT PROCESS:

Investment management is a complex activity which may be broken down into the

following steps:


33/84

33

1) Specification of investment objectives and constraints:

The typical objectives sought by investors are current income, capital

appreciation, and safety of principle. The relative importance of these objectives should

be specified further the constraints arising from liquidity, time horizon, tax and special

circumstances must be identified.

2) choice of the asset mix :

The most important decision in portfolio management is the asset mix decision very

broadly; this is concerned with the proportions of stocks (equity shares and units/shares

of equity-oriented mutual funds) and bonds in the portfolio.

The appropriate stock-bond mix depends mainly on the risk tolerance and

investment horizon of the investor.

ELEMENTS OF PORTFOLIO MANAGEMENT:

Portfoli o management is on-going process involving the fol lowing basic tasks:

Identification of the investors objectives, constraints and preferences.

Strategies are to be developed and implemented in tune with investment policy

formulated.

Review and monitoring of the performance of the portfolio.

Finally the evaluation of the portfolio

Risk:

Risk is uncertainty of the income /capital appreciation or loss or both. All

investments are risky. The higher the risk taken, the higher is the return. But proper

management of risk involves the right choice of investments whose risks are

compensating. The total risks of two companies may be different and even lower than the

risk of a group of two companies if their companies are offset by each other.


34/84

34

SOURCES OF INVESTMENT RISK:

Business risk:

As a holder of corporate securities (equity shares or debentures), you are

exposed to the risk of poor business performance. This may be caused by a variety of

factors like heightened competition, emergence of new technologies, development of

substitute products, shifts in consumer preferences, inadequate supply of essential inputs,

changes in governmental policies, and so on.

Interest rate risk:

The changes in interest rate have a bearing on the welfare on investors. As the

interest rate goes up, the market price of existing firmed income securities falls, and vice

versa. This happens because the buyer of a fixed income security would not buy it at its

par value of face value o its fixed interest rate is lower than the prevailing interest rate on

a similar security. For example, a debenture that has a face value of RS. 100 and a fixed

rate of 12% will sell a discount if the interest rate moves up from, say 12% to 14%.while

the chances in interest rate have a direct bearing on the prices of fixed income securities,

they affect equity prices too, albeit some what indirectly.

The two major types of ri sks are:

Systematic or market related risk.

Unsystematic or company related risks.

Systematic r isks affected from the entire market are (the problems, raw material

availability, tax policy or government policy, inflation risk, interest risk and financial

risk). It is managed by the use of Beta of different company shares.

The unsystematic risks are mismanagement, increasing inventory, wrong financial

policy, defective marketing etc. this is diversifiable or avoidable because it is possible to


35/84

35

eliminate or diversify away this component of risk to a considerable extent by investing

in a large portfolio of securities. The unsystematic risk stems from inefficiency

magnitude of those factors different form one company to another.

RETURNS ON PORTFOLIO:

Each security in a portfolio contributes return in the proportion of its

investments in security. Thus the portfolio expected return is the weighted average of the

expected return, from each of the securities, with weights representing the proportions

share of the security in the total investment. Why does an investor have so many

securities in his portfolio? If the security ABC gives the maximum return why not he

invests in that security all his funds and thus maximize return? The answer to this

questions lie in the investors perception of risk attached to investments, his objectives of

income, safety, appreciation, liquidity and hedge against loss of value of money etc. this

pattern of investment in different asset categories, types of investment, etc., would all be

described under the caption of diversification, which aims at the reduction or even

elimination of non-systematic risks and achieve the specific objectives of investors

RISK ON PORTFOLIO:

The expected returns from individual securities carry some degree of risk. Risk

on the portfolio is different from the risk on individual securities. The risk is reflected in

the variability of the returns from zero to infinity. Risk of the individual assets or a

portfolio is measured by the variance of its return. The expected return depends on the

probability of the returns and their weighted contribution to the risk of the portfolio.

These are two measures of risk in this context one is the absolute deviation and other

standard deviation.

Most investors invest in a portfolio of assets, because as to spread risk by not

putting all eggs in one basket. Hence, what really matters to them is not the risk and


36/84

36

return of stocks in isolation, but the risk and return of the portfolio as a whole. Risk is

mainly reduced by Diversification.

RISK RETURN ANALYSIS:

All investment has some risk. Investment in shares of companies has its own risk or

uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or

depreciation of share prices, losses of liquidity etc

The risk over time can be represented by the variance of the returns. While the return

over time is capital appreciation plus payout, divided by the purchase price of the share.

Normally, the higher the risk that the investor takes, the higher is the return.

There is, how ever, a risk less return on capital of about 12% which is the bank, rate

charged by the R.B.I or long term, yielded on government securities at around 13% to

14%. This risk less return refers to lack of variability of return and no uncertainty in the

repayment or capital. But other risks such as loss of liquidity due to parting with money

etc., may however remain, but are rewarded by the total return on the capital. Risk-return


37/84

37

is subject to variation and the objectives of the portfolio manager are to reduce that

variability and thus reduce the risky by choosing an appropriate portfolio.

Traditional approach advocates that one security holds the better, it is according

to the modern approach diversification should not be quantity that should be related to the

quality of scripts which leads to quality of portfolio.

Experience has shown that beyond the certain securities by adding more securities

expensive.

Simple diversification reduces:

An assets total risk can be divided into systematic plus unsystematic risk, as shown

below:

Systematic risk (undiversifiable risk) + unsystematic risk (diversified risk) =Total

risk =Var (r).

Unsystematic risk is that portion of the risk that is unique to the firm (for example, risk

due to strikes and management errors.) Unsystematic risk can be reduced to zero by

simple diversification.

Simple diversification is the random selection of securities that are to be added to a

portfolio. As the number of randomly selected securities added to a portfolio is increased,

the level of unsystematic risk approaches zero. However market related systematic risk

cannot be reduced by simple diversification. This risk is common to all securities.


38/84

38

Persons involved in portfolio management:

Investor:

Are the people who are interested in investing their funds?

Portfolio managers:

Is a person who is in the wake of a contract agreement with a client, advices or

directs or undertakes on behalf of the clients, the management or distribution or

management of the funds of the client as the case may be.

Discretionary portfolio manager:

Means a manager who exercise under a contract relating to a portfolio

management exercise any degree of discretion as to the investment or management of

portfolio or securities or funds of clients as the case may be

.

The relati on shi p between an investor and portfolio manager is of a highly interactive

nature

The portfolio manager carries out all the transactions pertaining to the investor

under the power of attorney during the last two decades, and increasing complexity was

witnessed in the capital market and its trading procedures in this context a key

(uninformed) investor formed ) investor found him self in a tricky situation , to keep track

of market movement ,update his knowledge, yet stay in the capital market and make

money , there fore in looked forward to resuming help from portfolio manager to do the

job for him .The portfolio management seeks to strike a balance between risks and

return.

The generally rule in that greater risk more of the profits but S.E.B.I. in its

guidelines prohibits portfolio managers to promise any return to investor.

Portfolio management is not a substitute to the inherent risks associated with equity

investment.


39/84

39

Who can be a portfolio manager?

Only those who are registered and pay the required license fee are eligible to

operate as portfolio managers. An applicant for this purpose should have necessary

infrastructure with professionally qualified persons and with a minimum of two persons

with experience in this business and a minimum net worth of Rs. 50lakhs. The certificate

once granted is valid for three years. Fees payable for registration are Rs 2.5lakhs every

for two years and Rs.1lakhs for the third year. From the fourth year onwards, renewal

fees per annum are Rs 75000. These are subjected to change by the S.E.B.I.

The S.E.B.I. has imposed a number of obligations and a code of conduct on

them. The portfolio manager should have a high standard of integrity, honesty and should

not have been convicted of any economic offence or moral turpitude. He should not

resort to rigging up of prices, insider trading or creating false markets, etc. their books of

accounts are subject to inspection to inspection and audit by S.E.B.I... The observance of

the code of conduct and guidelines given by the S.E.B.I. are subject to inspection and

penalties for violation are imposed. The manager has to submit periodical returns and

documents as may be required by the SEBI from time-to- time.

.Functions of portfolio managers:

Advisory role:advice new investments, review the existing ones, identification

of objectives, recommending high yield securities etc.

Conducting market and economic service:this is essential for recommending

good yielding securities they have to study the current fiscal policy, budget

proposal; individual policies etc further portfolio manager should take in to

account the credit policy, industrial growth, foreign exchange possible change in

corporate laws etc.


40/84

40

Financial analysis: he should evaluate the financial statement of company in

order to understand, their net worth future earnings, prospectus and strength.

Study of stock market :he should observe the trends at various stock exchange

and analysis scripts so that he is able to identify the right securities for

investment

Study of industry: he should study the industry to know its future prospects,

technical changes etc, required for investment proposal he should also see the

problems of the industry.

Decide the type of port folio: keeping in mind the objectives of portfolio a

portfolio manager has to decide weather the portfolio should comprise equity

preference shares, debentures, convertibles, non-convertibles or partly

convertibles, money market, securities etc or a mix of more than one type of

proper mix ensures higher safety, yield and liquidity coupled with balanced risk

techniques of portfolio management.

A portfolio manager in the Indian context has been Brokers (Big

brokers) who on the basis of their experience, market trends, Insider trader, helps the

limited knowledge persons.

Registered merchant bankers can acts as portfolio managers

Investors must look forward, for qualification and performance and ability and research

base of the portfolio managers.

Techniques of portfolio management:

As of now the under noted technique of portfolio management: are in vogue in our

country


41/84

41

1. equity portfolio: is influenced by internal and external factors the internal factors

effect the inner working of the companys growth plans are analyzed with

referenced to Balance sheet, profit & loss a/c (account) of the company.

Among the external factor are changes in the government policies, Trade cycles,

Political stability etc.

2. equity stock analysis: under this method the probable future value of a share of a

company is determined it can be done by ratios of earning per share of the

company and price earnings ratio

EPS == PROFIT AFTER TAX

NO: OF EQUITY SHARES

PRICE EARNING RATIO= MARKET PRICE

E.P.S (earnings per share)

One can estimate trend of earning by EPS, which reflects trends of earning quality of

company, dividend policy, and quality of management.

Price earning ratio indicate a confidence of market about the company future, a high

rating is preferable

The following points must be considered by port fol io managers whi le analyzing the

securities.

1. Nature of the industry and its product: long term trends of industries,

competition within, and outside the industry, Technical changes, labour relations,

sensitivity, to Trade cycle.

2. Industrial analysis of prospective earnings, cash flows, working capital,

dividends, etc.

3. Ratio analysis: Ratio such as debt equity ratios current ratios net worth,

profit earning ratio, return on investment, are worked out to decide the portfolio.


42/84

42

The wise principle of portfolio management suggests that Buy when themarket i s

low orBEARISH, and sell when the market is risingorBULLISH.

Stock market operation can be analyzed by:

a) Fundamental approach :- based on intrinsic value of shares

b) Technical approach:-based on Dowjones theory, Random walk theory,

etc.

Prices are based upon demand and supply of the market.

i. Traditional approach assumes that

ii. Objectives are maximization of wealth and minimization of risk.

iii. Diversification reduces risk and volatility.

iv. Variable returns, high illiquidity; etc.

Capital Assets pricing approach (CAPM) it pays more weight age, to risk or portfolio

diversification of portfolio.

Diversif icati on of por tfol io reduces risk but i t should be based on certain assessment

such as:

Trend analysis of past share prices.

Valuation of intrinsic value of company (trend-marker moves are known for their

Uncertainties they are compared to be high, and low prompts of wave market trends

are constituted by these waves it is a pattern of movement based on past).

The following rules must be studied while cautious portfolio manager before decide to

invest their funds in portfolios.


43/84

43

1. Compile the financials of the companies in the immediate past 3 years such as turn

over, gross profit, net profit before tax, compare the profit earning of company with

that of the industry average nature of product manufacture service render and it future

demand ,know about the promoters and their back ground, dividend track record,

bonus shares in the past 3 to 5 years ,reflects companys commitment to share holders

the relevant information can be accessed from the RDC(registrant of

companies)published financial results financed quarters, journals and ledgers.

2. Watch out the highs and lows of the scripts for the past 2 to 3 years and their

timing cyclical scripts have a tendency to repeat their performance ,this hypothesis

can be true of all other financial ,

3. The higher the trading volume higher is liquidity and still higher the chance of

speculation, it is futile to invest in such shares whos daily movements cannot be kept

track, if you want to reap rich returns keep investment over along horizon and it will

offset the wild intra day trading fluctuations, the minor movement of scripts may be

ignored, we must remember that share market moves in phases and the span of each

phase is 6 months to 5 years.

a. Long term of the market should be the guiding factor to enable you to invest

and quit. The market is now bullish and the trend is likely to continue for some

more time.

b. UN tradable shares must find a last place in portfolio apart from return; even

capital invested is eroded with no way of exit with no way of exit with inside.

How at all one should avoid such scripts in future?

(1) Never invest on the basis of an insider trader tip in a company which is not sound

(insider trader is person who gives tip for trading in securities based on prices sensitive

up price sensitive un published information relating to such security).


44/84

44

(2) Never invest in the so called promoter quota of lesser known company

(3) Never invest in a company about which you do not have appropriate knowledge.

(4) Never at all invest in a company which doesnt have a stringent financial record your

portfolio should not a stagnate

(4) Shuffle the portfolio and replace the slow moving sector with active ones , investors

were shatter when the technology , media, software , stops have taken a down slight.

(5) Never fall to the magic of the scripts dont confine to the blue chip companys, lookout for other portfolio that ensure regular dividends.

(6) In the same way never react to sudden raise or fall in stock market index such

fluctuation is movement minor corrections in stock market held in consolidation of

market their by reading out a weak player often taste on wait for the dust and dim to settle

to make your move .

PORT FOLIO MANAGEMENT AND DIVESIFICATOIN:

Combinations of securities that have high risk and return features make up a

portfolio.

Portfolios may or may not take on the aggregate characteristics of individual

part, portfolio analysis takes various components of risk and return for each industry and

consider the effort of combined security.

Portfolio selection involves choosing the best portfolio to suit the risk return

preferences of portfolio investor management of portfolio is a dynamic activity of

evaluating and revising the portfolio in terms of portfolios objectives


45/84

45

It may include in cash also, even if one goes bad the other will provide protection from

the loss even cash is subject to inflation the diversification can be either vertical or

horizontal the vertical diversification portfolio can have script of different companys

with in the same industry.

In horizontal diversification one can have different scripts chosen from different

industries. It should be an adequate diversification looking in to the size of portfolio.

Traditional approach advocates the more security one holds in a portfolio , the better it is

according to modern approach diversification should not be quantified but should be related to

the quality of scripts which leads to the quality and portfolio subsequently experience can show

that beyond a certain number of securities adding more securities become expensive.

Investment in a fixed return securities in the current market scenario which is passing

through a an uncertain phase investors are facing the problem of lack of liquidity combined

with minimum returns the important point to both is that the equity market and debt market

moves in opposite direction .where the stock market is booming, equities perform better where

as in depressed market the assured returns related securities market out perform equities.

It is cyclic and is evident in more global market keeping this in mind an investor can

shift from fixed income securities to equities and vise versa along with the changing market

scenario , if the investment are wisely planned they , fetch good returns even when the market

is depressed most , important the investor must adopt the time bound strategy in differing state

of market to achieve the optimum result when the aim is short term returns it would be wise for

the investor to invest in equities when the market is in boom & it could be reviewed if the same

is done.Maximum of returns can be achieved by following a composite pattern of investment

by having, suitable investment allocation strategy among the available resources.

Never i nvest in a single secur i ties your investment can be all ocated in the fol lowing

areas:

1. Equities:-primary and secondary market.

2. Mutual Funds


46/84

46

3. Bank deposits

4. Fixed deposits & bonds and the tax saving schemes

The different areas of fixed income are as:-

Fixed deposits in company

Bonds

Mutual funds schemes

with an investment strategy to invest in debt investment in fixed deposit can be made for the

simple reason that assured fixed income of a high of 14-17% per annum can be expected

which is much safer then investing a highly volatile stock market, even in comparison to

banks deposit which gives a maximum return of 12% per annum, fixed deposit s in high

profile esteemed will performing companies definitely gives a higher returns.

BETA:

The concept of Beta as a measure of systematic risk is useful in portfolio management.

The beta measures the movement of one script in relation to the market trend*. Thus BETA

can be positive or negative depending on whether the individual scrip moves in the same

direction as the market or in the opposite direction and the extent of variance of one scrip

vis--vis the market is being measured by BETA. The BETA is negative if the share price

moves contrary to the general trend and positive if it moves in the same direction. The

scrips with higher BETA of more than one are called aggressive, and those with a low

BETA of less than one are called defensive.

It is therefore it is necessary, to calculate Betas for all scrips and choose those with

high Beta for a portfolio of high returns.


47/84

47

INVESTMENT DECISIONS

Definition of investment:

According to F. AMLING Investment may be defined as the purchase by anindividual or an Institutional investor of a financial or real asset that produces a return

proportional to the risk assumed over some future investment period. According to D.E.

Fisher and R.J. Jordon, Investment is a commitment of funds made in the expectation of

some positive rate of return. If the investment is properly undertaken, the return will be

commensurate with the risk of the investor assumes.

Concept of Investment:

Investment will generally be used in its financial sense and as such investment is the

allocation of monetary resources to assets that are expected to yield some gain or positive

return over a given period of time. Investment is a commitment of a persons funds to derive

future income in the form of interest, dividends, rent, premiums, pension benefits or the

appreciation of the value of his principal capital.

Many types of investment media or channels for making investments are

available. Securities ranging from risk free instruments to highly speculative shares and

debentures are available for alternative investments.

All investments are risky, as the investor parts with his money. An efficient investor

with proper training can reduce the risk and maximize returns. He can avoid pitfalls and

protect his interest.

There are different methods of classifying the investment avenues. A major

classification is physical Investments and Financial Investments. They are physical, if

savings are used to acquire physical assets, useful for consumption or production.

Some physical assets like ploughs, tractors or harvesters are useful in agricultural production.

A few useful physical assets like cars, jeeps etc., are useful in business.


48/84

48

Many items of physical assets are not useful for further production or goods or create

income as in the case of consumer durables, gold, silver etc. among different types of

investment, some are marketable and transferable and others are not. Examples of marketable

assets are shares and debentures of public limited companies, particularly the listed

companies on Stock Exchange, Bonds of P.S.U., Government securities etc. non-marketable

securities or investments in bank deposits, provident fund and pension funds, insurance

certificates, post office deposits, national savings certificate, company deposits, private

limited companies shares etc.

The investment process may be descri bed in the fol lowing stages:

Investment policy:

The first stage determines and involves personal financial affairs and objectives

before making investment. It may also be called the preparation of investment policy stage.

The investor has to see that he should be able to create an emergency fund, an element of

liquidity and quick convertibility of securities into cash. This stage may, therefore be called

the proper time of identifying investment assets and considering the various features of

investments.

investment analysis:

After arranging a logical order of types of investment preferred, the next step is to

analyze the securities available for investment. The investor must take a comparative analysis

of type of industry, kind of securities etc. the primary concerns at this stage would be to form

beliefs regarding future behavior of prices and stocks, the expected return and associated

risks

.

Investment valuation:

Investment value, in general is taken to be the present worth to the owners of future

benefits from investments. The investor has to bear in mind the value of these investments.

An appropriate set of weights have to be applied with the use of forecasted benefits to

estimate the value of the investment assets such as stocks, debentures, and bonds and other


49/84

49

assets. Comparison of the value with the current market price of the assets allows a

determination of the relative attractiveness of the asset allows a determination of the relative

attractiveness of the asset. Each asset must be value on its individual merit.

Portfolio construction and feed-back:

Portfolio construction requires knowledge of different aspects of

securities in relation to safety and growth of principal, liquidity of assets etc. In this stage,

we study, determination of diversification level, consideration of investment timing

selection of investment assets, allocation of invest able wealth to different investments,

evaluation of portfolio for feed-back.

INVESTMENT DECISIONS- GUIDELINES FOR EQUITY INVESTMENT

Equity shares are characterized by price fluctuations, which can produce

substantial gains or inflict severe losses. Given the volatility and dynamism of the stock

market, investor requires greater competence and skill-along with a touch of good luck too-to

invest in equity shares. Here are some general guidelines to play to equity game, irrespective

of weather you aggressive or conservative.

Adopt a suitable formula plan.

Establish value anchors.

Assets market psychology.

Combination of fundamental and technical analyze.

Diversify sensibly.

Periodically review and revise your portfolio.

Requirement of portfolio:

1. Maintain adequate diversification when relative values of various securities in the

portfolio change.


50/84

50

2. Incorporate new information relevant for return investment.

3. Expand or contrast the size of portfolio to absorb funds or with draw funds.

4.Reflect changes in investor risk disposition.

.

Qualitiles For successful Investing:

Contrary thinking

Patience

Composure

Flexibility

Openness

INVESTORS PORTFOLIO CHOICE:

An investor tends to choose that portfolio, which yields him maximum return by

applying utility theory. Utility Theory is the foundation for the choice under uncertainty.

Cardinal and ordinal theories are the two alternatives, which is used by economist to

determine how people and societies choose to allocate scare resources and to distribute

wealth among one another.

The former theory implies that a consumer is capable of assigning to every

commodity or combination of commodities a number representing the amount of degree

of utility associated with it. Were as the latter theory, implies that a consumer needs not

be liable to assign numbers that represents the degree or amount of utility associated with

commodity or combination of commodity. The consumer can only rank and order the

amount or degree of utility associated with commodity.


51/84

51

In an uncertain environment it becomes necessary to ascertain how different

individual will react to risky situation. The risk is defined as a probability of success or

failure or risk could be described as variability of out comes, payoffs or returns. This

implies that there is a distribution of outcomes associated with each investment decision.

Therefore we can say that there is a relationship between the expected utility and risk.

Expected utility with a particular portfolio return. This numerical value is calculated by

taking a weighted average of the utilities of the various possible returns. The weights are

the probabilities of occurrence associated with each of the possible returns.

MARKOWITZ MODEL

THE MEAN-VARIENCE CRITERION

Dr. Harry M.Markowitz is credited with developing the first modern

portfolio analysis in order to arrange for the optimum allocation of assets with in

portfolio. To reach this objective, Markowitz generated portfolios within a reward risk

context. In essence, Markowitzs model is a theoretical framework for the analysis of risk

return choices. Decisions are based on the concept of efficient portfolios.

A portfolio is efficient when it is expected to yield the highest return for the level

of risk accepted or, alternatively, the smallest portfolio risk for a specified level of

expected return. To build an efficient portfolio an expected return level is chosen, and

assets are substituted until the portfolio combination with the smallest variance at the

return level is found. At this process is repeated for expected returns, set of efficient

portfolio is generated.

ASSUMPTIONS:

1. Investors consider each investment alternative as being represented by a

probability distribution of expected returns over some holding period.

2. Investors maximize one period-expected utility and posses utility cu

Documents

Portfolio Management Karvy 2013