Potfolio Management IIFL - 2014

8/10/2019 Potfolio Management IIFL - 2014

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SUMMARY

Portfolio management is a process of encompassing many activities of

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

regular and systematic analysis, judgment, and action. 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 main objective of the Portfolio management is to help the investors to

make wise choice between alternate investments without a post trading shares. Any

portfolio management must specify the objectives like aximum returns, !ptimum

"eturns, #apital appreciation, $afety etc., in the same prospectus.

This service renders optimum returns to the investors by proper selection and

continuous shifting of portfolio from one scheme to another scheme of from one plan

to another plan within the same scheme.

The study gives the returns offered by the companies of various securities are

compared and conclusions are brought out which produces large and better portfolio

combinations for the investors.

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CONTENTS

Chapter No. Name of the concept Page No.

I

Introduction

(eed of the study

!bjectives of the study

$cope of the study

ethodology of the study

)imitations of the study

II "eview of )iterature

III Industry Profile

I* #ompany Profile

* +ata analysis and interpretation

*I indings, $uggestions and #onclusion

*II -ibliography

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CHAPTER I - INTRODUCTION

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INTRODUCTION

Portfolios are combinations of assets held by the investors. These

combinations may be of various asset classes like e0uity and debt and of differentissuers like 1overnment bond and corporate debt or of various instruments like

discount bonds, warrants, debentures and -lue chip e0uity or scrip2s of emerging blue

chip companies.

The traditional Portfolio Theory aims at the selection of such securities

that would fit in well with the asset preferences, need and choice of investor. odern

Portfolio Theory postulates that maximi3ation of return and or minimi3ation of risk

will yield optimal returns and choice and attitudes of investors are only a starting

point for investment decision and that vigorous risk4return analysis is necessary for

optimi3ation of returns. The return on portfolio is weighted average of returns of

individual stocks and the weights are proportional to each stock2s percentages in the

total portfolio.

Portfolio analysis includes portfolio construction, and performance of

portfolio. All these are part of the subject of portfolio anagement which is a

dynamic concept, subject to daily and hourly changes based on information flows,

money flows and economic and non4economic forces operating in the country on the

markets and securities

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SCOPE OF THE STUDY

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 $tandard +eviation 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 investment based on

risky portfolios.

METHODO#O$Y

"esearch design or research methodology is the procedure of collecting, analy3ing

and interpreting the data to diagnose the problem and react to the opportunity in such

a way where the costs can be minimi3ed and the desired level of accuracy can be

achieved to arrive at a particular conclusion.

$!9"#5$ ! +ATA #!))5#TI!(: The methodology adopted or

employed in this study was ostly on secondary data collection i.e..,

#ompanies Annual "eports

Information from Internet

Publications

Information provided by Inter #onnected $tock 5xchange.

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Period of study:

or different companies, financial data has been collected from the year


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CHAPTER II - RE"IE% OF #ITERATURE

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PORTFO#IO MANA$EMENT & ITS PHASES

P!"T!)I! A(A155(T I$ a process encompassing many

activities aimed at optimi3ing investment of funds, each phase is an integral part of

the whole process and the success of portfolio management depends upon the

efficiency in carrying out each phase. ive phases can be identified:4

%. $ecurity analysis

. Portfolio analysis

/. Portfolio selection

'. Portfolio revision

8. Portfolio evaluation

SECURITY ANA#YSIS: It refers to the analysis of trading securities from the point

of view of their prices, return, and risk. All investment is risky and the expected return

is related to risk. The securities available to an investor for investment are numerous

and of various types. The shares of over more than ?


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PORTFO#IO RE"ISION

The portfolio which is once selected has to be continuously reviewed over a period of

time and then revised depending on the objectives of the investor. The care taken in

construction of portfolio should be extended to the review and revision of the portfolio.

luctuations that occur in the e0uity prices cause substantial gain or loss to the investors.

The investor should have competence and skill in the revision of the portfolio. The

portfolio management process needs fre0uent changes in the composition of stocks and

bonds. In securities, the type of securities to be held should be revised according to the

portfolio policy.

An investor purchases stock according to his objectives and return risk framework.

The prices of stock that he purchases fluctuate, each stock having its own cycle of

fluctuations. These price fluctuations may be related to economic activity in a country or due

to other changed circumstances in the market.

If an investor is able to forecast these changes by developing a framework for the

future through careful analysis of the behaviour and movement of stock prices is in a position

to make higher profit than if he was to simply buy securities and hold them through the

process of diversification. echanical methods are adopted to earn better profit through

proper timing. The investor uses formula plans to help him in making decisions for the.

future by exploiting the fluctuations in prices

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E"A#UATION OF PORTFO#IO

Portfolio manager evaluates his portfolio performance and identifies the sources of

strengths and weakness. The evaluation of the portfolio provides a feed back about the

performance to evolve better management strategy. 5ven though evaluation of portfolio

performance is considered to be the last stage of investment process, it is a continuous

process. There are number of situations in which an evaluation becomes necessary and

important.

'. Se(f "a()at'on: An individual may want to evaluate how well he has done. This is a

part of the process of refining his skills and improving his performance over a period

of time.

''. E*a()at'on of Manager+: A mutual fund or similar organi3ation might want to

evaluate its managers. A mutual fund may have several managers each running a

separate fund or sub4fund. It is often necessary to compare the performance of these

managers.

'''. E*a()at'on of M)t)a( F)n,+: An investor may want to evaluate the various mutual

funds operating in the country to decide which, if any, of these should be chosen for

investment. A similar need arises in the case of individuals or organi3ations who

engage external agencies for portfolio advisory services.

'*. E*a()at'on of $ro)p+: have different skills or access to different information.

Academics or researchers may want to evaluate the performance of a whole group of

investors and compare it with another group of investors who use different techni0ues

.

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NEED FOR E"A#UATION OF PORTFO#IO

e can try to evaluate every transaction. henever a security is brought or sold, we

can attempt to assess whether the decision was correct and profitable.

e can try to evaluate the performance of a specific security in the portfolio to

determine whether it has been worthwhile to include it in our portfolio.

e can try to evaluate the performance of portfolio as a whole during the period

without examining the performance of individual securities within the portfolio.

PORTFO#IO THEORIES

MARO%IT/ MODE#

arkowit3 model is a theoretical framework for analysis of risk and return and

their relationships. Be used statistical analysis for the measurement of risk and

mathematical programming for selection of assets in a portfolio in an efficient

manner. arkowit3 apporach determines for the investor the efficient set of portfolio

through three important variables i.e.

"eturn

$tandard deviation

#o4efficient of correlation

arkowit3 model is also called as a Cull #ovariance odelC. Through this

model the investor can find out the efficient set of portfolio by finding out the trade

off between risk and return, between the limits of 3ero and infinity. According to this

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theory, the effects of one security purchase over the effects of the other security

purchase are taken into consideration and then the results are evaluated. ost people

agree that holding two stocks is less risky than holding one stock. or example,

holding stocks from textile, banking and electronic companies is better than investing

all the money on the textile company7s stock.

arkowit3 had given up the single stock portfolio and introduced

diversification. The single stock portfolio would be preferable if the investor is

perfectly certain that his expectation of highest return would turn out to be real. In the

world of uncertainty, most of the risk adverse investors would like to join arkowit3

rather than keeping a single stock, because diversification reduces the risk.

ASSUMPTIONS

All investors would like to earn the maximum rate of return that they can

achieve

from their investments.

All investors have the same expected single period investment hori3on.

All investors before making any investments have a common goal. This is the

avoidance of risk because Investors are risk4averse.

Investors base their investment decisions on the expected return and standard

deviation of returns from a possible investment.

Perfect markets are assumed De.g. no taxes and no transaction costsE

The investor assumes that greater or larger the return that he achieves on hisinvestments, the higher the risk factor surrounds him. !n the contrary when

risks are low the return can also be expected to be low.

The investor can reduce his risk if he adds investments to his portfolio.

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An investor should be able to get higher return for each level of risk Cby

determining the efficient set of securitiesC.

An individual seller or buyer cannot affect the price of a stock. This

assumption is the basic assumption of the perfectly competitive market.

Investors make their decisions only on the basis of the expected returns,

standard deviation and covariance2s of all pairs of securities.

Investors are assumed to have homogenous expectations during the decision4

making period.

The investor can lend or borrow any amount of funds at the risk less rate of

interest. The risk less rate of interest is the rate of interest offered for the

treasury bills or 1overnment securities.

Investors are risk4averse, so when given a choice between two otherwise

identical portfolios, they will choose the one with the lower standard

deviation.

Individual assets are infinitely divisible, meaning that an investor can buy a

fraction of a share if he or she so desires.

There is a risk free rate at which an investor may either lend Di.e. investE

money or borrow money.

There is no transaction cost i.e. no cost involved in buying and selling of

stocks.

There is no personal income tax. Bence, the investor is indifferent to the form

of return either capital gain or dividend.

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THE EFFECT OF COMININ$ T%O SECURITIES

It is believed that holding two securities is less risky than by having only one

investment in a person7s portfolio. hen two stocks are taken on a portfolio and if

they have negative correlation then risk can be completely reduced because the gain

on one can offset the loss on the other. This can be shown with the help of following

example:

INTER- ACTI"E RIS THROU$H CO"ARIANCE

#ovariance of the securities will help in finding out the inter4active risk. hen

the covariance will be positive then the rates of return of securities move together

either upwards or downwards. Alternatively it can also be said that the inter4active

risk is positive. $econdly, covariance will be 3ero on two investments if the rates of

return are independent. Bolding two securities may reduce the portfolio risk too. The

portfolio risk can be calculated with the help of the following formula:

CAPITA# ASSET PRICIN$ MODE# 0CAPM1

arkowit3, illiam $harpe, Fohn )intner and Fan ossin provided the basic

structure of #apital Asset Pricing odel. It is a model of linear general e0uilibrium

return. In the #AP theory, the re0uired rate return of an asset is having a linear

relationship with asset7s beta value i.e. undiversifiable or systematic risk Di.e. market

related riskE because non market risk can be eliminated by diversification and

systematic risk measured by beta. Therefore, the relationship between an assets return

and its systematic risk can be expressed by the #AP, which is also called the

$ecurity arket )ine.

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"p G "fHf "mD%4 HfE

"p G Portfolio return

Hf G The proportion of funds invested in risk free assets

%4 Hf G The proportion of funds invested in risky assets

"f G "isk free rate of return

"m G "eturn on risky assets

ormula can be used to calculate the expected returns for different situations, like

mixing risk less assets with risky assets, investing only in the risky asset and mixing

the borrowing with risky assets.

THE CONCEPT

According to #AP, all investors hold only the market portfolio and risk less

securities. The market portfolio is a portfolio comprised of all stocks in the market.

5ach asset is held in proportion to its market value to the total value of all risky assets.

THE SHARPE2S INDE3 MODE#

The investor always like to purchase a combination of stock that provides the

highest return and has lowest risk. Be wants to maintain a satisfactory reward to risk

ratio traditionally analysis paid more attention to the return aspects of the stocks. (ow

a day2s risk has received increased attention and analysts are providing estimates of

risk as well as return. $harp has developed a simplified model to analy3e the portfolio.

Be assumed that the return of a security is linearly related to a single index like to

market index. $trictly speaking the market index should consist of all the securities

trading on the exchange.In the absence of it, a popular index can be treated as a

surrogate for the market index.$harpe has provided a model for the selection of

appropriate securities in a portfolio.

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The selection of any stock is directly related to its excess return 6 beta ratio

"i 6"f>ai

here "i G the expected return on stock i

"f G the return on a risk less asset

Ai G the expected change in the rate of return on stock I associatd

with one unit change in the market return

SIN$#E INDE3 MODE#

#ausal observation of the stock prices over a period of time reveals that most

of the stock process move with the market index. hen sensex increases, stock prices

also tend to increase and vice versa. This indicates that some underlying factor affect

the market index as well as the stock prices. $tock prices are related to the market

index and this relationship could be used to estimate the return on stock. Towards the

purpose, the following e0uation can be used:

"i G aa i"mei

here "Gexpected return on security i

a G intercept of the straight line or alpha co4efficient

ai G slope of straight line or beta co4efficient

"m G the rate of return on market index

ei G error term with a mean of 3ero J a std.dev. hich is a constantK

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ARITRA$E PRICIN$ THEORY

According to this theory the returns of the securities are influenced by a

number of macroeconomic factors such as growth rate of industrial production rate of

inflation, spread between low4grade and high grade bonds.

The )aw of !ne Price:

The foundation for Apt is the law of one price. The law of one price states that

two identical goods should sell at the same price. If they sold at different prices

anyone could engage in arbitrage by simultaneously buying at low prices and selling

at the high prices and make a risk less profit. Arbitrage also applies to financial assets.

If two financial assets have the same risk, they should have the same expected return.

If they do not have the same expected return, a riskless profit could be earned by

simultaneously issuingDor selling shortE at the low return and buying the high4return

asset. Arbitrage causes prices to be revised as suggested by the law of one price.

The arbitrage pricing line for one risk factor can be written as:

rG L


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RESEARCH

D5.g. $ecurityAnalysisE

PORTFO#IO

MANA$ERS

OPERATIONS

D5.g. buying and$elling of

$ecuritiesE

C#IENTS

PORTFO#IO MANA$EMENT

A portfolio is a collection of assets. The assets may be physical or financial like

$hares, -onds, +ebentures, Preference $hares, etc. The individual investor or a fund manager

would not like to put all his money in the shares of one company that would amount to great

risk. Be would therefore, follow the age old maxim that one should not put all the eggs into

one basket. -y doing so, he can achieve objective to maximi3e portfolio return and at the

same time minimi3ing the portfolio risk by diversification.

Portfolio management is the management of various financial assets which comprise the

portfolio.

Portfolio management is a decision 6 support system that is designed with a view to

meet the multi4faced needs of investors.

According to $ecurities and 5xchange -oard of India Portfolio anager is defined

as: CPortfolio means the total holdings of securities belonging to any personO.

STRUCTURE 4 PROCESS OF TYPICA# PORTFO#IO MANA$EMENT

In the small firm, the portfolio manager performs the job of security analyst.

In the case of medium and large si3ed organi3ations, job function of portfolio manager and

security analyst are separate.

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CHARACTERISTICS OF PORTFO#IO MANA$EMENT

Individuals will benefit immensely by taking portfolio management services for the

following reasons:

hatever may be the status of the capital market, over the long period capital markets

have given an excellent return when compared to other forms of investment. The

return from bank deposits, units, etc., is much less than from the stock market.

The Indian $tock arkets are very complicated. Though there are thousands of

companies that are listed only a few hundred which have the necessary li0uidity. 5ven

among these, only some have the growth prospects which are conducive for

investment. It is impossible for any individual wishing to invest and sit down and

analy3e all these intricacies of the market unless he does nothing else.

5ven if an investor is able to understand the intricacies of the market and separate

from the grain the trading practices in India are so complicated that it is really a

difficult task for an investor to trade in all the major exchanges of India, look after hisdeliveries and payments

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Proce++ of Portfo('o Management

The Portfolio Program and Asset anagement Program both follow a

disciplined process to establish and monitor an optimal investment mix. This six4stage process helps ensure that the investments match investor2s uni0ue needs, both

now and in the future.

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5. IDENTIFY $OA#S AND O!ECTI"ES

hen will you need the money from your investmentsK hat are you saving your

money forK ith the assistance of financial advisor, the Investment Profile

uestionnaire will guide through a series of 0uestions to help identify the goals

and objectives for the investments.

6. DETERMINE OPTIMA# IN"ESTMENT MI3

!nce the Investment Profile uestionnaire is completed, investor2s optimal

investment mix or asset allocation will be determined. An asset allocation

represents the mix of investments Dcash, fixed income and e0uitiesE that match

individual risk and return needs. This step represents one of the most important

decisions in your portfolio construction, as asset allocation has been found to be

the major determinant of long4term portfolio performance.

7. CREATE A CUSTOMI/ED IN"ESTMENT PO#ICY STATEMENT

hen the optimal investment mix is determined, the next step is to formali3e our

goals and objectives in order to utili3e them as a benchmark to monitor progress

and future updates.

8. SE#ECT IN"ESTMENTS

The customi3ed portfolio is created using an allocation of select unds.

5ach und is designed to satisfy the re0uirements of a specific asset class,

and is selected in the necessary proportion to match the optimal investment mix.

9 MONITOR PRO$RESS

-uilding an optimal investment mix is only part of the process. It is e0ually

important to maintain the optimal mix when varying market conditions cause

investment mix to drift away from its target. To ensure that mix of asset classes

stays in line with investor2s uni0ue needs, the portfolio will be monitored and

rebalanced back to the optimal investment mix

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:. REASSESS NEEDS AND $OA#S

Fust as markets shift, so do the goals and objectives of investors. ith the

flexibility of the Portfolio Program and Asset anagement Program, when the

investor2s needs or other life circumstances change, the portfolio has the

flexibility to accommodate such changes.

F)nct'on+ of Portfo('o Manger+

A,*'+or; ro(e

Advice new investments, review the existing ones, identification of objectives,

recommending high yield securities etc.

Con,)ct'ng mar


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Dec',e the t;pe of portfo('o

Reeping in mind the objectives of portfolio a portfolio manager has to decide

weather the portfolio should comprise e0uity preference shares, debenture,

convertibles, non4convertibles or partly convertibles, money market, securities etc or

a mix of more than one type of proper mix ensures higher safety, yield and li0uidity

coupled with balanced risk techni0ues of portfolio management.

A portfolio manager in the Indian context has been -rokers D-ig brokersE who

on the basis of their experience, market trends, insider trader, helps the limited

knowledge persons.

"egistered merchant bankers can acts2 as portfolio managers. Investor2s must

look forward, for 0ualification and performance and ability and research base of the

portfolio manager2s

RIS

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"isk is uncertainty of the income>capital appreciation or loss or both. All

investment is risky. The higher the risk taken, the higher is the return. -ut proper

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

compensating. The total risk involves the right choice of investment whose risks are

compensating. The total risks of two 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.

SOURCE OF IN"ESTMENT RISS

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-ased on the below pyramid diagram the type of risks will be described

5. S;+temat'c R'+


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)abour problems

The nature and magnitude of the above mentioned factors differ from industry

to industry and company to company. They have to be analy3ed separately for each

industry and firm. 9n4systematic risk can be broadly classified into:

-usiness "isk

inancial "isk

USINESS RIS

-usiness risk is that portion of the unsystematic risk caused by the operating

environment of the business. -usiness risk arises from the inability of a firm to

maintain its competitive edge and growth or stability of the earnings. The volatibility

in stock prices due to factors intrinsic to the company itself is known as -usiness risk.

-usiness risk is concerned with the difference between revenue and earnings before

interest and tax. -usiness risk can be divided into.

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FINANCIA# RIS

It refers to the variability of the income to the e0uity capital due to the debt

capital. inancial risk in a company is associated with the capital structure of the

company. #apital structure of the company consists of e0uity funds and borrowed

funds.

RETURN ON PORTFO#IO

5ach security in a portfolio contributes return in the proportion of its

investment in security. Thus the portfolio expected returns is the weighted average of

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

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

securities in his total investmentK hy does an investor have so many securities in

this portfolioK If the security A-# gives the maximum return why not he invests in

that security all his funds and thus maximi3e returnK The answer to these 0uestions

lies in the investor2s perception of risk attached in investments. !bjectives of income,

safety, appreciation, li0uidity and hedge against loss of values of money etc. thispattern 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 non4systematic risks and achieve the specific objectives of investors.

RIS ON PORTFO#IO

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

"isk on the portfolio is different from the risk on the individual securities. The risk is

reflected in the variability of the returns from 3ero to infinity. "isk 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

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the portfolio. These are two measures of risk in this context one is the absolute

deviation and other standard deviation.

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

putting all eggs in one basket. Bence, what really mater to them are not the risk and

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

mainly reduced by +iversification.

RIS RETURN ANA#YSIS

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

risk or uncertaintyQ these risks arise out of variability of yields and uncertainty of

appreciation or depreciation of shares prices, losses of li0uidity etc. The risk over

time can be represented by the variance of the returns. hile the returns over time is

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

(ormally, 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 %S which is the bank, rate

charged by the ".-.I or long term, yielded on government securities at round %/S to

%'S. This risk less return refers to lack of variability of return and no uncertainty in

the repayment or capital. -ut other risks such as loss of li0uidity due to parting with

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

"isk4return 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 0uantity that should be related to the

0uality of scripts which leads to 0uality of portfolio.

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RIS AND E3PECTED RETURN

There is a positive relationship between the amount of risk and the amount ofexpected return i.e., the greater the risk, the larger the expected return and larger the

chances of substantial loss. !ne of the most difficult problems for an investor is to

estimate the highest level of risk he is able to assume.

"isk is measured along the hori3ontal axis and increases from the left to right.

5xpected rate of return is measured on the vertical axis and rises from bottom to

top.

The line from < to " DfE is called the rate of return or risk less investments

commonly associated with the yield on government securities.

The diagonal line form " DfE to 5DrE illustrates the concept of expected rate of

return increasing as level of risk increases.

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5xperience has shown that beyond the certain securities by adding more securities

expensive.

S'mp(e ,'*er+'f'cat'on re,)ce+

An asset2s total risk can be divided into systematic plus unsystematic risk, as

shown below

$ystematic risk Dundiversifiable riskE unsystematic risk Ddiversified riskE

GTotal risk

G*arDrE.

9nsystematic risk is that portion of the risk that is uni0ue to the firm

Dfor example, risk due to strikes and management errors.E 9nsystematic risk can be

reduced to 3ero by simple diversification.

$imple 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 3ero. Bowever market related

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

all securities.

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CHAPTER III - INDUSTRY PROFI#E

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FINANCIA# MARETS

inance is the pre4re0uisite for modern business and financial institutions play a vital

role in the economic system. It is through financial markets and institutions that the

financial system of an economy works. inancial markets refer to the institutional

arrangements for dealing in financial assets and credit instruments of different types

such as currency, che0ues, bank deposits, bills, bonds, e0uities, etc.

inancial market is a broad term describing any marketplace where buyers and sellers

participate in the trade of assets such as e0uities, bonds, currencies and derivatives.

They are typically defined by having transparent pricing, basic regulations on trading,

costs and fees and market forces determining the prices of securities that trade.

1enerally, there is no specific place or location to indicate a financial market.

herever a financial transaction takes place, it is deemed to have taken place in the

financial market. Bence financial markets are pervasive in nature since financial

transactions are themselves very pervasive throughout the economic system. or

instance, issue of e0uity shares, granting of loan by term lending institutions, deposit

of money into a bank, purchase of debentures, sale of shares and so on.

In a nutshell, financial markets are the credit markets catering to the various needs of

the individuals, firms and institutions by facilitating buying and selling of financial

assets, claims and services.

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C#ASSIFICATION OF FINANCIA# MARETS

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Cap'ta( Mar


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Secondary market: $econdary market is a market where existing securities are

traded. In other words, securities which have already passed through new issue

market are traded in this market. 1enerally, such securities are 0uoted in the stock

exchange and it provides a continuous and regular market for buying and selling of

securities. This market consists of all stock exchanges recogni3ed by the government

of India.

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Forwards: orwards are the oldest of all the derivatives. A forward contract

refers to an agreement between two parties to exchange an agreed 0uantity of

an asset for cash at a certain date in future at a predetermined price specified

in that agreement. The promised asset may be currency, commodity,

instrument etc.

Futures: uture contract is very similar to a forward contract in all respects

excepting the fact that it is completely a standardi3ed one. It is nothing but a

standardi3ed forward contract which is legally enforceable and always traded

on an organi3ed exchange.

Options: A financial derivative that represents a contract sold by one party

Doption writerE to another party Doption holderE. The contract offers the buyer

the right, but not the obligation, to buy DcallE or sell DputE a security or other

financial asset at an agreed4upon price Dthe strike priceE during a certain

period of time or on a specific date Dexercise dateE. #all options give the

option to buy at certain price, so the buyer would want the stock to go up. Put

options give the option to sell at a certain price, so the buyer would want the

stock to go down.

Swaps: It is yet another exciting trading instrument. Infact, it is the

combination of forwards by two counterparties. It is arranged to reap the

benefits arising from the fluctuations in the market 6 either currency market or

interest rate market or any other market for that matter.

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Fore'gn E?change Mar


41/94

INDIAN FINANCIA# MARETS

India inancial market is one of the oldest in the world and is considered to be the

fastest growing and best among all the markets of the emerging economies.

The history of Indian capital markets dates back


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respective sectors. The corporate sector wasnUt allowed into many industry segments,

which were dominated by the state controlled public sector resulting in stagnation of

the economy right up to the early %&&


43/94

sector and the !T#5I for those from the small4scale sector. hile the ($5 has not

just done well to grow and evolve into the virtual backbone of capital markets in

India the !T#5I struggled and is yet to show any sign of growth and development.

The integration of IT into the capital market infrastructure has been particularly

smooth in India due to the country2s world class IT industry. This has pushed up the

operational efficiency of the Indian stock market to global standards and as a result

the country has been able to capitali3e on its high growth and attract foreign capital

like never before.

The regulating authority for capital markets in India is the $5-I D$ecurities and

5xchange -oard of IndiaE. $5-I came into prominence in the %&&


44/94

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CHAPTER I" - COMPANY PROFI#E

Page '8 of &'


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IIFL Ltd

The II) DIndia InfolineE group, comprising the holding company, India Infoline )td

and its subsidiaries, is one of the leading players in the Indian financial services

space. II) offers advice and execution platform for the entire range of financial

services covering products ranging from 50uities and derivatives, #ommodities,

ealth management, Asset management, Insurance, ixed deposits, )oans,

Investment -anking, 1old bonds and other small savings instruments. II) recently

received an in4principle approval for $ecurities Trading and #learing memberships

from $ingapore 5xchange D$1HE paving the way for II) to become the first Indian

brokerage to get a membership of the $1H. II) also received membership of the

#olombo $tock 5xchange becoming the first foreign broker to enter $ri )anka. II)

owns and manages the website, www.indiainfoline.com, which is one of India2s

leading online destinations for personal finance, stock markets, economy and

business.

II) has been awarded the 7-est -roker, India2 by inance Asia and the 7ost

improved brokerage, India2 in the Asia oney polls. India Infoline was also adjudged

as 7astest 1rowing 50uity -roking Bouse 4 )arge firms2 by +un J -radstreet. A

forerunner in the field of e0uity research, II)2s research is acknowledged by none

other than orbes as 7-est of the eb2 and 7@a must read for investors in Asia2.

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The company2s research is available not just over the Internet but also on

international wire services like -loomberg, Thomson irst #all and Internet

$ecurities where it is amongst one of the most read Indian brokers.

A network of over ,8


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In,'a Info('ne #'m'te,

India Infoline )imited is listed on both the leading stock exchanges in India, vi3. the

$tock 5xchange, umbai D-$5E and the (ational $tock 5xchange D($5E and is also

a member of both the exchanges. It is engaged in the businesses of 50uities broking,

ealth Advisory $ervices and Portfolio anagement $ervices. It offers broking

services in the #ash and +erivatives segments of the ($5 as well as the #ash

segment of the -$5. It is registered with ($+) as well as #+$) as a depository

participant, providing a one4stop solution for clients trading in the e0uities market. It

has recently launched its Investment banking and Institutional -roking business.

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A $5-I authori3ed Portfolio anagerQ it offers Portfolio anagement $ervices to

clients. These services are offered to clients as different schemes, which are based on

differing investment strategies made to reflect the varied risk4return preferences of

clients.

In,'a Info('ne Me,'a an, Re+earch Ser*'ce+ #'m'te,

The services represent a strong support that drives the broking, commodities, mutual

fund and portfolio management services businesses. It undertakes e0uities research

which is acknowledged by none other than orbes as U-est of the ebU and U@a must

read for investors in AsiaU. India InfolineUs research is available not just over the

internet but also on international wire services like -loomberg D#ode: II))E,

Thomson irst #all and Internet $ecurities where India Infoline is amongst the most

read Indian brokers.

In,'a Info('ne Commo,'t'e+ #'m'te,.

India Infoline #ommodities Pvt )imited is engaged in the business of commodities

broking. Their experience in securities broking empowered them with the re0uisite

skills and technologies to allow them to offer commodities broking as a contra4

cyclical alternative to e0uities broking. It enjoys memberships with the #H and

(#+5H, two leading Indian commodities exchanges, and recently ac0uired

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membership of +1#H. It has a multi4channel delivery model, making it among the

select few to offer online as well as offline trading facilities.

In,'a Info('ne Mar


51/94

subsidiaries for various lending businesses like loans against securities, $5

financing, distribution of retail loan products, consumer finance business and housing

finance business. India Infoline Investment $ervices Private )imited consists of the

following step4down subsidiaries.

India Infoline +istribution #ompany )imited Ddistribution of retail loan

productsE

oneyline #redit )imited Dconsumer financeE

India Infoline Bousing inance )imited Dhousing financeE

IIF# 0A+'a1 Pr'*ate #'m'te,

II) DAsiaE Private )imited is wholly owned subsidiary which has been incorporated

in $ingapore to pursue financial sector activities in other Asian markets. urther to

obtaining the necessary regulatory approvals, the company has been initially

capitali3ed at % million $ingapore dollars.

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IIF# MANA$EMENT

THE MANA$EMENT TEAM

Mr. N'rma( !a'n Cha'rman & Manag'ng D'rector

(irmal Fain, -A DII, AhmadabadE and a #hartered and #ost Accountant, founded

India2s leading financial services company India Infoline )td. in %&&8,

providing globally acclaimed financial services in e0uities and

commodities broking, life insurance and mutual funds distribution, among others.

Mr. R "en


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THE OARD OF DIRECTORS

Apart from (irmal Fain and " *enkataraman, the -oard of +irectors of India Infoline

)td. comprises:

Mr. N'(e+h "'


54/94

PRODUCTS & SER"ICES

EB)'t'e+

India Infoline provided the prospect of researched investing to its clients, which was

hitherto restricted only to the institutions. "esearch for the retail investor did not exist

prior to India Infoline. India Infoline leveraged technology to bring the convenience

of trading to the investor2s location of preference Dresidence or officeE through

computeri3ed access. India Infoline made it possible for clients to view transaction

costs and ledger updates in real time. The #ompany is among the few financial

intermediaries in India to offer a complement of online and offline broking. The

#ompanies network of branches also allows customers to place orders on phone or

visit our branches for trading.

Commo,'t'e+

India Infoline2s extension into commodities trading reconciles its strategic intent to

emerge as a one stop solutions financial intermediary. Its experience in securities

broking has empowered it with re0uisite skills and technologies. The #ompanies

commodities business provides a contra4cyclical alternative to e0uities broking. The

#ompany was among the first to offer the facility of commodities trading in India2s

young commodities market Dthe #H commenced operations in


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monthly turnover on the commodity exchanges increased from "s


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needs and risk appetite. The II) Private ealth anagement Team of financial

experts will recommend an appropriate financial strategy to effectively meet

customer2s investment re0uirements.

A++et Management

India Infoline is a leading pan4India mutual fund distribution house associated with

leading asset management companies. It operates primarily in the retail segment

leveraging its existing distribution network to reach prospective clients. It has

received the in4principle approval to set up a mutual fund.

Portfo('o Management

II) Portfolio anagement $ervice is a product wherein an e0uity investment

portfolio is created to suit the investment objectives of a client. India Infoline

invests the client2s resources into stocks from different sectors, depending on

client2s risk4return profile. This service is particularly advisable for investors who

cannot afford to give time or donUt have that expertise for day4to4day

management of their e0uity portfolio.

Ne=+(etter+

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As a subscriber to the +aily arket $trategy, client2s get research reports of India

Infoline research team on a priority basis. The Indiainfoline eekly (ewsletter is

the flashback for the week gone by. A weekly outlook coupled with the best of

the web stories from Indiainfoline and links to important investment ideas,

)eader $peak and features is delivered in the client2s inbox every riday evening.

H'+tor; & M'(e+tone+

59 - #ommenced operations as an 50uity "esearch firm

5 - )aunched research products of leading Indian companies, key sectors and the

economy #lient included leading IIs, banks and companies.

5 - )aunched www.indiainfoline.com

6 - )aunched online trading through www.8paisa.com $tarted distribution of life

insurance and mutual fund

67 - )aunched proprietary trading platform Trader Terminal for retail customers

68 - Ac0uired commodities broking license J )aunched Portfolio anagement

$ervice

69 - aiden IP! and listed on ($5, -$5

6:4 Ac0uired membership of +1#H J #ommenced the lending business

6 - #ommenced institutional e0uities business under II) J ormed $ingapore

subsidiary, II) DAsiaE Pte )td

6 - )aunched II) ealth J Transitioned to insurance broking model

6 - Ac0uired registration for Bousing inance, got $5-I in4principle approval for

utual und J !btained *enture #apital license

Page 8? of &'


58/94

65 - "eceived in4principle approval for membership of the $ingapore $tock

5xchange and membership of the #olombo $tock 5xchange

CHAPTER "

DATA ANA#YSIS & INTERPRETATIONS

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CA#CU#ATION OF A"ERA$E RETURNS:

$AI#

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2009 198 415 7 217 113.13

2010 415 524 7.5 109 28.07

2011 524 383 7.5 -141 -25.48

2012 383 363 8.7 -20 -2.95

2013 363 341 9.6 -22 -3.42

AVERAGE RETURN 21.87

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CIP#A

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2009 185 341 2 156 85.41

2010 341 363 2 22 7.04

2011 363 335 2.8 -28 -6.94

2012 335 425 2 90 27.46

2013 425 400 2 -25 -5.41

AVERAGE RETURN 21.51

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hart' A'rte(

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*100

2009 324 325 1 1 0.62

2010 325 353 1 28 8.92

2011 353 330 1 -23 -6.23

2012 330 328 1 -2 -0.30

2013 328 330 2 2 1.22

AVERAGE RETURN 0.84

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D#F

Year (P0) (P1) D (P1-P0)

D+(P1-P0)/

P0*1002009 234 390 2 156 67.52

2010 390 268 2 -122 -30.77

2011 268 176 2 -92 -33.58

2012 176 234 2 58 34.09

2013 234 167 2 -67 -27.78

AVERAGE RETURN 1.90

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Comparat'*e Ret)rn+ on Se(ecte, Scr'p+

Scrip Rate of Return (%)

$AI# 21.87

HU# 20.87

C'p(a 21.51

hart' A'rte( 0.84

D#F 1.90

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CA#CU#ATION OF STANDARD DE"IATION:

Standard Deviation = Variance

__

Variance = 1/n (R-R2

$AI#

Year Retr! (R)

A"#. Retr!

(R) (R-R) (R-R)2

2009 113.13 21.87 91.26 8328.26

2010 28.07 21.87 6.20 38.44

2011 -25.48 21.87 -47.35 2241.94

2012 -2.95 21.87 -24.82 616.15

2013 -3.42 21.87 -25.29 639.48

T$TA%11864.28

__

Variance = 1/n (R-R2 = 1/5 (11864.28 = 2372.855195

Standard Deviation = Variance

= 2372.855

= 48.71

HU#

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Year Retr! (R)

A"#. Retr!

(R) (R-R) (R-R)2

2009 8.17 20.87 -12.70 161.32

2010 23.67 20.87 2.81 7.87

2011 24.53 20.87 3.66 13.42

2012 34.82 20.87 13.95 194.69

2013 13.15 20.87 -7.72 59.61

T$TA

%436.9

__

Variance = 1/n (R-R2 = 1/5 (436.9 = 87.38

$tandard +eviation G *ariance G =?./=

G &./'

CIP#A

Year Retr! (R)

A"#. Retr!

(R) (R-R) (R-R)2

2009 85.41 21.51 63.89 4082.56

2010 7.04 21.51 -14.47 209.45

2011 -6.94 21.51 -28.45 809.55

2012 27.46 21.51 5.95 35.43

2013 -5.41 21.51 -26.92 724.81

T$TA% 5861.80

__

Variance = 1/n (R-R2 = 1/5 (5861.80 = 1172.36

Standard Deviation = Variance = 1172.36 = 34.23

HARTI AIRTE#

Year Retr! (R) A"#. Retr!

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(R) (R-R) (R-R)2

2009 0.62 0.84 -0.23 0.05

2010 8.92 0.84 8.08 65.26

2011 -6.23 0.84 -7.08 50.09

2012 -0.30 0.84 -1.15 1.32

2013 1.22 0.84 0.37 0.14

T$TA% 116.85

__

Variance = 1/n.(R-R2 = 1/5 (116.85 = 23.37

Standard Deviation = Variance = 23.37 = 4.834

D#F

Year

Retr!

(R)

A"#. Retr!

(R) (R-R) (R-R)2

2009 67.52 1.90 65.62 4306.61

2010 -30.77 1.90 -32.67 1067.06

2011 -33.58 1.90 -35.48 1258.74

2012 34.09 1.90 32.19 1036.47

2013 -27.78 1.90 -29.67 880.57 T$TA% 8549.45

__

Variance = 1/n-1 (R-R2 = 1/5 (8549.45 = 1709.889

Standard Deviation = Variance = 1709.889= 41.35

DIA$RAMATIC PRESENTATION OF COMPANIES RIS

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69/94

#orrelation #oefficient G #!* ab>ab

$AI# %ITH OTHER COMPANIES

$AI# 0RA1 & HU# 0R1

YEAR 0RA-RA1 0R-R1 0RA-RA1 0R-R12009 91.26 -12.70 -1159.09

2010 6.20 2.81 17.3969

2011 -47.35 3.66 -173.432

2012 -24.82 13.95 -346.3482013 -25.29 -7.72 195.239-1466.24

#ovariance D#!* abE G %>8 D4%';;.'E G 4&/.8


a G '=.?% Q b G &./'

G 4&/.8>D'=.?%ED&./'E G 4


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71/94

2011 -47.35 -35.48 1679.887

2012 -24.82 32.19 -799.14

2013 -25.29 -29.67 750.40677417.483

#ovariance D#!* abE G %>8 D7417.48E G 1483.5


a G '=.?%Q b G '%./8

G %'=/.8> D'=.?%E D'%./8E G


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2011 3.66 -28.45 -104.217

2012 13.95 5.95 83.05153

2013 -7.72 -26.92 207.8562-665.451

#ovariance D#!* abE G %>8 D-665.451E G -133.09


a G &./'Q b G /'./&

G 4%//. D&./'E D/'./&E G4 D&./'ED'.=/'E G 4


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2013 -7.72 -29.67 229.1048-376.801



a G &./'Q b G '%./8

G 4?8./;>D&./'ED'%./8E G 4 D/'./&ED'.=/'E G


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2013 -26.92 -29.67 798.90126665.831



a G /'./Q b G '%./8

G %///.%?> D/'./ED'%./8E G D'.=/'ED'%./8E G 4


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%EI$HTS OF $AI# & OTHER COMPANIES

$AI# & HU#

a G '=.?%%

b G &./'?

nab G 4


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('=.?%%) ('.=/')6 D


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a G &./'?

b G /'./&

nab G 4


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b G '%./8

nab G 4


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nab G


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$AI# & OTHER COMPANIES

$AI# 0a1 & HU# 0G1

a G '=.?%

b G &./'

a G


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a G 4


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b G /'./

a G


83/94

a G /'./

b G '.=/

a G


84/94

AIRTE# 0a1 & D#F 0G1

a G '.=/

b G '%./8

a G


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86/94

"AG %.=? AG4


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"AG


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CHAPTER "I

FINDIN$S SU$$ESTIONS & CONC#USION

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FINDIN$S

Investors would be able to achieve when the returns of shares and debentures

"esultant would be known as diversified portfolio. Thus portfolio construction would

address itself to three major via, selectivity, timing and diversification. In case of

portfolio management, negatively correlated assets are most profitable. A rational

investor would constantly examine his chosen portfolio both for average return and

risk.

Individual returns on the selected stocks including 1AI), B9), #ipla, -harati

Airtel J +) are %.=?S,


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SUGGESTIOS

!f the five stocks selected, all the stocks have given positive returns. #1

#ompany B9), Bealthcare #ompany #ipla and 9tilities #ompany 1AI)

have been giving good profits while Telecom #ompany Airtel and "eal 5state

#ompany +) have given profits between %4S. Investors should put caution

while investing in Telecom and "eal 5state #ompanies.

#omparing the individual risks, 1AI), +) and #ipla are high risky

compared to the other securities like B9) and Airtel and it is suggested that

the investors should be careful while investing in high risk securities.

The investors who re0uire average returns with low risk can invest in B9).

All the investors who invest in the securities are ultimately benefited by

investing in selected scripts of Industries.

Investors are advised to invest in Portfolios of +) J #ipla D/;.%%SE

followed by 1AI) J#ipla D%.8SE, 1AI) J B9) D


92/94

$ome general rules to follow while investing in securities include:

(ever invest on the basis of an insider trader tip in a company which is not

sound Dinsider trader is person who gives tip for trading in securities based on

prices sensitive up price sensitive un published information relating to such

securityE.

(ever invest in the so called promoter 0uota of lesser known company.

(ever invest in a company about which you do not have appropriate

knowledge.

(ever at all invest in a company which doesn2t have a stringer

financial record your portfolio should not stagnate.

$huffle 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.

(ever fall to magic of the scripts don2t confine to the blue chip

company2s look out for other portfolio that ensure regular dividends.

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

fluctuations in movement minor correction2s 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 moveO.

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!O!"USIOS

Portfolio management is a process of encompassing many activities of

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

regular and systematic analysis, judgment, and action. 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 main objective of the Portfolio management is to help the investors to

make wise choice between alternate investments without a post trading shares. Any

portfolio management must specify the objectives like aximum returns, !ptimum

"eturns, #apital appreciation, $afety etc., in the same prospectus.

This service renders optimum returns to the investors by proper selection and

continuous shifting of portfolio from one scheme to another scheme of from one plan

to another plan within the same scheme.

&Greater P'rt'' Retr! t, e R aa a! attrat"e '!at'!3

!or t"e #nve$tor$.

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I#IO$RAPHY

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Potfolio Management IIFL - 2014