Background

Karvy Consultants Limited was established in 1982 at Hydrabad. It was established by a

group of Hydrabadbased pra!ti!ing Chartered "!!ountants. "t initial stage it was very
small in si#e. It was started with a !apital of $s. 1%&'%'''.
In starting it was only offering auditing and ta(ation servi!es. Later% it a!ts into the
$egistrar and )hare transfer a!tivities and subse*uently into finan!ial servi!es and other
servi!es li+e ,inan!ial -rodu!t .istribution% Investment "dvisory )ervi!es% .emat
)ervi!es% Corporate ,inan!e% Insuran!e et!.
"ll along% Karvy/s strong wor+ ethi!s and professional ba!+ground leveraged with
Information 0e!hnology enabled it to deliver *uality to the individual. " de!ade of
!ommitment% professional integrity and vision helped Karvy a!hieving a leadership
position in its field when it handled largest number of !orporate and retail that proved to
be a sound business synergy.
0oday% Karvy has a!!ess to millions of Indian shareholders% besides !ompanies% ban+s%
finan!ial institutions and regulatory agen!ies. 1ver the past one and half de!ades% Karvy
has evolved as a veritable lin+ between industry% finan!e and people.
In 2anuary 1998% Karvy be!ame first .epository -arti!ipant in "ndhra -radesh. "n I)1
9''2 Company% Karvy/s !ommitment to *uality and retail rea!h has made it an Integrated
,inan!ial )ervi!es Company.
0oday% !ompany has 23' bran!h offi!es in 145 !ities all over the India. 0he !ompany
adds & new offi!es every month to the !ompany/s ever growing national networ+ in every
noo+ and !orner of the !ountry. 0he !ompany servi!e over 14 million individual
investors% 18' !orporate and handle !orporate disbursements that e(!eed $s.2&'' Crores.
1
WHERE KARVY STAND IN THE MARKET?
K"$67 is a legendary name in finan!ial servi!es% Karvy/s !redit is defined by its
mission to su!!eed% passion for professionalism% e(!ellent wor+ ethi!s and !ustomer
!entri! values.
0oday K"$67 is well +nown as a premier finan!ial servi!es enterprise% offering a broad
spe!trum of !ustomi#ed servi!es to its !lients% both !orporate and retail. )ervi!es that
K"$67 !onstantly upgrade and improve are be!ause of !ompany/s s+ill in leveraging
te!hnology. 8eing one of the most te!hnosavvy organi#ations around helps !ompany to
deliver even more !ost effe!tive finan!ial solutions in the shortest possible time.
9hat bears ample testimony to Karvy/s su!!ess is the faith reposed in !ompany by
valued investors and !ustomers% all a!ross the !ountry. Indeed% with Karvy/s wide
networ+ tou!hing every !orner of the !ountry% even the most remote investor !an easily
a!!ess Karvy/s servi!es and benefit from !ompany/s e(pert advi!e.
KARVY GROUP
Karvy Consultants Limited
Karvy )e!urities Limited
Karvy Investor )ervi!es Limited
Karvy )to!+ bro+ing Limited
Karvy Computer )hares -vt. Ltd.
2
Board of Directors
Karvy Consultants Limited
Parthasarathy C
Yugandhar M
Ramakrshna M S
Prasad V Potur
Robert Gbson
San|ay Kumar Dhr
R Shyamsunder
:0able1; 81.s of Karvy Consultants Limited<
Karvy Investor Services Limited
Parthasarathy C
Yugandhar M
Ramakrshna M S
:0able2; 81.s of Karvy Investor )ervi!es Limited<
3
Karvy Securities Limited
Parthasarathy C
Yugandhar M
Ramakrshna M S
A|ay Kumar K
Wam Samue
Nchoas Tuy
:0able3; 81.s of Karvy )e!urities Limited<
Karvy Stock Broking Limited
Parthasarathy C
Yugandhar M
Ramakrshna M S
A|ay Kumar K
Kutumba Rao V
Wam Samue
Nchoas Tuy
:0able5; 81.s of Karvy )to!+ 8ro+ing Limited<
4
Mission Statement of Karvy`
"n organi#ation e(ists to a!!omplish something or a!hieve something. 0he mission
statement indi!ates what an organi#ation wants to a!hieve. 0he mission statement may be
!hanged periodi!ally to ta+e advantage of new opportunities or respond to new mar+et
!onditions.
Karvy/s mission statement is ~To Bring Industry, Finance and People together.
Karvy is wor+ as intermediary between industry and people. Karvy wor+ as investment
advisor and helps people to invest their money same way Karvy helps industry in
a!hieving finan!e from people by issuing shares% debentures% bonds% mutual funds% fi(ed
deposits et!.
Company/s mission statement is !lear and thoughtful whi!h guide geographi!ally
dispersed employees to wor+ independently yet !olle!tively towards a!hieving the
organi#ation/s goals.
Vision of Karvy
Company/s vision is !rystal !lear and mind frame very dire!ted. ~To be pioneering
financial services company. And continue to grow at a healthy pace, year after year,
decade after decade. Company/s foray into I0enabled servi!es and internet business
has provided an opportunity to e(plore new frontiers and business solutions. 0o build a
!orporate that sets ben!hmar+s for others to follow.
5
Behind the Picture: What Customers matter for KARVY?
0he underlying pi!ture forming answer for above *uestion is given below.
:,ig.1 Competitive "dvantage of Karvy<
=very year with this pi!ture +eeping in mind >Karvy a!!elerate with $e!overy% $evival
and $eappearan!e./
Karvy has started 2''5 on a strong note with the reali#ation to signal some of the
!hallenges it fa!ed previous year. In a !ompetitive mar+et and a branded business% Karvy
need to !arefully manage itself to avoid down trading or brand shifts by !onsumers.
,or Karvy% 2amnagar bran!h 2''3 was truly e(hilarating be!ause of;
)u!!essful implementation of a !arefully !rafted strategy.
=(!ellen!e in e(e!ution.
Immense learning enabling to set up a laun!h pad for revitali#ing
itself.
)ome !ompetitive advantages are long lasting. 0hese are intangible% diffi!ult to repli!ate
and thus more sustainable. Karvy has fo!used on some of these to gain !ompetitive
advantages. 0here are;
9inning !ulture and a desire to e(!el in everything Karvy do.
6
)trong meaningful relationships with Customers along with )trategi!
-artners in whi!h Karvy operate and above all% its own staff.
Karvy value and !arefully nurture relationships with !ustomers. Karvy truly believe that
more than te!hnologi!al prowess and business pro!ess innovations% it is the >fo!us on
relationships/ whi!h has been the !orner stone of satisfying and su!!essful presen!e in
India over many years.
0his has been possible with deep insight of !onsumer behavior as well as mar+et demand
drivers% understanding of the arena where to operate and *uality e(e!ution ? all than+s to
a >greater team/ that ma+es this happen.
Karvy/s !ustomers !onsider themselves part of Karvy family and share their e(perien!es
and dreams with other !ustomers and thus Karvy be!omes su!!essful not only in relating
!ustomers but also gains new !ustomers from satisfied prevailing !ustomers.
Karvy want to !reate a strong emotional bond with new !ustomers promoted by
prevailing !ustomers.
Karvy Values:
Integrity
$esponsibility
$eliability
@nity
@nderstanding
=(!ellen!e
Confidentiality
Karvy has ade*uate internal !ontrol systems and pro!edures !ommensurate with the si#e
nature of its business. 0hese system and pro!edures provide reasonable assuran!e of
7
maintenan!e of proper a!!ounting re!ords% reliability of finan!ial information% prote!tion
of resour!es and safeguarding of assets against unauthori#ed use.
KARVY SERVICES - AN OVERVIEW
1. Stock brokng
2. Demat servces
3. Investment product dstrbuton
4. Investment advsory servces
5. Corporate fnance & Merchant bankng
4. Insuran!e
A. Butual fund servi!es
8. I0 enabled servi!es
9. $egistrars C 0ransfer agents
1'. Loans
1. Stock Broking:
K"$67 is wor+ing as Capital Bar+et Intermediaries. )to!+bro+ers are regulated by
)=8I :)to!+bro+ers and )ubbro+ers< $egulations% 1992. 0he sto!+bro+er is a member
of the sto!+ e(!hange. )to!+bro+ers are the intermediaries who are allowed to trade in
se!urities on the e(!hange of whi!h they are members. 0hey buy and sell on their own
behalf as well as on behalf of their !lients.
)to!+bro+ers e(pand their business by engaging subbro+er. )ubbro+ers mean Dany
person not being a member of a sto!+ e(!hange who a!ts on behalf of a sto!+ bro+er as
8
an agent or otherwise for assisting the investors in buying% selling or dealing in se!urities
through su!h sto!+bro+ers.E
2. Demat Services:
Karvy is a depository parti!ipant with the Fational )e!urities .epository Limited
GF).LH for trading and settlement of demateriali#ed shares.
.epository -arti!ipants G.-sH are des!ribed as an agent of the depository. 0hey are
intermediaries between the depository and the investors. 0he relationship between the
.-s and the depository is governed by an agreement made between the two under
.epositories "!t.
" .- !an offer depositoryrelated servi!es only after obtaining a !ertifi!ate of
registration from )=8I.
)in!e Karvy is also in the bro+ing business% investors who use Karvy/s depository
servi!es get a dual benefit. 0hey !an use Karvy/s bro+erage servi!es to e(e!ute
transa!tions and Karvy/s depository servi!es to settle them.
3. Investment Products Distribution:
Company is also !on!ern with the distribution of investment produ!ts li+e
GaH. ,i(ed .eposit
GbH. 8onds
G!H. I-1
(a). Fixed Deposit:
9
K"$67 is dealer of 35 fi(ed deposits of various types whi!h in!ludes fi(ed deposits of
-ubli! )e!tor% Fon 8an+ing ,inan!e Companies% Housing ,inan!e Companies and
Banufa!turing Companies.
Company is dealer of following ,i(ed .eposits
PUBLIC SECTOR
Sl. No. Company Name
1 H@.C1
2 )ardar )arovar Farmada Figam Ltd.
3 0amilnadu -ower ,inan!e Corporation Ltd.
5 F0-C
:0able&; -ubli! )e!tor ,. with whi!h Karvy deals<
NON BANKING FINANCE COMPANIES
Sl. No. Company Name
1 "sho+ Leyland ,inan!e Ltd.
2 8aIaI "uto ,inan!e Ltd.
3 8irla Home ,inan!e Ltd.
5 Cholamandalam Investment C ,inan!e Co. Ltd.
& =s!orts ,inan!e Ltd.
4 ,irst Leasing Company of India Ltd.
A I.8I )uvidha
8 Fi!!o @!o "llian!e Credit Ltd.
:0able4; ,. of Fon 8an+ing ,inan!e Companies with whi!h Karvy deals<
HOUSING FINANCE COMPANIES
10
Sl. No. Company Name
1 Can ,in Homes Ltd.
2 .ewan Housing ,inan!e Corporation Ltd.
3 Jruh ,inan!e Ltd.
5 H.,C Ltd.
& -F8 Housing ,inan!e Ltd.
4 )undaram Home ,inan!e Ltd.
:0ableA; ,. of Housing ,inan!e Companies with whi!h Karvy deals<
MANUFACTURING COMPANIES
Sl. No. Company Name
1 " - -aper Bills Ltd.
2 "mte+ India Ltd.
3 "tul Ltd.
5 8allarpur Industries Ltd.
& Chambal ,ertili#ers C Chemi!als Ltd.
4 =s!ort Ltd.
A Jreaves Ltd.
8 JuIarat "l+alies C Chemi!als Ltd.
9 Indian =(press
1' Ind)wift Ltd.
11 2K Industries Ltd.
12 2indal )teel C -ower Ltd.
13 )ound Craft Industries Ltd.
15 )upreme Industries Ltd.
1& Kuari Industries Ltd.
:0able8; ,. of Banufa!turing Companies with whi!h Karvy deals<
(b). Bonds:
11
Karvy is dealer of following bonds
$8I )aving 8onds
FH8
$=C
(c). IPO:
Company is also provides servi!es related to Initial -ubli! 1ffer of !ompany. Company
provides stationary at the time of I-1 as well as provides information to investors
regarding I-1 and solves their *ueries.
4. Investment Advisory Services:
0his division provides portfolio management servi!es to high networth individuals and
!orporate. 0he e(pertise of Karvy in resear!h and sto!+ bro+ing gives it the right
perspe!tive to provide investment advisory servi!es. Company provides advisory servi!es
to its !lients.
,inan!ial goal of ea!h individual investor varies a!!ording to his dream% ambition and
family si#e and future finan!ial planning for the !hildren C old age pension for self and
wife so does the pathway to a!hieve it. Karvy apply the prin!iples of ,inan!ial -lanning
as both s!ien!e C art% it understands the time hori#on% ris+ bearing !apa!ity and
investment goals of investors +eeping in mind their psy!he and finan!ial needs. 8ased
upon this Karvy helps individual investors to plan their entire life up to retirement% 0a(es%
Insuran!e needs and other important personal finan!ial goals. It designs portfolio for
investor to invest their saving in various finan!ial produ!ts li+e shares% bonds% debentures%
mutual funds% fi(ed deposits% insuran!e et!.% Company design portfolio by !onsidering
following fa!tors.
Investor/s re*uirement of getting money ba!+%
12
Investor/s willingness to ta+e ris+%
Investor/s ta( planning et!.
5. Corporate finance & Merchant banking:
Corporate fnance s the fnanca actvty of corporaton. It deas wth
the frm's operatons wth regard to nvestng and fnancng. It
concerned wth how frms rase capta and the consequences of
aternatve methods of rasng capta. Frms capta can be rased by
rasng oans, ssung shares, and acqurng or mergng wth other
busnesses by pubc or prvate companes.
Ber!hant ban+ing is a finan!ial intermediation that mat!hes entities that need !apital and
those that have !apital. Hen!e they fa!ilitate the flow of !apital in the mar+et.
Karvy enIoys )=8I !ategory GIH authori#ation for Ber!hant 8an+ing. Karvy offers the
full spe!trum of Ber!hant 8an+ing )ervi!es% beginning from identifying the best time for
an issue to final stage of mar+eting it% to harvest unparalleled su!!ess.
"s a mer!hant ban+er Karvy offer following servi!es;
Issue management
Instrument designing
-ri!ing of the issue
$egistration pro!ess for the issue of shares
Bar+eting efforts
,inal allotment to investors
13
Listing details on sto!+ e(!hanges
Loan syndi!ation
Lease finan!ing
Corporate advisory servi!es
@nderwriting
-ortfolio management
6. Insurance:
Karvy is also dealer of many private life insuran!e !ompanies. "t 2amnagar bran!h%
!ompany is asso!iated with dealing of following !ompanies.
ICICI -rudential Life Insuran!e
H.,C Life Insuran!e
0"0" "IJ Life Insuran!e
7. Mutual Fund Services:
)in!e its in!eption in 1982% Karvy has demonstrated a dedi!ation !oupled with dynamism
that has inspired trust from various segments ? !orporate% government bodies and
individuals. Karvy has sin!e been performing a pivotal role as the intermediary ? the
interfa!e ? between these players.
9ith Butual ,unds emerging as a distin!t asset !lass% Karvy has made a strategi! !hoi!e
to leverage the power of latest te!hnology to provide a !utting edge to its servi!es. Karvy%
today% servi!e nearly 8'L of the asset management !ompanies G"BCsH a!ross an
14
e(tensive networ+ of servi!e !enters with assets under servi!e in e(!ess of $s.1'%'''
!rores.
KarvyMs ability to mass !ustomi#e and offer a diverse range of produ!ts for a diverse
range of !ustomers has helped mutual fund !ompanies to uni*uely position themselves in
the mar+et pla!e. 0hese diverse range of servi!es !ut a!ross multiple delivery !hannels ?
servi!e !enters% web% mobile phones% !all !enter ? has brought home the benefits of
te!hnology to investors% distributors% and the mutual funds.
Joing forward% Karvy shall strive to !reate new produ!ts and servi!es% whi!h would
address the needs of the end !ustomer. Company/s single minded fo!us in delivering
produ!ts for !ustomers has given it the distinguished position of being the preferred
provider of finan!ial servi!es in the !ountry.
List of Mutual Fund Clients of KARVY:
15
16
1 Aance Mutua Fund
2 Bra Mutua Fund
3 Bank of Baroda Mutua Fund
4 Can Bank Mutua Fund
5 Choa Mutua Fund
6 Deutsche Mutua Fund
7 DSP Merr Lynch Mutua Fund
8 Frankn Tempeton Investments
9 GIC Mutua Fund
10 HDFC Mutua Fund
11 HSBC Mutua Fund
12 IL & FS Mutua Fund
13 |M Mutua Fund
14 Kotak Mutua Fund
15 LIC Mutua Fund
16 Pun|ab Natona Bank Mutua Fund
17 Prudenta ICICI Mutua Fund
18 Prncpa Mutua Fund
19 Reance Mutua Fund
20 State Bank of Inda Mutua Fund
21 Standard Chartered Mutua Fund
22 Sundaram Mutua Fund
23 SUN F&C Mutua Fund
24 Tata Mutua Fund
:0able9; List of B, Companies with whi!h Karvy deals<
8. Income Tax enabled services:
Karvy has been started this servi!e sin!e Bar!h% 2''5. Karvy is wor+ as 0IF ,a!ilitation
Centre it provides following I0 enabled servi!es.
a. .istribution of -"F Card.
b. .istribution of 0"F Card.
!. )ervi!es related to e0.).
Karvy wor+ as an intermediary between F).L and I0 payers. Karvy provides various
form for different I0 enabled servi!es and guide people to fill that forms. It also solves
*ueries of the ta( payers. It also distributes -"F and 0"F !ard to the ta( payers.
TIN Overview
Natona Securtes Depostory Ltd. (NSDL) has estabshed a
natonwde Tax Informaton Network (TIN) on behaf of the Income Tax
Department (ITD). Ths s desgned to make the tax admnstraton
more effectve, furnshng of returns convenent, reduce compance
cost and brng greater transparency.
17
Whe NSDL w be the prmary agency responsbe for the desgn,
mpementaton and mantenance of TIN as per the requrements of
ITD, other agences w aso pay key roes n the TIN system.
Karvy has estabshed nfrastructure requred to provde IT enabed
servces so, Karvy provdes TIN factaton centers a over Inda on
behaf of NSDL. Besdes Karvy foowng companes can aso work as
ntermedary between NSDL and customers.
9. Registrars & Transfer agents:
In 198&% Karvy entered the $egistrar and )hare 0ransfer 8usiness to !reate a mar+et
ni!he in the !ompetitive field of finan!ial servi!es. In 19959&% it rea!hed a
milestone when it pro!essed 1'5 -ubli! Issues !onstituting 54 per !ent mar+et share.
Fow in its se!ond de!ade of e(isten!e% Karvy is the leader in the industry; In an opinion
poll !ondu!ted by an independent mar+et resear!h agen!y B"$J% Karvy has been rated
as India/s Bost "dmired $egistrar on various parameters;
1verall =(!ellen!e.
Handling of 6olumes
0imely .ispat!h
Nuality Banagement and 0e!hnologi!al @p gradation.
" )=8I Category 1 $egistrar% )o far% Karvy has handled over 4A& I))@=) as $egistrars
to publi! issues pro!essed over &2 million appli!ations and is servi!ing over 14 million
investors from various lo!ations spread over 2'& !lients.
18
10. Loan:
Karvy has recenty started ths servce at seected branches of metro
ctes. Ths servce has not been started n Saurashtra-Kucch regon.
Karvy provdes oans for foowng.
Vehce Loan
Home Loan
Persona Loan
19
MARKETING STRATEGY OF KARVY
Market Positioning:
Bar+et positioning statements of Karvy are At Karvy we give you single window
service and We also ensure your comfort.
)o% Karvy fo!us on the !onsumers who prefer almost all investment a!tivities at same
pla!e by providing number of various finan!ial servi!es. "t Karvy a person !an
pur!hase or sell shares% debentures et!. and at the same pla!e also demat it. Karvy
also provides other investment option to the same person at same pla!e li+e Butual
,und% Insuran!e% ,i(ed .eposit% and 8onds et!. and help the person in designing his
portfolio. 8y this way Karvy provides !omfort to its !ustomers.
Karvy is also positioned a!!ording to Ries and Trout. Karvy is promoted as a no. 1
investment produ!t distributor and $ C 0 agent of India.
Target Market:
Karvy uses demographic segmentation strategy and segment peope
based on ther occupaton. Karvy uses selective specialization strategy
for market targetng. Target person for the Karvy Stock Brokng and
Karvy Investment Servce are persons who can work as sub-broker for
the companes. Companes focus on Advsors of Insurance and post
offce, Tax consutants and CAs for makng sub-broker.
20
Marketing channel System:
Karvy uses one level marketng channe for nvestment product
dstrbuton. Sub-brokers work as ntermedary between consumer and
company. Company has both forward and backward fow of actvty
through channe. Company dstrbutes statonery, brokerage, and
nformaton forward to ts sub-broker. The sub-brokers send fed
forms, queres, amount of nvestment etc. back to the company.
PROJCT Channel Members:
Karvy provdes PRO|ECT to the sub-brokers because they w be
vewed as the company by the nvestors. The executves of Karvy
expan varous new schemes of nvestment to the sub-brokers wth ts
ob|ectve, rsk factors and expected return. Company aso perodcay
arrange semnar to gude sub-brokers.
!"#ertising an" Promotion:
The ob|ectve of advertsng of Karvy s to create awareness about
servces of Karvy among nvestors and sub-brokers and ncrease sub-
brokers of Karvy.
Company doesnt gve advertsement n meda ke TV, Newspapers,
and Magaznes etc. Karvys advertsement s made ndrecty by the
companes assocate wth t. Karvy s R & T agent of around 700
21
companes. They pubsh name, address and ogo of Karvy on ther
annua report.
Karvy aso pubsh ts weeky Stock Market Newsetter Karvy Bazaar
Baaten and monthy magazne The Fnapos to gude nvestors and
sub-brokers about market.
$R PO%&C' O( )!R*'
Karvys HR Department s ocated at Hyderabad.
Recr+itment an" Selection Policy:
The upper eve members ke zona managers, regona managers,
branch managers and senor executves are recruted by pubshng
recrutment advertsement n eadng natona eve newspaper. The
quafed appcant are then caed for ntervew and seected.
The regona manager has authorty to seect ower eve empoyee ke
peon, marketng executves, accountant etc. by approva of zona
manager.
PROJCT an" ,e#elopment:
Contnuous PRO|ECT and upgradng technca, behavora and
managera sks s a way of fe n Karvy. Karvy encourages empoyees
22
to hone ther sks reguary to enabe them to face the chaenges of
the changng requrements of customers that ft market up and down.
PRO|ECT needs anayss s done on a reguar bass and systematc
methodooges are ensured that sks and capabtes of a empoyees
are constanty upgraded to enabe them to perform n the chaengng
work envronment.
New empoyee has gven PRO|ECT under experenced empoyee. The
new empoyee work under experence empoyee and observe hs a
actvtes. When company empoys new technoogy or there s any
change n the workng of company the PRO|ECT program s arranged.
mployee Moti#ation:
Karvys empoyees are hghy empowered. They dont have to report
any person of the same branch but they report upper eve branch. E.e.
Marketng executve of |amnagar branch drecty reports Senor
Marketng executve of Baroda zona offce.
If partcuar branch earn certan proft then Karvy gves them speca
ncentves. E.g. ast year Karvy had arranged two days tour of Dv for
ther empoyees of Ra|kot, |amnagar, |unagadh and Bhavnagar branch
whch was totay free of cost. Ths aso heps n mantanng co-
operaton between empoyees.
Quality Policy Of Karvy:
To acheve and retan eadershp, Karvy sha am for compete
customer satsfacton, by combnng ts human and technoogca
23
resources, to provde superor quaty fnanca servces. In the process,
Karvy w strve to exceed Customers expectatons.
Quality Objectives of Karvy
8uild inhouse pro!esses that will ensure transparent and
harmonious relationships with its !lients and investors to provide high *uality of
servi!es.
=stablish a partner relationship with its investor servi!e agents and
vendors that will help in +eeping up its !ommitments to the !ustomers.
-rovide high *uality of wor+ life for all its employees and e*uip
them with ade*uate +nowledge C s+ills so as to respond to !ustomerMs needs.
Continue to uphold the values of honesty C integrity and strive to
establish unparalleled standards in business ethi!s.
@se stateofthe art information te!hnology in developing new and
innovative finan!ial produ!ts and servi!es to meet the !hanging needs of investors
and !lients.
)trive to be a reliable sour!e of valueadded finan!ial produ!ts and
servi!es and !onstantly guide the individuals and institutions in ma+ing
a Iudi!ious !hoi!e of same.
)trive to +eep all sta+eholders Gshareholders% !lients% investors%
employees% suppliers and regulatory authoritiesH proud and satisfied.
24
Achievements of Karvy:
Largest mobzer of funds as per PRIME DATABASE
Frst ISO - 9002 Certfed Regstrar n Inda
A Category- I Merchant banker
A Category- I Regstrar to Pubc Issues
Ranked as "The Most Admred Regstrar" by MARG
Handed the argest- ever Pubc Issue - IDBI
Strategc te-up wth |ardne Femng Inda Securtes
Ltd
Handed over 500 Pubc ssues as Regstrars
Handng the Reance Account whch accounts for
neary 10 mon account hoders
Frst Depostory Partcpant from Andhra Pradesh
SWOT ANALYSIS OF KARVY
Strengths:
=mployees are highly empowered.
)trong Communi!ation Fetwor+.
Jood !ooperation between employees.
Fumber 1 $egistrar and 0ransfer agent in India.
Fumber 1 dealer of Investment -rodu!ts in India.
Weaknesses:
25
High =mployee 0urnover.
Opportunity:
Jrowth rate of mutual fund industry is 5' to &'L during last year
and it e(pe!ted that this rate will be maintained in future also.
Bar+eting at rural and semiurban areas.
Threats:
In!reasing number of lo!al players.
-ast image of Butual ,und.
ED FOR SELECTING THE PRO1ECT
0o get the overall +nowledge of se!urities and investment.
0o +now how the investment made in different se!urities minimizes the risk and
maximizes the returns.
0o get the +nowledge of different fa!tors that affe!ts the investment de!ision of investors.
0o +now how different !ompanies are managing their portfolio i.e. when and in whi!h
se!tors they are investing.
0o +now what is the need of appointing a -ortfolio Banager and how does he meets the
needs of the various investors.
0o get the +nowledge about the role GplayedH and fun!tions of portfolio manager.
0o get the +nowledge of investment de!ision and asset allo!ation.
26
EXECUTIVE SUMMARY
Investing in e*uities re*uires time% +nowledge and !onstant monitoring of the mar+et. ,or
those who need an e(pert to help to manage their investments% portfolio management servi!e
G-B)H !omes as an answer.
0he business of portfolio management has never been an easy one. 2uggling the limited
!hoi!es at hand with the twin re*uirements of ade*uate safety and si#eable returns is a tas+
fraught with !omple(ities.
Jiven the unpredi!table nature of the mar+et it re*uires solid e(perien!e and strong resear!h
to ma+e the right de!ision. In the end it boils down to ma+e the right move in the right dire!tion at
the right time. 0hat/s where the e(pert !omes in.
0he term portfolio management in !ommon pra!ti!e refers to sele!tion of se!urities and their
!ontinuous shifting in a way that the holder gets ma(imum returns at minimum possible ris+.
-ortfolio management servi!es are mer!hant ban+ing a!tivities re!ogni#ed by )=8I and these
a!tivities !an be rendered by )=8I authori#ed portfolio managers or dis!retionary portfolio
managers.
" portfolio manager by the virtue of his +nowledge% ba!+ground and e(perien!e helps his
!lients to ma+e investment in profitable avenues. " portfolio manager has to !omply with the
provisions of the )=8I Gportfolio managersH rules and regulations% 1993.
0his proIe!t also in!ludes the different servi!es rendered by the portfolio manager. It in!ludes
the fun!tions to be performed by the portfolio manager.
9hat is the differen!e between the value of time and moneyO In other words% learn to separate
time from money.
27
9hen it !omes to the importan!e of time% how many of us believe that time is money. 9e all
+now that the wor+ done by us is !al!ulated by units of time. Have you ever !onsidered the
differen!e between an employee who is wor+ing on an hourly rate and the other who is wor+ing
on salary basisO 0he only differen!e between them is of the unit of time. Fo matter whether you
get your pay by the hour% biwee+ly% or annuallyP one thing !ommon in all is that the amount is
paid to you a!!ording to amount of time you spent on wor+ing.
In other words% time is pre!ious and holds mu!h more importan!e than money. 0hat is the
reason the time is !onsidered as an important fa!tor in wealth !reation.
0he proIe!t also shows the fa!tors that one !onsiders for ma+ing an investment de!ision and
briefs about the information related to asset allo!ation.
28
INDEX
SRNO. TOPICS PAGE NO
1.
PORTFOLIO MANAGEMENT -
INTRODUCTION
1
2. TYPES OF PORTFOLIO MANAGEMENT
11
3. PORTFOLIO MANAGEMENT PROCESS
14
4. RISK - RETURN ANALYSIS
28
5. PORTFOLIO THEORIES
31
6.
PERSONS INVOLVED IN PORTFOLIO
MANAGEMENT
41
7. INVESTMENT ANALYSIS
47
8. ASSEST ALLOCATION
59
CONCLUSION
63
BIBLOGRAPHY
65
29
CHAPTER: 1
PORTFOLIO MANAGEMENT
INTRODUCTION
)to!+ e(!hange operations are pe!uliar in nature and most of the Investors feel inse!ure in
managing their investment on the sto!+ mar+et be!ause it is diffi!ult for an individual to identify
!ompanies whi!h have growth prospe!ts for investment. ,urther due to volatile nature of the
mar+ets% it re*uires !onstant reshuffling of portfolios to !apitali#e on the growth opportunities.
=ven after identifying the growth oriented !ompanies and their se!urities% the trading pra!ti!es
are also !ompli!ated% ma+ing it a diffi!ult tas+ for investors to trade in all the e(!hange and
follow up on post trading formalities.
Investors !hoose to hold groups of se!urities rather than single se!urity that offer the greater
e(pe!ted returns. 0hey believe that a !ombination of se!urities held together will give a
benefi!ial result if they are grouped in a manner to se!ure higher return after ta+ing into
!onsideration the ris+ element. 0hat is why professional investment advi!e through portfolio
management servi!e !an help the investors to ma+e an intelligent and informed !hoi!e between
alternative investments opportunities without the worry of post trading hassles.
30
MEANING OF PORTFOLIO MANAGEMENT
-ortfolio management in !ommon parlan!e refers to the sele!tion of se!urities and their
!ontinuous shifting in the portfolio to optimi#e returns to suit the obIe!tives of an investor. 0his
however re*uires finan!ial e(pertise in sele!ting the right mi( of se!urities in !hanging mar+et
!onditions to get the best out of the sto!+ mar+et. In India% as well as in a number of western
!ountries% portfolio management servi!e has assumed the role of a spe!iali#ed servi!e now a days
and a number of professional mer!hant ban+ers !ompete aggressively to provide the best to high
net worth !lients% who have little time to manage their investments. 0he idea is !at!hing on with
the boom in the !apital mar+et and an in!reasing number of people are in!lined to ma+e profits
out of their hardearned savings.
-ortfolio management servi!e is one of the mer!hant ban+ing a!tivities re!ogni#ed by
)e!urities and =(!hange 8oard of India G)=8IH. 0he servi!e !an be rendered either by mer!hant
ban+ers or portfolio managers or dis!retionary portfolio manager as define in !lause GeH and GfH
of $ule 2 of )e!urities and =(!hange 8oard of IndiaG-ortfolio BanagersH$ules% 1993 and their
fun!tioning are guided by the )=8I.
"!!ording to the definitions as !ontained in the above !lauses% a portfolio manager means
any person who is pursuant to !ontra!t or arrangement with a !lient% advises or dire!ts or
underta+es on behalf of the !lient Gwhether as a dis!retionary portfolio manager or otherwiseH the
management or administration of a portfolio of se!urities or the funds of the !lient% as the !ase
may be. " mer!hant ban+er a!ting as a -ortfolio Banager shall also be bound by the rules and
regulations as appli!able to the portfolio manager.
$eali#ing the importan!e of portfolio management servi!es% the )=8I has laid down !ertain
guidelines for the proper and professional !ondu!t of portfolio management servi!es. "s per
guidelines only re!ogni#ed mer!hant ban+ers registered with )=8I are authori#ed to offer these
servi!es.
-ortfolio management or investment helps investors in effe!tive and effi!ient management
of their investment to a!hieve this goal. 0he rapid growth of !apital mar+ets in India has opened
up new investment avenues for investors.
31
0he sto!+ mar+ets have be!ome attra!tive investment options for the !ommon man. 8ut the
need is to be able to effe!tively and effi!iently manage investments in order to +eep ma(imum
returns with minimum ris+.
Hen!e this is the study on DPORTFOLIO MANAGEMENT C INVESTMENT DECISION E
so as to e(amine the role% pro!ess and merits of effe!tive investment management and de!ision.
DEFINITIONS OF PORTFOLIO
1) Investor`sWords.com
" collection of investments GallH owned by the same individual or organization. 0hese
investments often in!lude stocks% whi!h are investments in individual businessesP bonds%
whi!h are investments in debt that are designed to earn interestP and mutual funds% whi!h
are essentially pools of money from many investors that are invested by professionals or
a!!ording to indices.
2) Financial Dictionary and WikiAnswers.com
" !olle!tion of various !ompany shares% fi(ed interest se!urities or moneymar+et
instruments. -eople may tal+ grandly of Mrunning a portfolioM when they own a !ouple of
shares but the !hara!teristi! of a serious investment portfolio is diversity. It should show a
spread of investments to minimi#e ris+ bro+ers and investment advisers warn against
Mputting all your eggs in one bas+etM.
3) YourDictionary.com
aH "ll the se!urities held for investment as by an individual% ban+% investment !ompany%
et!.
bH " list of su!h se!urities.
32
DEFINITIONS OF PORTFOLIO MANAGEMENT
1) Investor`swords.com
0he pro!ess of managing the assets of a mutual fund% in!luding !hoosing and monitoring
appropriate investments and allo!ating funds a!!ordingly.
2) Investor Glossary
.etermining the mi( of assets to hold in a portfolio is referred to as portfolio
management. " fundamental aspe!t of portfolio management is !hoosing assets whi!h are
!onsistent with the portfolio holderMs investment obIe!tives and ris+ toleran!e. 0he ultimate
goal of portfolio management is to a!hieve the optimum return for a given level of ris+.
Investors must balan!e ris+ and performan!e in ma+ing portfolio management de!isions.
-ortfolio management strategies may be either a!tive or passive. "n investor who prefers
passive portfolio management will li+ely !hoose to invest in low !ost inde( funds with the
goal of mirroring the mar+etMs performan!e. "n investor who prefers a!tive portfolio
management will !hoose managed funds whi!h have the potential to outperform the mar+et.
Investors are generally !harged higher initial fees and annual management fees for a!tive
portfolio management.
3) Financial Dictionary
Banaging a large single portfolio or being employed by its owner to do so. -ortfolio
managers have the +nowledge and s+ill whi!h en!ourage people to put their investment
de!isions in the hands of a professional Gfor a feeH.
33
DEFINITION OF DISCRETIONARY PORTFOLIO
MANAGEMENT
BusinessDictionary.com
Investment a!!ount arrangement in whi!h an investment manager ma+es the buysell
de!isions without referring to the a!!ount owner G!lientH for every transa!tion. 0he manager%
however% must operate within the agreed upon limits to a!hieve the !lientMs stated investment
obIe!tives.
DEFINITIONS OF PRO1ECT PORTFOLIO MANAGEMENT
1) Internet.com - Webopedia
--B% short for project portfolio management% refers to a software pa!+age that enables
!orporate and business users to organi#e a series of proIe!ts into a single portfolio that will
provide reports based on the various proIe!t obIe!tives% !osts% resour!es% ris+s and other
pertinent asso!iations. -roIe!t portfolio management software allows the user% usually
management or e(e!utives within the !ompany% to review the portfolio whi!h will assist in
ma+ing +ey finan!ial and business de!isions for the proIe!ts.
2) Bitpipe.com
-roIe!t portfolio management organi#es a series of proIe!ts into a single portfolio
!onsisting of reports that !apture proIe!t obIe!tives% !osts% timelines% a!!omplishments%
resour!es% ris+s and other !riti!al fa!tors. =(e!utives !an then regularly review entire
portfolios% spread resour!es appropriately and adIust proIe!ts to produ!e the highest
departmental returns. "lso !alled as Enterprise Project management and PPM
34
MEANING OF PORTFOLIO MANAGERS
-ortfolio manager means any person who enters into a !ontra!t or arrangement with a !lient.
-ursuant to su!h arrangement he advises the !lient or underta+es on behalf of su!h !lient
management or administration of portfolio of se!urities or invests or manages the !lient/s funds.
" dis!retionary portfolio manager means a portfolio manager who e(er!ises or may under a
!ontra!t relating to portfolio management% e(er!ise any degree of dis!retion in respe!t of the
investment or management of portfolio of the portfolio se!urities or the funds of the !lient% as the
!ase may be. He shall independently or individually manage the funds of ea!h !lient in
a!!ordan!e with the needs of the !lient in a manner whi!h does not resemble the mutual fund.
" non dis!retionary portfolio manager shall manage the funds in a!!ordan!e with the
dire!tions of the !lient.
" portfolio manager by virtue of his +nowledge% ba!+ground and e(perien!e is e(pe!ted to
study the various avenues available for profitable investment and advise his !lient to enable the
latter to ma(imi#e the return on his investment and at the same time safeguard the funds invested.
35
SCOPE OF PORTFOLIO MANAGEMENT:
-ortfolio management is an art of putting money in fairly safe% *uite profitable and reasonably
in li*uid form. "n investor/s attempt to find the best !ombination of ris+ and return is the first and
usually the foremost goal. In !hoosing among different investment opportunities the following
aspe!ts ris+ management should be !onsidered;
a) 0he sele!tion of a level or ris+ and return that refle!ts the investor/s toleran!e for ris+ and
desire for return% i.e. personal preferen!es.
b) 0he management of investment alternatives to e(pand the set of opportunities available at
the investors a!!eptable ris+ level.
0he very ris+averse investor might !hoose to invest in mutual funds. 0he more ris+tolerant
investor might !hoose shares% if they offer higher returns. -ortfolio management in India is still in
its infan!y. "n investor has to !hoose a portfolio a!!ording to his preferen!es. 0he first preferen!e
normally goes to the ne!essities and !omforts li+e pur!hasing a house or domesti! applian!es. His
se!ond preferen!e goes to some !ontra!tual obligations su!h as life insuran!e or provident funds.
0he third preferen!e goes to ma+e a provision for savings re*uired for ma+ing day to day
payments. 0he ne(t preferen!e goes to short term investments su!h as @0I units and post offi!e
deposits whi!h provide easy li*uidity. 0he last !hoi!e goes to investment in !ompany shares and
debentures. 0here are number of !hoi!es and de!isions to be ta+en on the basis of the attributes of
ris+% return and ta( benefits from these shares and debentures. 0he final de!ision is ta+en on the
basis of alternatives% attributes and investor preferen!es.
,or most investors it is not possible to !hoose between managing one/s own portfolio. 0hey
!an hire a professional manager to do it. 0he professional managers provide a variety of servi!es
in!luding diversifi!ation% a!tive portfolio management% li*uid se!urities and performan!e of
duties asso!iated with +eeping tra!+ of investor/s money.
36
NEED FOR PORTFOLIO MANAGEMENT:
-ortfolio management is a pro!ess en!ompassing many a!tivities of investment in assets and
se!urities. It is a dynami! and fle(ible !on!ept and involves regular and systemati! analysis%
Iudgment and a!tion. 0he obIe!tive of this servi!e is to help the un+nown and investors with the
e(pertise of professionals in investment portfolio management. It involves !onstru!tion of a
portfolio based upon the investor/s obIe!tives% !onstraints% preferen!es for ris+ and returns and ta(
liability. 0he portfolio is reviewed and adIusted from time to time in tune with the mar+et
!onditions. 0he evaluation of portfolio is to be done in terms of targets set for ris+ and returns.
0he !hanges in the portfolio are to be effe!ted to meet the !hanging !ondition.
-ortfolio !onstru!tion refers to the allo!ation of surplus funds in hand among a variety of
finan!ial assets open for investment. -ortfolio theory !on!erns itself with the prin!iples governing
su!h allo!ation. 0he modern view of investment is oriented more go towards the assembly of
proper !ombination of individual se!urities to form investment portfolio.
" !ombination of se!urities held together will give a benefi!ial result if they grouped in a
manner to se!ure higher returns after ta+ing into !onsideration the ris+ elements.
0he modern theory is the view that by diversifi!ation ris+ !an be redu!ed. .iversifi!ation !an
be made by the investor either by having a large number of shares of !ompanies in different
regions% in different industries or those produ!ing different types of produ!t lines. Bodern
theory believes in the perspe!tive of !ombination of se!urities under !onstraints of ris+ and
returns.
37
OB1ECTIVES OF PORTFOLIO MANAGEMENT:
The major objectives of portfolio management are summarized as below:-
1) Security/Safety of Prinicpal: )e!urity not only involves +eeping the prin!ipal sum inta!t
but also +eeping inta!t its pur!hasing power inta!t.
2) Stability of Income: )o as to fa!ilitate planning more a!!urately and systemati!ally the
reinvestment !onsumption of in!ome.
3) Capital Growth: 0his !an be attained by reinvesting in growth se!urities or through
pur!hase of growth se!urities.
4) Marketability: i.e. is the !ase with whi!h a se!urity !an be bought or sold. 0his is
essential for providing fle(ibility to investment portfolio.
5) Liquidity i.e Nearness To Money: It is desirable to investor so as to ta+e advantage of
attra!tive opportunities up!oming in the mar+et.
6) Diversification: 0he basi! obIe!tive of building a portfolio is to redu!e ris+ of loss of
!apital and Q or in!ome by investing in various types of se!urities and over a wide range of
industries.
7) Favorable Tax Status: 0he effe!tive yield an investor gets form his investment depends
on ta( to whi!h it is subIe!t. 8y minimi#ing the ta( burden% yield !an be effe!tively
improved.
38
BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:
0here are two basi! prin!iples for effe!tive portfolio management whi!h are given below;
&. Effective investment planning for the investment in securities by considering the
following factors-
a- ,is!al% finan!ial and monetary poli!ies of the Jovt. of India and the
$eserve 8an+ of India.
b- Industrial and e!onomi! environment and its impa!t on industry.
-rospe!t in terms of prospe!tive te!hnologi!al !hanges% !ompetition in the mar+et%
!apa!ity utili#ation with industry and demand prospe!ts et!.
&&. Constant Review of Investment: It re*uires to review the investment in se!urities and to
!ontinue the selling and pur!hasing of investment in more profitable manner. ,or this
purpose they have to !arry the following analysis;
a- 0o assess the *uality of the management of the !ompanies in whi!h investment has been
made or proposed to be made.
b- 0o assess the finan!ial and trend analysis of !ompanies 8alan!e )heet and -rofit and Loss
"!!ounts to identify the optimum !apital stru!ture and better performan!e for the purpose
of withholding the investment from poor !ompanies.
c- 0o analy#e the se!urity mar+et and its trend in !ontinuous basis to arrive at a !on!lusion
as to whether the se!urities already in possession should be disinvested and new
se!urities be pur!hased. If so the timing for investment or disinvestment is also revealed.
39
CHAPTER 2
TYPES OF PORTFOLIO MANAGEMENT
There are various types of portfolio management:
Investment Management
It Portfolio Management
Project Portfolio Management
1. INVESMENT MANAGEMENT:
Investment management is the professional management of various se!urities Gshares%
bonds et!.H and assets Ge.g.% real estateH% to meet spe!ified investment goals for the benefit of the
investors. Investors may be institutions Ginsuran!e !ompanies% pension funds% !orporations et!.H
or private investors Gboth dire!tly via investment !ontra!ts and more !ommonly via !olle!tive
investment s!hemes e.g. mutual funds or =(!hange 0raded ,undsH.
0he term asset management is often used to refer to the investment management of
!olle!tive investments%Gnot ne!essarilyH whilst the more generi! fund management may refer to
all forms of institutional investment as well as investment management for private investors.
Investment managers who spe!iali#e in advisory or discretionary management on behalf of
Gnormally wealthyH private investors may often refer to their servi!es as wealth management or
portfolio management often within the !onte(t of so!alled Rprivate ban+ingR.
40
Fund manager Gor investment adviser in the @.).H refers to both a firm that provides
investment management servi!es and an individual who dire!ts fund management de!isions.
41
2. IT PORTFOLIO MANAGEMENT:
IT portfolio management is the appli!ation of systemati! management to large !lasses of
items managed by enterprise Information 0e!hnology GI0H !apabilities. =(amples of I0
portfolios would be planned initiatives% proIe!ts% and ongoing I0 servi!es Gsu!h as appli!ation
supportH. 0he promise of I0 portfolio management is the *uantifi!ation of previously mysterious
I0 efforts% enabling measurement and obIe!tive evaluation of investment s!enarios.
0he !on!ept is analogous to finan!ial portfolio management% but there are signifi!ant
differen!es. I0 investments are not li*uid% li+e sto!+s and bonds Galthough investment portfolios
may also in!lude illi*uid assetsH% and are measured using both finan!ial and nonfinan!ial
yardsti!+s Gfor e(ample% a balan!ed s!ore!ard approa!hHP a purely finan!ial view is not suffi!ient.
"t its most mature% I0 -ortfolio management is a!!omplished through the !reation of two
portfolios;
(i) Application Portfolio - Banagement of this portfolio fo!uses on !omparing spending on
established systems based upon their relative value to the organi#ation. 0he !omparison !an
be based upon the level of !ontribution in terms of I0 investment/s profitability.
"dditionally% this !omparison !an also be based upon the nontangible fa!tors su!h as
organi#ations/ level of e(perien!e with a !ertain te!hnology% users/ familiarity with the
42
appli!ations and infrastru!ture% and e(ternal for!es su!h as emergen!e of new te!hnologies
and obsoles!e of old ones.
(ii) Project Portfolio - 0his type of portfolio management spe!ially address the issues with
spending on the development of innovative !apabilities in terms of potential $1I and
redu!ing investment overlaps in situations where reorgani#ation or a!*uisition o!!urs. 0he
management issues with the se!ond type of portfolio management !an be Iudged in terms
of data !leanliness% maintenan!e savings% suitability of resulting solution and the relative
value of new investments to repla!e these proIe!ts.
3. PRO1ECT PORTFOLIO MANAGEMENT:
-roIe!t portfolio management organi#es a series of proIe!ts into a single portfolio !onsisting
of reports that !apture proIe!t obIe!tives% !osts% timelines% a!!omplishments% resour!es% ris+s and
other !riti!al fa!tors. =(e!utives !an then regularly review entire portfolios% spread resour!es
appropriately and adIust proIe!ts to produ!e the highest departmental returns.
-roIe!t management is the dis!ipline of planning% organi#ing and managing resour!es to
bring about the su!!essful !ompletion of spe!ifi! proIe!t goals and obIe!tives.
" proIe!t is a finite endeavor Ghaving spe!ifi! start and !ompletion datesH underta+en to
!reate a uni*ue produ!t or servi!e whi!h brings about benefi!ial !hange or added value. 0his
finite !hara!teristi! of proIe!ts stands in !ontrast to pro!esses% or operations% whi!h are
permanent or semipermanent fun!tional wor+ to repetitively produ!e the same produ!t or
servi!e. In pra!ti!e% the management of these two systems is often found to be *uite different%
and as su!h re*uires the development of distin!t te!hni!al s+ills and the adoption of separate
management.
43
CHAPTER: 3
PORTFOLIO MANAGEMENT PROCESS:
.!- THERE ARE THREE MA1OR ACTIVITIES INVOLVED IN AN
EFFICIENT PORTFOLIO MANAGEMENT WHICH ARE AS
FOLLOWS:-
a- Identifi!ation of assets or se!urities% allo!ation of investment and also identifying the
!lasses of assets for the purpose of investment.
b- 0hey have to de!ide the maIor weights% proportion of different assets in the portfolio by
ta+ing in to !onsideration the related ris+ fa!tors.
c- ,inally they sele!t the se!urity within the asset !lasses as identify.
0he above a!tivities are dire!ted to a!hieve the sole purpose of ma(imi#ing return and
minimi#ing ris+ on investment.
It is well +nown fa!t that portfolio manager balan!es the ris+ and return in a portfolio
investment. 9ith higher ris+ higher return may be e(pe!ted and vi!e versa.
(B) INVESTMENT DECISION:
Jiven a !ertain sum of funds% the investment de!isions basi!ally depend upon the following
fa!tors;
&. Objectives of Investment Portfolio: 0his is a !ru!ial point whi!h a ,inan!e Banager must
44
!onsider. 0here !an be many obIe!tives of ma+ing an investment. 0he manager of a
provident fund portfolio has to loo+ for se!urity and may be satisfied with none too high a
return% where as an aggressive investment !ompany be willing to ta+e high ris+ in order to
have high !apital appre!iation.
How the obIe!tives !an affe!t in investment de!ision !an be seen from the fa!t that the
@nit 0rust of India has two maIor s!hemes ; Its D!apital unitsE are meant for those who
wish to have a good !apital appre!iation and a moderate return% where as the ordinary unit
are meant to provide a steady return only. 0he investment manager under both the s!heme
will invest the money of the 0rust in different +inds of shares and se!urities. )o it is
obvious that the obIe!tives must be !learly defined before an investment de!ision is ta+en.
&&. Selection of Investment: Having defined the obIe!tives of the investment% the ne(t
de!ision is to de!ide the +ind of investment to be sele!ted. 0he de!ision what to buy has to
be seen in the !onte(t of the following;
a- 0here is a wide variety of investments available in mar+et i.e. =*uity shares% preferen!e
share% debentures% !onvertible bond% Jovt. se!urities and bond% !apital units et!. 1ut of
these what types of se!urities to be pur!hased.
b- 9hat should be the proportion of investment in fi(ed interest dividend se!urities and
variable dividend bearing se!uritiesO 0he fi(ed one ensures a definite return and thus a
lower ris+ but the return is usually not as higher as that from the variable dividend
bearing shares.
c- If the investment is de!ided in shares or debentures% then the industries showing a
potential in growth should be ta+en in first line. Industrywiseanalysis is important sin!e
various industries are not at the same level from the investment point of view. It is
important to re!ogni#e that at a parti!ular point of time% a parti!ular industry may have a
45
better growth potential than other industries. ,or e(ample% there was a time when Iute
industry was in great favour be!ause of its growth potential and high profitability% the
industry is no longer at this point of time as a growth oriented industry.
"- 1n!e industries with high growth potential have been identified% the ne(t step is to sele!t
the parti!ular !ompanies% in whose shares or se!urities investments are to be made.
46
FUNDAMENTAL ANALYSIS:
(A) FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED COMPANIES:
1ne of the first de!isions that an investment manager fa!es is to identify the industries whi!h
have a high growth potential. 0wo approa!hes are suggested in this regard. 0hey are;
a- Statistical Analysis of Past Performance:
" statisti!al analysis of the immediate past performan!e of the share pri!e indi!es of various
industries and !hanges there in related to the general pri!e inde( of shares of all industries should
be made. 0he $eserve 8an+ of India inde( numbers of se!urity pri!es published every month in
its bulletin may be ta+en to represent the behaviour of share pri!es of various industries in the
last few years. 0he related !hanges in the pri!e inde( of ea!h industry as !ompared with the
!hanges in the average pri!e inde( of the shares of all industries would show those industries
whi!h are having a higher growth potential in the past few years. It may be noted that an Industry
may not be remaining a growth Industry for all the time. )o he shall now have to ma+e an
assessment of the various Industries +eeping in view the present potentiality also to finali#e the
list of Industries in whi!h he will try to spread his investment.
b- Assessing the Intrinsic Value of an Industry/Company:
"fter an investment manager has identified statisti!ally the industries in the share of whi!h the
investors show interest% he would assess the various fa!tors whi!h influen!e the value of a
parti!ular share. 0hese fa!tors generally relate to the strengths and wea+nesses of the !ompany
under !onsideration% Chara!teristi!s of the industry within whi!h the !ompany fails and the
national and international e!onomi! s!ene. It is the Iob of the investment manager to e(amine
and weigh the various fa!tors and Iudge the *uality of the share or the se!urity under
!onsideration. 0his approa!h is +nown as the intrinsi! value approa!h.
0he maIor obIe!tive of the analysis is to determine the relative *uality and the *uantity of the
se!urity and to de!ide whether or not is se!urity is good at !urrent mar+ets pri!es. In this% both
*ualitative and *uantitative fa!tors are to be !onsidered.
47
(B) INDUSTRY ANALYSIS
,irst of all% an assessment will have to be made regarding all the !onditions and fa!tors relating
to demand of the parti!ular produ!t% !ost stru!ture of the industry and other e!onomi! and
Jovernment !onstraints on the same. "s we have dis!ussed earlier% an appraisal of the parti!ular
industry/s prospe!t is essential and the basi! profitability of any !ompany is dependent upon the
e!onomi! prospe!t of the industry to whi!h it belongs. 0he following fa!tors may parti!ularly be
+ept in mind while assessing to fa!tors relating to an industry.
.i- Demand and Supply Pattern for the Industries Products and Its Growth Potential:
0he main important aspe!t is to see the li+ely demand of the produ!ts of the industry and
the gap between demand and supply. 0his would refle!t the future growth prospe!ts of the
industry. In order to +now the future volume and the value of the output in the ne(t ten
years or so% the investment manager will have to rely on the various demand fore!asts made
by various agen!ies li+e the planning !ommission% Chambers of Commer!e and institutions
li+e FC"=$% et!.
0he management e(pert identifies fives stages in the life of an industry. 0hese are
DIntrodu!tion% development% rapid growth% maturity and de!lineE. If an industry has already
rea!hed the maturity or de!line stage% its future demand potential is not li+ely to be high.
48
.ii- Profitability: It is a vital !onsideration for the investors as profit is the measure of
performan!e and a sour!e of earning for him. )o the !ost stru!ture of the industry as related
to its sale pri!e is an important !onsideration. In India there are many industries whi!h have
a growth potential on a!!ount of good demand position. 0he other point to be !onsidered is
the ratio analysis% espe!ially return on investment% gross profit and net profit ratio of the
e(isting !ompanies in the industry. 0his would give him an idea about the profitability of
the industry as a whole.
.iii- Particular Characteristics of the Industry: =a!h industry has its own !hara!teristi!s%
whi!h must be studied in depth in order to understand their impa!t on the wor+ing of the
industry. 8e!ause the industry having a fast !hanging te!hnology be!ome obsolete at a
faster rate. )imilarly% many industries are !hara!teri#ed by high rate of profits and losses in
alternate years. )u!h flu!tuations in earnings must be !arefully e(amined.
.i#- Labour Management Relations in the Industry: 0he state of labourmanagement
relationship in the parti!ular industry also has a great deal of influen!e on the future
profitability of the industry. 0he investment manager should% therefore% see whether the
industry under analysis has been maintaining a !ordial relationship between labour and
management.
1n!e the industry/s !hara!teristi!s have been analy#ed and !ertain industries with growth
potential identified% the ne(t stage would be to underta+e and analy#e all the fa!tors whi!h show
the desirability of various !ompanies within an industry group from investment point of view.
49
(C) COMPANY ANALYSIS:
0o sele!t a !ompany for investment purpose a number of *ualitative fa!tors have to be seen.
8efore pur!hasing the shares of the !ompany% relevant information must be !olle!ted and
properly analy#ed. An illustrative list of factors which help the analyst in taking the
investment decision is given below. However% it must be emphasi#ed that the past performan!e
and information is relevant only to the e(tent it indi!ates the future trends. Hen!e% the investment
manager has to visuali#e the performan!e of the !ompany in future by analy#ing its past
performan!e.
/- Size and Ranking: " rough idea regarding the si#e and ran+ing of the !ompany within
the e!onomy% in general% and the industry% in parti!ular% would help the investment
manager in assessing the ris+ asso!iated with the !ompany. In this regard the net !apital
employed% the net profits% the return on investment and the sales volume of the !ompany
under !onsideration may be !ompared with similar data of other !ompany in the same
industry group. It may also be useful to assess the position of the !ompany in terms of
te!hni!al +nowhow% resear!h and development a!tivity and pri!e leadership.
0- Growth Record: 0he growth in sales% net in!ome% net !apital employed and earnings per
share of the !ompany in the past few years must be e(amined. 0he following three
growth indi!ators may be parti!ularly loo+ed in to GaH -ri!e earnings ratio% GbH -er!entage
growth rate of earnings per annum and G!H -er!entage growth rate of net blo!+ of the
!ompany. 0he pri!e earnings ratio is an important indi!ator for the investment manager
sin!e it shows the number the times the earnings per share are !overed by the mar+et
pri!e of a share. 0heoreti!ally% this ratio should be same for two !ompanies with similar
features. However% this is not so in pra!ti!e due to many fa!tors. Hen!e% by a !omparison
of this ratio pertaining to different !ompanies the investment manager !an have an idea
about the image of the !ompany and !an determine whether the share is underpri!ed or
overpri!ed. "n evaluation of future growth prospe!ts of the !ompany should be !arefully
made. 0his re*uires the analysis of the e(isting !apa!ities and their utili#ation% proposed
e(pansion and diversifi!ation plans and the nature of the !ompany/s te!hnology.
50
0he e(isting !apa!ity utili#ation levels !an be +nown from the *uantitative information
given in the published profit and loss a!!ounts of the !ompany. 0he plans of the
!ompany% in terms of e(pansion or diversifi!ation% !an be +nown from the dire!tors
reports the !hairman/s statements and from the future !apital !ommitments as shown by
way of notes in the balan!e sheets. 0he nature of te!hnology of a !ompany should be
seen with referen!e to te!hnologi!al developments in the !on!erned fields% the possibility
of its produ!t being superseded of the possibility of emergen!e of more effe!tive method
of manufa!turing.
Jrowth is the single most important fa!tor in !ompany analysis for the purpose of
investment management. " !ompany may have a good re!ord of profits and performan!e
in the pastP but if it does not have growth potential% its shares !annot be rated high from
the investment point of view.
(D) FINANCIAL ANALYSIS:
"n analysis of finan!ial for the past few years would help the investment manager in
understanding the finan!ial solven!y and li*uidity% the effi!ien!y with whi!h the funds are used%
the profitability% the operating effi!ien!y and operating leverages of the !ompany. ,or this
purpose !ertain fundamental ratios have to be !al!ulated.
,rom the investment point of view% the most important figures are earnings per share% pri!e
earnings ratios% yield% boo+ value and the intrinsi! value of the share. 0he five elements may be
!al!ulated for the past ten years or so and !ompared with similar ratios !omputed from the
finan!ial a!!ounts of other !ompanies in the industry and with the average ratios of the industry
as a whole. 0he yield and the asset ba!+ing of a share are important !onsiderations in a de!ision
regarding whether the parti!ular mar+et pri!e of the share is proper or not.
6arious other ratios to measure profitability% operating effi!ien!y and turnover effi!ien!y of the
!ompany may also be !al!ulated. 0he return on owner/s investment% !apital turnover ratio and
the !ost stru!ture ratios may also be wor+ed out. 0o e(amine the finan!ial solven!y or li*uidity
of the !ompany% the investment manager may wor+ out !urrent ratio% li*uidity ratio% debt e*uity
51
ratio% et!. 0hese ratios will provide an overall view of the !ompany to the investment analyst. He
!an analy#e its strengths and wea+ness and see whether it is worth the ris+ or not.
(i) Quality of Management: 0his is an intangible fa!tor. 7et it has a very important bearing
on the value of the shares. =very investment manager +nows that the shares of !ertain
business houses !ommand a higher premium than those of similar !ompanies managed by
other business houses. 0his is be!ause of the *uality of management% the !onfiden!e that
the investors have in a parti!ular business house% its poli!y visSvis its relationship with
the investors% dividend and finan!ial performan!e re!ord of other !ompanies in the same
group% et!.
0his is perhaps the reason that an investment manager always gives a !lose loo+ to the
management of the !ompany whose shares he is to invest. Nuality of management has to be
seen with referen!e to the e(perien!e% s+ill and integrity of the persons at the helm of the
affairs of the !ompany. 0he poli!y of the management regarding relationship with the share
holders is an important fa!tor sin!e !ertain business houses believe in generous dividend
and bonus distributions while others are rather !onservative.
(ii) Location and labour management relations: 0he lo!ations of the !ompany/s
manufa!turing fa!ilities determine its e!onomi! viability whi!h depends on the availability
of !ru!ial inputs li+e power% s+illed labour and raw materials et!. Fearness to mar+et is also
a fa!tor to be !onsidered.
In the past few years% the investment manager has begun loo+ing into the state of labour
management relations in the !ompany under !onsideration and the area where it is lo!ated.
.iii- Pattern of Existing Stock Holding: "n analysis of the pattern of the e(isting sto!+
holdings of the !ompany would also be relevant. 0his would show the sta+e of various
parties asso!iated with the !ompany. "n interesting !ase in this regard is that of the -unIab
Fational 8an+ in whi!h the L.I.C. and other finan!ial institutions had substantial holdings.
9hen the ban+ was nationali#ed% the residual !ompany proposed a s!heme whereby those
shareholders% who wish to opt out% !ould re!eive a !ertain amount as !ompensation in !ash.
52
It was only at the instant and bargaining strength of institutional investors that the
!ompensation offered to the shareholders% who wish to opt out of the !ompany% was raised
!onsiderably.
.i#- Marketability of the Shares: "nother important !onsideration for an investment manager
is the mar+etability of the shares of the !ompany. Bere listing of the share on the sto!+
e(!hange does not automati!ally mean that the share !an be sold or pur!hased at will.
0here are many shares whi!h remain ina!tive for long periods with no transa!tions being
affe!ted.
0o pur!hase or sell su!h s!rips is a diffi!ult tas+. In this regard% dispersal of share holding
with spe!ial referen!e to the e(tent of publi! holding should be seen. 0he other relevant
fa!tors are the spe!ulative interest in the parti!ular s!rip% the parti!ular sto!+ e(!hange
where it is traded and the volume of trading.
,undamental analysis thus is basi!ally an e(amination of the e!onomi!s and finan!ial aspe!ts of a
!ompany with the aim of estimating future earnings and dividend prospe!t. It in!luded an analysis
of the ma!ro e!onomi! and politi!al fa!tors whi!h will have an impa!t on the performan!e of the
firm. "fter having analy#ed all the relevant information about the !ompany and its relative
strength visSvis other firm in the industry% the investor is e(pe!ted to de!ide whether he should
buy or sell the se!urities.
53
(C) TIMING OF PURCHASES:-
0he timing of dealings in the se!urities% spe!ially shares is of !ru!ial importan!e% be!ause
after !orre!tly identifying the !ompanies one may lose money if the timing is bad due to wide
flu!tuation in the pri!e of shares of that !ompanies.
0he de!ision regarding timing of pur!hases is parti!ularly diffi!ult be!ause of !ertain
psy!hologi!al fa!tors. It is obvious that if a person wishes to ma+e any gains% he should buy
!heap and sell dear% i.e. buy when the share are selling at a low pri!e and sell when they are at a
higher pri!e. 8ut in pra!ti!al it is a diffi!ult tas+.
9hen the pri!es are rising in the mar+et i.e. there is bull phase% everybody Ioins in buying
without any delay be!ause every day the pri!es tou!h a new high. Later when the bear fa!e starts%
pri!es tumble down every day and everybody starts !ounting the losses. 0he ordinary investor
regretted su!h situation by thin+ing why he did not sell his shares in previous day and ultimately
sell at a lower pri!e. 0his +ind of investment de!ision is entirely devoid of any sense of timing.
54
In short we can conclude by saying that Investment management is a complex activity
which may be broken down into the following steps:
1) Specification Of Investment Objectives And Constraints ;
0he typi!al obIe!tives sought by investors are !urrent in!ome% !apital appre!iation% and
safety of prin!iple. 0he relative importan!e of these obIe!tives should be spe!ified further the
!onstraints arising from li*uidity% time hori#on% ta( and spe!ial !ir!umstan!es must be
identified.
2) Choice Of The Asset Mix :
0he most important de!ision in portfolio management is the asset mi( de!ision very
broadlyP this is !on!erned with the proportions of >sto!+s/ Ge*uity shares and unitsQshares of
e*uityoriented mutual fundsH and >bonds/ in the portfolio.
0he appropriate >sto!+bond/ mi( depends mainly on the ris+ toleran!e and investment
hori#on of the investor.
55
ELEMENTS OF PORTFOLIO MANAGEMENT:
Portfolio management is on-going process involving the following basic tasks;
Identifi!ation of the investor/s obIe!tives% !onstraints and preferen!es.
)trategies are to be developed and implemented in tune with investment poli!y
formulated.
$eview and monitoring of the performan!e of the portfolio.
,inally the evaluation of the portfolio
56
Technique`s Of Portfolio Management:
"s of now the under noted te!hni*ue of portfolio management; are in vogue in our !ountry.
1) Equity Portfolio: It is influen!ed by internal and e(ternal fa!tors the internal fa!tors
affe!t the inner wor+ing of the !ompany/s growth plans are analy#ed with referen!ed to
8alan!e sheet% profit C loss aQ! Ga!!ountH of the !ompany.
"mong the e(ternal fa!tor are !hanges in the government poli!ies% 0rade !y!le/s% -oliti!al
stability et!.
2) Equity Stock Analysis ; @nder this method the probable future value of a share of a
!ompany is determined it !an be done by ratio/s of earning per share of the !ompany and
pri!e earnings ratio
EARNING PER SHARE _ PROFIT AFTER TAX__
NO. OF EQUITY SHARES
PRICE EARNING RATIO _MARKET PRICE (PER SHARE)_
EARNING PER SHARE
1ne !an estimate trend of earning by =-)% whi!h refle!ts trends of earning *uality of
!ompany% dividend poli!y% and *uality of management.
-ri!e =arnings ratio indi!ate a !onfiden!e of mar+et about the !ompany future% a high rating is
preferable.
57
The following points must be considered by portfolio managers while analyzing the
securities.
1) Nature of the industry and its product: Long term trends of industries% !ompetition
within% and outside the industry% 0e!hni!al !hanges% labour relations% sensitivity% to 0rade
!y!le.
2) Industrial analysis of prospective earnings, cash flows, working capital, dividends,
etc.
3) Ratio analysis: Ratios su!h as debt e*uity ratio% !urrent ratio% net worth% profit earnings
ratio% returns on investment% are wor+ed out to de!ide the portfolio.
0he wise prin!iple of portfolio management suggests that ~Buy when the market is low or
BEARISH, and sell when the market is rising or BULLISH.
)to!+ mar+et operation !an be analy#ed by;
aH Fundamental approach: - 8ased on intrinsi! value of shares.
bH Technical approach: - 8ased on .ow 2one/s 0heory% $andom 9al+ 0heory% et!.
Prices are based upon demand and supply of the market .
1bIe!tives are ma(imi#ation of wealth and minimi#ation of ris+.
.iversifi!ation redu!es ris+ and volatility.
6ariable returns% high illi*uidityP et!.
58
CHAPTER - 4
RISK - RETURN ANALYSIS
RISK ON PORTFOLIO :
0he e(pe!ted returns from individual se!urities !arry some degree of ris+. $is+ on the
portfolio is different from the ris+ on individual se!urities. 0he ris+ is refle!ted in the variability
of the returns from #ero to infinity. $is+ of the individual assets or a portfolio is measured by the
varian!e of its return. 0he e(pe!ted return depends on the probability of the returns and their
weighted !ontribution to the ris+ of the portfolio. 0hese are two measures of ris+ in this !onte(t
one is the absolute deviation and other standard deviation.
Bost investors invest in a portfolio of assets% be!ause as to spread ris+ by not putting all eggs
in one bas+et. Hen!e% what really matters to them is not the ris+ and return of sto!+s in isolation%
but the ris+ and return of the portfolio as a whole. $is+ is mainly redu!ed by .iversifi!ation.
Following are the some of the types of Risk:
1) Interest Rate Risk: 0his arises due to the variability in the interest rates from time to
time. " !hange in the interest rate establishes an inverse relationship in the pri!e of the
se!urity i.e. pri!e of the se!urity tends to move inversely with !hange in rate of interest%
long term se!urities show greater variability in the pri!e with respe!t to interest rate
!hanges than short term se!urities.
Interest rate ris+ vulnerability for different se!urities is as under;
TYPES RISK EXTENT
Cash =*uivalent Less vulnerable to interest rate ris+.
Long 0erm 8onds Bore vulnerable to interest rate ris+.
59
2) Purchasing Power Risk: It is also +nown as inflation ris+ also emanates from the very
fa!t that inflation affe!ts the pur!hasing power adversely. Fominal return !ontains both
the real return !omponent and an inflation premium in a transa!tion involving ris+ of the
above type to !ompensate for inflation over an investment holding period. Inflation rates
vary over time and investors are !aught unaware when rate of inflation !hanges
une(pe!tedly !ausing erosion in the value of reali#ed rate of return and e(pe!ted return.
-ur!hasing power ris+ is more in inflationary !onditions espe!ially in respe!t of bonds
and fi(ed in!ome se!urities. It is not desirable to invest in su!h se!urities during
inflationary periods. -ur!hasing power ris+ is however% less in fle(ible in!ome se!urities
li+e e*uity shares or !ommon sto!+ where rise in dividend in!ome offsets in!rease in the
rate of inflation and provides advantage of !apital gains.
3) Business Risk: 8usiness ris+ emanates from sale and pur!hase of se!urities affe!ted by
business !y!les% te!hnologi!al !hanges et!. 8usiness !y!les affe!t all types of se!urities
i.e. there is !heerful movement in boom due to bullish trend in sto!+ pri!es whereas
bearish trend in depression brings down fall in the pri!es of all types of se!urities during
depression due to de!line in their mar+et pri!e.
4) Financial Risk: It arises due to !hanges in the !apital stru!ture of the !ompany. It is also
+nown as leveraged ris+ and e(pressed in terms of debte*uity ratio. =(!ess of ris+ visS
vis e*uity in the !apital stru!ture indi!ates that the !ompany is highly geared. "lthough a
leveraged !ompany/s earnings per share are more but dependen!e on borrowings e(poses
it to ris+ of winding up for its inability to honor its !ommitments towards lender or
!reditors. 0he ris+ is +nown as leveraged or finan!ial ris+ of whi!h investors should be
aware and portfolio managers should be very !areful.
5) Systematic Risk or Market Related Risk: )ystemati! ris+s affe!ted from the entire
mar+et are Gthe problems% raw material availability% ta( poli!y or government poli!y%
60
inflation ris+% interest ris+ and finan!ial ris+H. It is managed by the use of 8eta of different
!ompany shares.
6) Unsystematic Risks: 0he unsystemati! ris+s are mismanagement% in!reasing inventory%
wrong finan!ial poli!y% defe!tive mar+eting et!. this is diversifiable or avoidable be!ause
it is possible to eliminate or diversify away this !omponent of ris+ to a !onsiderable
e(tent by investing in a large portfolio of se!urities. 0he unsystemati! ris+ stems from
ineffi!ien!y magnitude of those fa!tors different form one !ompany to another.
RISK RETURN ANALYSIS:
"ll investment has some ris+. Investment in shares of !ompanies has its own ris+ or
un!ertaintyP these ris+s arise out of variability of yields and un!ertainty of appre!iation or
depre!iation of share pri!es% losses of li*uidity et!
0he risk over time !an be represented by the varian!e of the returns while the return over
time is !apital appre!iation plus payout% divided by the pur!hase pri!e of the share.

Formally% the higher the ris+ that the investor ta+es% the higher is the return. 0here is%
however% a ris+ less return on !apital of about 12L whi!h is the ban+% rate !harged by the $.8.I
or long term% yielded on government se!urities at around 13L to 15L. 0his ris+ less return refers
to la!+ of variability of return and no un!ertainty in the repayment or !apital. 8ut other ris+s su!h
61
as loss of li*uidity due to parting with money et!.% may however remain% but are rewarded by the
total return on the !apital.
$is+return is subIe!t to variation and the obIe!tives of the portfolio manager are to redu!e
that variability and thus redu!e the ris+ by !hoosing an appropriate portfolio.
0raditional approa!h advo!ates that one se!urity holds the better% it is a!!ording to the modern
approa!h diversifi!ation should not be *uantity that should be related to the *uality of s!ripts
whi!h leads to *uality of portfolio.
=(perien!e has shown that beyond the !ertain se!urities by adding more se!urities e(pensive.
RETURNS ON PORTFOLIO;
=a!h se!urity in a portfolio !ontributes return in the proportion of its investments in
se!urity. 0hus the portfolio e(pe!ted return is the weighted average of the e(pe!ted return% from
ea!h of the se!urities% with weights representing the proportions share of the se!urity in the total
investment. 9hy does an investor have so many se!urities in his portfolioO If the se!urity "8C
gives the ma(imum return why not he invests in that se!urity all his funds and thus ma(imi#e
returnO 0he answer to this *uestions lie in the investor/s per!eption of ris+ atta!hed to
investments% his obIe!tives of in!ome% safety% appre!iation% li*uidity and hedge against loss of
value of money et!. this pattern of investment in different asset !ategories% types of investment%
et!.% would all be des!ribed under the !aption of diversifi!ation% whi!h aims at the redu!tion or
even elimination of nonsystemati! ris+s and a!hieve the spe!ifi! obIe!tives of investors.
62
CHAPTER: 5
PORTFOLIO THEORIES
I. DOW 1ONES THEORY:
0he .19 21F=) 0H=1$7 is probably the most popular theory regarding the behavior of
sto!+ mar+et pri!es. 0he theory derives its name from Charles H. .ow% who established the .ow
2ones C Co. and was the first editor of the 9all )treet 2ournal ? a leading publi!ation on
finan!ial and e!onomi! matters in the @.).". "lthough .ow never gave a proper shape to the
theory% ideas have been e(panded and arti!ulated by many of his su!!essors.
0he .ow 2ones theory !lassifies the movement of the pri!es on the share mar+et into three maIor
!ategories;
1. -rimary Bovements%
2. )e!ondary Bovements and
3. .aily ,lu!tuations.
1) Primary Movements: 0hey refle!t the trend of the sto!+ mar+et and last from one year
to three years% or sometimes even more. If the long range behavior of mar+et pri!es is
seen% it will be observed that the share mar+ets go through definite phases where the
pri!es are !onsistently rising or falling. 0hese phases are +nown as bull and bear phases.
-3
-2
-1 03
02
01
Graph 1
63
.uring a bull phase% the basi! trend is that of rise in pri!es. Jraph 1 above shows the
behavior of sto!+ mar+et pri!es in bull phase.
7ou would noti!e from the graph that although the pri!es fall after ea!h rise% the basi!
trend is that of rising pri!es. "s !an be seen from the graph that ea!h trough pri!es rea!h% is at
a higher level than the earlier one. )imilarly% ea!h pea+ that the pri!es rea!h is on a higher
level than the earlier one. 0hus -2 is higher than -1 and 02 is higher than 01. 0his means that
pri!es do not rise !onsistently even in a bull phase. 0hey rise for some time and after ea!h
rise% they fall. However% the falls are of a lower magnitude then earlier. "s a result% pri!es
rea!h higher levels with ea!h rise.
1n!e the pri!es have risen very high% the bear phase in bound to start i.e.% pri!e will start
falling. Jraph 2 shows the typi!al behavior of pri!es on the sto!+ e(!hange in the !ase of a
-3

-2
01 -1
02
03
Graph 2
8ear phase. It would be seen that pri!es are not falling !onsistently and% after ea!h fall% there
is a rise in pri!es. However% the rise is not mu!h as to ta+e the pri!es higher than the previous
pea+. It means that ea!h pea+ and trough is now lower than the previous pea+ and trough.
0he theory argues that primary movements indi!ate basi! trends in the mar+et. It states
that if !y!li!al swings of sto!+ mar+et pri!es indi!es are su!!essively higher% the mar+et
trend is up and there is a bull mar+et. 1n the !ontrary% if su!!essive highs and low are
su!!essively lower% the mar+et is on a downward trend and we are in bear mar+et. 0his
64
theory thus relies upon a behavior of the indi!es of share mar+et pri!es in per!eiving the
trend in the mar+et.
2) Secondary Movements: 9e have seen that even when the primary trend is upward% there
are also downward movements of pri!es. )imilarly% even where the primary trend is
downward% there is upward movement of pri!es also. 0hese movements are +nown as
se!ondary movements and are shorter in duration and are opposite in dire!tion to the
primary movements. 0hese movements normally last from three wee+s to three months
and retra!e 1Q3 to 2Q3 of the previous advan!e in a bull mar+et of previous fall in the bear
mar+et.
3) Daily Movements : 0here are irregular flu!tuations whi!h o!!ur every day in the mar+et.
0hese flu!tuations are without any definite trend. 0hus is the daily share mar+et pri!e
inde( for a few months are plotted on the graph it will show both upward and downward
flu!tuations. 0hese flu!tuations are the result of spe!ulative fa!tor. "n investment
manger really is not interested in the short run flu!tuations in share pri!es sin!e he is not
a spe!ulator. It may be reiterated that anyone who tries to gain from short run flu!tuations
in the sto!+ mar+et% !an ma+e money only be sheer !han!e. 0he investment manager
should s!rupulously +eep away from the daily flu!tuations of the mar+et. He is not a
spe!ulator and should always resist the temptation of spe!ulating. )u!h a temptation is
always very attra!tive but must always be resisted. )pe!ulation is beyond the s!ope of the
Iob of an investment manager.
Timing of investment decisions on the basis of Dow 1ones Theory:
Ideally spea+ing the investment manage would li+e to pur!hase shares at a time when they have
rea!hed the lowest trough and sell them at a time when they rea!h the highest pea+. However% in
pra!ti!e% this seldom happens. =ven the most astute investment manager !an never +now when
the highest pea+ or the lowest through have been rea!hed. 0herefore% he has to time his de!ision
in su!h a manner that he buys the shares when they are on the rise and sells then when they are
65
on the fall. It means that he should be able to identify e(a!tly when the falling or the rising trend
has begun.
0his is te!hni!ally +nown as identifi!ation of the turn in the share mar+et pri!es. Identifi!ation of
this turn is diffi!ult in pra!ti!e be!ause of the fa!t that% even in a rising mar+et% pri!es +eep on
falling as a part of the se!ondary movement. )imilarly even in a falling mar+et pri!es +eep on
rising temporarily. How to be !ertain that the rise in pri!es or fall in the same in due to a real turn
in pri!es from a bullish to a bearish phase or vi!e versa or that it is due only to short run
spe!ulative trendsO
.ow 2ones 0heory identifies the turn in the mar+et pri!es by seeing whether the su!!essive pea+s
and troughs are higher or lower than earlier.
II. RANDOM WALK THEORY:
0he first spe!ifi!ation of effi!ient mar+ets and their relationship to the randomness of pri!es
for things traded in the mar+et goes to )amuelson and Bandelbrot. ~Samuelson has proved in
1965 that if a market has zero transaction costs, if all available information is free to all
interested parties, and if all market participants and potential participants have the same
horizons and expectations about prices, the market will be efficient and prices will fluctuate
randomly.
"!!ording to the $andom 9al+ 0heory% the !hanges in pri!es of sto!+ show independent
behavior and are dependent on the new pie!es of information that are re!eived but within
themselves are independent of ea!h other. 9henever a new pri!e of information is re!eived in the
sto!+ mar+et% the mar+et independently re!eives this information and it is independent and
separate from all the other pri!es of information. ,or e(ample% a sto!+ is selling at $s. 5' based
on e(isting information +nown to all investors. "fterwards% the news of a stri+e in that !ompany
will bring down the sto!+ pri!e to $s. 3' the ne(t day. 0he sto!+ pri!e further goes down to $s.
2&. 0hus% the first fall in sto!+ pri!e from $s. 5' to $s. 3' is !aused be!ause of some information
about the stri+e. 8ut the se!ond fall in the pri!e of a sto!+ from $s. 3' to $s. 2& is due to
additional information on the type of stri+e. 0herefore% ea!h pri!e !hange is independent of the
66
other be!ause ea!h information has been ta+en in% by the sto!+ mar+et and separately
disseminated. However% independent pie!es of information% when they !ome together
immediately after ea!h other show that the pri!e is falling but ea!h pri!e fall is independent of the
other pri!e fall.
0he basi! essential fa!t of the $andom 9al+ 0heory is that the information on sto!+ pri!es is
immediately and fully spread over that other investors have full +nowledge of the information.
0he response ma+es the movement of pri!es independent of ea!h other. 0hus% it may be said that
the pri!es have an independent nature and therefore% the pri!e of ea!h day is different. 0he theory
further states that the finan!ial mar+ets are so !ompetitive that there is immediate pri!e
adIustment. It is due to the effe!tive !ommuni!ation system through whi!h information !an be
disturbed almost anywhere in the !ountry. 0his speed of information determines the effi!ien!y of
the mar+et.
&&&. CAPITAL ASSETS PRICING MODEL (CAPM): C"-B provides a
!on!eptual framewor+ for evaluating any investment de!ision. It is used to estimate the
e(pe!ted return of any portfolio with the following formula;
E (Rp) Rf +Bp (E( Rm) - Rf )
Where,
E(Rp) T =(pe!ted return of the portfolio
Rf T $is+ free rate of return
Bp T 8eta portfolio i.e. mar+et sensitivity inde(
E(Rm) T =(pe!ted return on mar+et portfolio
E(Rm)-Rf] T Bar+et ris+ premium
0he above model of portfolio management !an be used effe!tively to;
67
=stimate the re*uired rate of return to investors on !ompany/s !ommon sto!+.
=valuate ris+y investment proIe!ts involving real "ssets.
=(plain why the use of borrowed fund in!reases the ris+ and in!reases the rate of return.
$edu!e the ris+ of the firm by diversifying its proIe!t portfolio.
&*. MOVING AVERAGE: It refers to the mean of the !losing pri!e whi!h !hanges
!onstantly and moves ahead in time% there by en!ompasses the most re!ent days and deletes
the old one.
*. MODERN PORTFOLIO THEORY: Bodern -ortfolio 0heory *uantifies the
relationship between ris+ and return and assumes that an investor must be !ompensated for
assuming ris+. It believes in the ma(imi#ation of return through a !ombination of
se!urities. 0he theory states that by !ombining se!urities of low ris+s with se!urities of
high ris+s su!!ess !an be a!hieved in ma+ing a !hoi!e of investments. 0here !an be various
!ombinations of se!urities. 0he modern theory points out that the ris+ of portfolio !an be
redu!ed by diversifi!ation. Harry Markowitz and William Sharpe have developed this
theory.
*&. MARKOWITZ THEORY: Bar+owit# has suggested a systemati! sear!h for optimal
portfolio. "!!ording to him% the portfolio manager has to ma+e probabilisti! estimates of
the future performan!es of the se!urities and analyse these estimates to determine an
effi!ient set of portfolios. 0hen the optimum set of portfolio !an be sele!ted in order to suit
the needs of the investors. 0he following are the assumptions of Bar+owit# 0heory;
68
Investors ma+e de!isions on the basis of e(pe!ted utility ma(imi#ation.
In an effi!ient mar+et% all investors rea!t with full fa!ts about all se!urities in the
mar+et.
Investors/ utility is the fun!tion of ris+ and return on se!urities.
0he se!urity returns are !orelated to ea!h other by !ombining the different
se!urities.
0he !ombination of se!urities is made in su!h a way that the investor gets
ma(imum return with minimum of ris+.
"n effi!ient portfolio e(ists% when there is lowest level of ris+ for a spe!ified level
of e(pe!ted return and highest e(pe!ted return for a spe!ified amount of portfolio
ris+.
0he ris+ of portfolio !an be redu!ed by adding investments in the portfolio.
*&&. SHARPE`S THEORY: 9illiam )harpe has suggested a simplified method of
diversifi!ation of portfolios. He has made the estimates of the e(pe!ted return and
varian!e of inde(es whi!h are related to e!onomi! a!tivity. )harpe/s 0heory assumes that
se!urities returns are related to ea!h other only through !ommon relationships with basi!
underlying fa!tor i.e. mar+et return inde(. Individual se!urities return is determined
solely by random fa!tors and on its relationship to this underlying fa!tor with the
following formula;
R
i
a
i +
B
i
I + e
i
Where% R
i
refers to e(pe!ted return on se!urity
a
i
the inter!ept of a straight line or alpha !oeffi!ient

B
i
slope of straightline or beta !oeffi!ient
I level of mar+et return inde(
69
e
i
error% i.e. residual ris+ of the !ompany.
70
RULES TO BE FOLLOWED BEFORE INVESTMENT IN
PORTFOLIO`S
1) Compile the finan!ials of the !ompanies in the immediate past 3 years su!h as turnover%
gross profit% net profit before ta(% !ompare the profit earning of !ompany with that of the
industry average nature of produ!t manufa!ture servi!e render and it future demand
%+now about the promoters and their ba!+ ground% dividend tra!+ re!ord% bonus shares in
the past 3 to & years %refle!ts !ompany/s !ommitment to share holders the relevant
information !an be a!!essed from the $.C G$egistrant of CompaniesH published
finan!ial results finan!ed *uarters% Iournals and ledgers.
2) 9at!h out the highs and lows of the s!ripts for the past 2 to 3 years and their timing
!y!li!al s!ripts have a tenden!y to repeat their performan!e% this hypothesis !an be true
of all other finan!ial%
3) 0he higher the trading volume higher is li*uidity and still higher the !han!e of
spe!ulation% it is futile to invest in su!h shares who/s daily movements !annot be +ept
tra!+% if you want to reap ri!h returns +eep investment over along hori#on and it will
offset the wild intraday trading flu!tuation/s% the minor movement of s!ripts may be
ignored% we must remember that share mar+et moves in phases and the span of ea!h
phase is 4 months to & years.
71
CHAPTER 6
PERSONS INVOLVED IN PORTFOLIO MANAGEMENT
1) INVESTOR:
"re the people who are interested in investing their fundsO
2) PORTFOLIO MANAGERS:
Is a person who is in the wa+e of a !ontra!t agreement with a !lient% advi!es or dire!ts or
underta+es on behalf of the !lients% the management or distribution or management of the funds of
the !lient as the !ase may be.
3) DISCRETIONARY PORTFOLIO MANAGER:
Beans a manager who e(er!ise under a !ontra!t relating to a portfolio management e(er!ise
any degree of dis!retion as to the investment or management of portfolio or se!urities or funds of
!lients as the !ase may be. 0he relationship between an investor and portfolio manager is of a
highly intera!tive nature.
0he portfolio manager !arries out all the transa!tions pertaining to the investor under the
power of attorney during the last two de!ades% and in!reasing !omple(ity was witnessed in the
!apital mar+et and its trading pro!edures in this !onte(t a +ey GuninformedH investor formed H
investor found himself in a tri!+y situation % to +eep tra!+ of mar+et movement %update his
+nowledge% yet stay in the !apital mar+et and ma+e money % therefore in loo+ed forward to
resuming help from portfolio manager to do the Iob for him . 0he portfolio management see+s
to stri+e a balan!e between ris+/s and return.
0he generally rule in that greater ris+ more of the profits but ).=.8.I. in its guidelines
prohibits portfolio managers to promise any return to investor.
-ortfolio management is not a substitute to the inherent ris+s asso!iated with e*uity
investment.
72
WHO CAN BE A PORTFOLIO MANAGER?
1nly those who are registered and pay the re*uired li!ense fee are eligible to operate as
portfolio managers. "n appli!ant for this purpose should have ne!essary infrastru!ture with
professionally *ualified persons and with a minimum of two persons with e(perien!e in this
business and a minimum net worth of $s. &'la+h/s. 0he !ertifi!ate on!e granted is valid for three
years. ,ees payable for registration are $s 2.&la+h/s every for two years and $s.1la+h/s for the
third year. ,rom the fourth year onwards% renewal fees per annum are $s A&'''. 0hese are
subIe!ted to !hange by the ).=.8.I.
0he ).=.8.I. has imposed a number of obligations and a !ode of !ondu!t on them. 0he
portfolio manager should have a high standard of integrity% honesty and should not have been
!onvi!ted of any e!onomi! offen!e or moral turpitude. He should not resort to rigging up of
pri!es% insider trading or !reating false mar+ets% et!. their boo+s of a!!ounts are subIe!t to
inspe!tion to inspe!tion and audit by ).=.8.I... 0he observan!e of the !ode of !ondu!t and
guidelines given by the ).=.8.I. are subIe!t to inspe!tion and penalties for violation are imposed.
0he manager has to submit periodi!al returns and do!uments as may be re*uired by the )=8I
from timeto time.
73
FUNCTIONS OF PORTFOLIO MANAGERS:
Advisory role: "dvi!e new investments% review the e(isting ones% identifi!ation of
obIe!tives% re!ommending high yield se!urities et!.
Conducting market and economic service: 0his is essential for re!ommending good
yielding se!urities they have to study the !urrent fis!al poli!y% budget proposalP individual
poli!ies et! further portfolio manager should ta+e in to a!!ount the !redit poli!y% industrial
growth% foreign e(!hange possible !hange in !orporate law/s et!.
Financial analysis: He should evaluate the finan!ial statement of !ompany in order to
understand% their net worth future earnings% prospe!tus and strength.
Study of stock market : He should observe the trends at various sto!+ e(!hange and
analysis s!ripts so that he is able to identify the right se!urities for investment
Study of industry: He should study the industry to +now its future prospe!ts% te!hni!al
!hanges et!% re*uired for investment proposal he should also see the problem/s of the
industry.
Decide the type of port folio : Keeping in mind the obIe!tives of portfolio a portfolio
manager has to de!ide whether the portfolio should !omprise e*uity preferen!e shares%
debentures% !onvertibles% non!onvertibles or partly !onvertibles% money mar+et% se!urities
et! or a mi( of more than one type of proper mi( ensures higher safety% yield and li*uidity
!oupled with balan!ed ris+ te!hni*ues of portfolio management.
" portfolio manager in the Indian !onte(t has been 8ro+ers G8ig bro+ersH who on the basis of
their e(perien!e% mar+et trends% Insider trader% helps the limited +nowledge persons.
0he one/s who use to manage the funds of portfolio% now being managed by the portfolio of
Ber!hant 8an+/s% professional/s li+e B8"/s C"/s "nd many finan!ial institution/s have entered
the mar+et in a big way to manage portfolio for their !lients.
"!!ording to ).=.8.I. rules it is mandatory for portfolio managers to get them self/s
registered.
$egistered mer!hant ban+ers !an a!t/s as portfolio managers. Investor/s must loo+ forward%
for *ualifi!ation and performan!e and ability and resear!h base of the portfolio managers.
74
NEED AND ROLE OF PORTFOLIO MANAGER:
9ith the development of Indian )e!urities mar+et and with appre!iation in mar+et pri!e of
e*uity share of profit ma+ing !ompanies% investment in the se!urities of su!h !ompanies has
be!ome *uite attra!tive. "t the same time% the sto!+ mar+et be!oming volatile on a!!ount of
various fa!ts% a layman is pu##led as to how to ma+e his investments without losing the same. He
has felt the need of an e(pert guidan!e in this respe!t. )imilarly non resident Indians are eager to
ma+e their investments in Indian !ompanies. 0hey have also to !omply with the !onditions
spe!ified by the $=)=$6= 8"FK 1, IF.I" under various s!hemes for investment by the non
residents. 0he portfolio manager with his ba!+ground and e(pertise meets the needs of su!h
investors by rendering servi!e in helping them to invest their fundQs profitably.
PORTFOLIO MANAGER`S OBLIGATION:
0he portfolio manager has number of obligations towards his !lients% some of them are;
He shall transa!t in se!urities within the limit pla!ed by the !lient himself with regard to
dealing in se!urities under the provisions of $eserve 8an+ of India "!t% 1935.
He shall not derive any dire!t or indire!t benefit out of the !lient/s funds or se!urities.
He shall not pledge or give on loan se!urities held on behalf of his !lient to a third person
without obtaining a written permission from su!h !lients.
9hile dealing with his !lient/s funds% he shall not indulge in spe!ulative transa!tions.
He may hold the se!urities in the portfolio a!!ount in his own name on behalf of his
!lient/s only if the !ontra!t so provides. In su!h a !ase% his re!ords and his report to his
!lients should !learly indi!ate that su!h se!urities are held by him on behalf of his !lient.
He shall deploy the money re!eived from his !lient for an investment purpose as soon as
possible for that purpose.
He shall pay the money due and payable to a !lient forthwith.
He shall not pla!e his interest above those of his !lients.
He shall not dis!lose to any person or any !onfidential information about his !lient% whi!h
has !ome to his +nowledge.
75
He shall endeavor to:
o =nsure that the investors are provided with true and ade*uate information without ma+ing
any misguiding or e(aggerated !laims.
o =nsure that the investors are made aware of the attendant ris+s before any investment
de!ision is made by them.
o $ender the best possible advi!e to his !lients relating to his needs and the environment
and his own professional s+ills.
o =nsure that all professional dealings are affe!ted in a prompt% effi!ient and !ost effe!tive
manner.
COORDINATION WITH RELATING AUTHORITIES:
0he portfolio manager shall designate a senior offi!er as !omplian!e offer.
The senior officer:
)hall !oordinate with regulating authorities regarding various matters.
)hall provide ne!essary guidan!e to and ensure !omplian!e internally by the portfolio
manager of all $ules% $egulations guidelines% Fotifi!ations et!. issued by )=8I%
government of India and other regulating authorities.
)hall ensure that observations madeQ defi!ien!ies pointed out by )=8I in the
fun!tioning of the portfolio manager do not re!ur.
76
DEFAULTS AND PENALTIES:
0he following aspe!ts must be +ept in view;
Liabilities for action in case of default - A portfolio manager is liable to penalties if he:
1. ,ails to !omply with any !onditions subIe!t to whi!h !ertifi!ate of registration has been
granted.
2. Contravenes any of the provisions of the )=8I a!t% its $ules and $egulations.
In such a case, he shall be liable to any of the following penalties, after enquiry-
i. )uspension of registration for a spe!ifi! period.
ii. Can!ellation of registration.
77
CHAPTER - 7
INVESTMENT ANALYSIS
MEANING OF INVESTMENT
Investment means employment of funds in a produ!tive manner so as to !reate additional
in!ome. 0he word investment means many things to many persons. Investment in finan!ial
assets leads to further produ!tion and in!ome. It is lending of funds for in!ome and !ommitment
of money for !reation of assets% produ!ing further in!ome.
Investment also means pur!hasing of se!urities% finan!ial instruments or !laims on future
in!ome. Investment is made out of in!ome and savings !redit or borrowings and out of wealth. It
is a reward for waiting for money.
There are two concepts of investment:
1) Economic Investment: 0he !on!ept of e!onomi! investment means additions to the
!apital sto!+ of the so!iety. 0he !apital sto!+ of so!iety is the goods whi!h are used in the
produ!tion of other goods. 0he term investment implies the formation of new and
produ!tive !apital in the form of new !onstru!tion and produ!er/s durable instrument
su!h as plant and ma!hinery% inventories and human !apital are also in!luded in this
!on!ept. 0hus% an investment% in e!onomi! terms% means an in!rease in building%
e*uipment% and inventory.
78
2) Financial Investment: 0his is an allo!ation of monetary resour!es to assets that are
e(pe!ted to yield some gain or return over a given period of time. It is a general or
e(tended sense of the term. It means an e(!hange of finan!ial !laims su!h as shares and
bonds% real estate% et!. in their viewP investment is a !ommitment of funds to derive future
in!ome in the form of interest% dividends% rent premiums% pension benefits and the
appre!iation of the value of their prin!ipal !apital.
0he e!onomi! and finan!ial !on!epts of investment are related to ea!h other
be!ause investment is a part of the savings of individuals whi!h flow into the !apital
mar+et either dire!tly or through institutions. 0hus% investment de!isions and finan!ial
de!isions intera!t with ea!h other. ,inan!ial de!isions are primarily !on!erned with the
sour!es of money where as investment de!isions are traditionally !on!erned with uses or
budgeting of money.
MEANING OF SECURITY
" se!urity means a do!ument that gives its owners a spe!ifi! !laim of ownership of a
parti!ular finan!ial asset. ,inan!ial mar+et provides fa!ilities for buying and selling of finan!ial
!laims and servi!es. 0hus% se!urities are the finan!ial instruments whi!h are bought and sold in
the finan!ial mar+et for investment.
0he important finan!ial instruments are shares% debentures% bonds% et!. other finan!ial
instruments are also +nown as 0reasury bills% Butual ,und @nits% ,i(ed .eposits% Insuran!e
-oli!ies% -ost 1ffi!e )avings li+e Fational )avings !ertifi!ates% Kisan 6i+as -atras% publi!
provident ,unds et!. 0hese se!urities are used by the investors for their investment. )ome of
these se!urities are transferable while some of them are not transferable.
INVESTMENT AVENUES
0he alternative investment avenues for the investor are to be !onsidered first so as to satisfy
the above obIe!tives of investors. 0he following !ategories of investors are open to investors as
avenues for savings to flow in finan!ial form;
79
(a) Investment in Bank Deposits - Savings And Fixed Deposits: 0his is the most !ommon
form of investment for an average Indian and nearly 5'L of funds in finan!ial savings
are used in this form these are least ris+y but the return is also low.
(b) Investment in P.O. Deposits, National Savings Certificates and other Postal Savings
Schemes: Bany people in villages and some urban areas are investors in these s!hemes
due to lower ris+ of loss of money and greater se!urity of funds. 8ut returns are also
lower than in )to!+s C )hares.
(c) Insurance Schemes of LIC/GIC etc. and Provident and Pension Funds: "bout 2'
2&L of finan!ial savings of the household se!tor are put in these forms and -.,.% -ension
and other forms of !ontra!tual savings.
(d) Investment in Mutual Fund Schemes or UTI Schemes as and when announced;
0hese are less ris+y than dire!t investment in sto!+s and shares as these enIoy the e(pert
management by the -ortfolio Banager or -rofessional e(perts. 0hey also have the
advantage of diversified -ortfolio involving the redu!tion of ris+ and e!onomies of s!ale
redu!ing the !ost of investment.
(e) Investment in New Issues Market: " new entrant in the )to!+ Bar+et should preferably
invest in Few Issues of e(isting and well reputed !ompanies either in e*uity or
debentures. In!identally the instruments in whi!h investment !an be made in the new
issues mar+et are;
1. Equity issues through prospe!tus or rights announ!ed by e(isting shareholders.
2. Preference shares with a fi(ed dividend either !onvertible into e*uity or not.
3. Debentures of various !ategories ? !onvertible% fully !onvertible% partly
!onvertible and non !onvertible debentures.
4. P.S.U. Bonds ? ta(able or freeta(ed with interest rates.
80
(f) Investment in gold, silver, precious metals and antiques.
(g) Investment in real estates.
(h) Investment in gilt-edged securities and se!urities of Jovernment and )emiJovernment
organi#ations Ge.g. $elief bonds% bonds of port trusts% treasury bills% et!.H. 0he maturity
period is varying generally upto1' to2' years. Jiltedged se!urities mar+et !onstitutes the
largest segment of the Indian !apital mar+et. 0hese are fully se!ured as they have
government ba!+ing. 0a( benefits are available to these se!urities.
81
The following figure indicates alternative avenues for Investment:
82
NEW ISSUES MARKET - INVESTMENT DECISION
Investors would prefer debentures if they are interested in a fi(ed in!ome. 0hey may go for
!onvertible debentures% if they want to have both fi(ed in!ome and li+ely !apital appre!iation in
future. If they are ris+ ta+ing and aim only at !apital gains% then they may invest in e*uity shares.
1f the new issues those of well established e(isting !ompanies are least ris+y while those of new
!ompanies floated by little +nown new entrepreneurs are most ris+y. In !hoosing the new issues
for investment de!ision% the investor has to read a !opy of the prospe!tus and note the following;
1. 9ho are the promoters and their past re!ordO
2. -rodu!ts manufa!tured and demand for those produ!ts at home or abroad ? the
!ompetitors and the share of ea!h in the mar+et.
3. "vailability of inputs% raw ? materials and a!!essories and the dependen!e on imports.
4. -roIe!t lo!ation and its advantages.
5. -rospe!ts through proIe!ted earnings% net profits and dividend paying !apa!ity% waiting
period involved% et!.
If the new issues belong to a !ompany promoted by well ? +nown 8usiness Jroups li+e
0atas% 8irlas et!. they are less ris+y. 0he !ompany should belong to an industry whi!h is
e(panding and has good potential li+e drugs% !hemi!als% 0ele!om et!. the terms of offer should
be attra!tive li+e !onversion or immediate prospe!ts of dividend et!.
STOCK MARKET - INVESTMENT DECISION
"s far as the sto!+ mar+et is !on!erned% investment in shares is most ris+y as the li+elihood
of fall or rise in pri!es is un!ertain. 8ut the returns may also be high !ommensurate with ris+. "
host of imponderable fa!tors operate in the sto!+ mar+et and a genuine investor has to do the
following things;
83
1. )tudy the 8alan!e )heet of the !ompany and analy#e the prospe!ts of sales and profits.
2. "naly#e the mar+et pri!e in terms of boo+ value and profit earning !apa!ity Gor -Q=
$atioH and use them to +now whether the share is overvalued or undervalued.
3. )tudy the e(pansion plans or ta( savings plans and analy#e the !ompany/s finan!ial
strength% bonus and dividend paying strength% through the me!hanism of finan!ial ratios.
4. )tudy whether the management is professional and good% whether other a!!ounting
pra!ti!es are dependable and !onsistent. 0he !ompany be!omes attra!tive to buy if the
finan!ial ratios support the view that the fundamentals are strong and the shares are worth
buying.
5. Lastly% if the pri!e of the share is undervalued on the basis of the proIe!ted earnings for
the !oming half year or one year and its -Q= $atio is below the industry average% then it is
worth buying. 0he same is worth selling if in his Iudgement it is overhauled. ,or
assessing the under valuation and over valuation% the analyst and his analyti!al power
!ount for this purpose.
GUIDELINES FOR INVESTORS IN THE STOCK MARKET
1. Fever buy on rumours or mar+et gossip.
2. 8uy only on the basis of fundamental analysis of the !ompanies based on balan!e sheet
data analysis.
3. 8uy a diversified list of !ompanies and not put all the money in one or two !ompanies.
"ll investments in the sto!+ mar+et are ris+y. 0he ris+ !an be redu!ed by proper
diversifi!ation of the portfolio into 1' or 1& !ompanies.
4. )tudy the sales% gross profit% net profit in relation to e*uity !apital employed and attempt
a fore!ast for the !oming half year or one year.
5. " de!laration of bonus or low -Q= ratio% along with strong fundamentals shows that the
!ompany should be a good buy.
6. 0he investor should also wat!h for low pri!ed shares whi!h are about to turn around for
more profitability in future.
84
7. Investors should buy on de!lines and follow the prin!iple of !ontrariness. 0his means that
if everyone is buying s!rip% avoid that s!rip but if a s!rip is deserted and your study has
shown that is has potentialP for e(panding earnings and profitability% then su!h s!rip/s
should be pur!hased by the investor.
8. "void both fear and greed on the sto!+ mar+et. If investor is not afraid of the mar+et% he
generally studies the mar+et and buys at lows and sells at highs.
9. 0he investor should +now how to analy#e the se!urity pri!es of !ompanies and pi!+ up
the undervalued shares. 0he valuation may be based on the net profits dis!ounted to the
present by a proper dis!ount rate or by the boo+ value of share% estimated on the basis of
net worth of the !ompany.
10. 0iming of pur!hase and sale is also very important. If te!hni!al analysis and the use of
!harts is not familiar to the investor he should follow the prin!iple Dbuy low and sell
highE. He should see whether there is a bull mar+et or bear mar+et in a share by a study
of the share pri!e over a period of 1& to 3' days. In a bull phase one !an sell at one of the
pea+s and in a bear phase one !an buy at one of troughs. If the investor is greedy to wait
on to see the ma(imum pea+% and then he may be disappointed if the pri!e shows a down
trend. )imilarly% it is diffi!ult to foresee the lowest pri!e for a s!rip for the buy. 0he
investor has to use his dis!retion.
The investors should not do the following things:
1) He should not put all his eggs in one bas+et whi!h means that he should not put all his
funds in one or two !ompanies.
2) .o not go by heresy or rumours to buy or sell a s!rip as that might be a dupe.
3) .o not spe!ulate involving the buying and selling in the same day or during the same
settlement period. " long ? term investor gains more than spe!ulator.
4) "void ta+ing undue ris+s or beyond the !apa!ity of your net worth. 0hat means if !apital
base is $s. 2 la+hs% put a stop loss order at $s. 2'%'''Q Gor 1Q8
th
or 1Q1'
th
of the !apital baseH.
5) .o not get pani!+y if the s!rips in whi!h you have invested go down in pri!e. 1n!e the
investment is made after a study of fundamentals% a temporary fall in its pri!e should not
!ause worry. 9hat the investor needs is patien!e% whi!h is possible if he is a long ? term
investor.
85
6) .o not be too greedy or ambitious. -ut limits to your operations and buy and sell orders
in a pri!e range and your minimum profit limit is 2'L.
INVESTMENT STRATEGY
-ortfolio management !an be pra!ti!ed by following either an a!tive or passive strategy.
"!tive strategy is based on the assumption that it is possible to beat the mar+et. 0his is done by
sele!ting assets that are viewed as under pri!ed or by !hanging the asset mi( or proportion of
fi(ed in!ome se!urities and shares. "!tive strategy is !arried out as follows;
1) Aggressive Security Management: "ggressive pur!hasing and selling of se!urities to
a!hieve high yields from dividend interest and !apital gains.
2) Speculation And Short Term Trading: 0he obIe!tive is to gain !apital profits. 0he ris+
is high and the !omposition of portfolio is fle(ible. )u!!ess of a!tive strategy depends on
!orre!t de!isions as regard the timing of movement in the mar+et as a whole% weight age
of various se!urities in the portfolio and individual share sele!tion.
0he passive strategy does not aim at outperforming the mar+et. @nli+e the a!tive strategy. 1n
the other hand the sto!+s !ould be randomly sele!ted on the assumption of a perfe!tly effi!ient
mar+et. 0he obIe!tive is to in!lude in the portfolio a large number of se!urities so as to redu!e
ris+s spe!ifi! to individual se!urities. 0he !hara!teristi!s of positive strategy are;
1. Long 0erm Investment Hori#on
2. Little -ortfolio $evisions
0hus it is basi!ally a buy and hold strategy.
0he strategy !an be implemented by investing in se!urities so as to dupli!ate the portfolio of
a mar+et inde( whi!h is !alled inde(ing.
86
INVESTMENT AND SPECULATION
DSpeculation is an a!tivity% *uite !ontrary to its literal meaning% in whi!h a person assumes
high ris+s% often without regard for the safety of his invested prin!ipal% to a!hieve large !apital
gains.E 0he time span in whi!h the gain is sought to be made is usually very short.
0he investor sa!rifi!es some money today in anti!ipation of a finan!ial return in future. He
indulges in a bit of spe!ulation. 0here is an element of spe!ulation involved in all investment
de!isions. However it does not mean that all investments are spe!ulative by nature. Jenuine
investments are !arefully thought out de!isions. 1n the other hand% spe!ulative investments are
not !arefully thought out de!isions. 0hey are based on tips and rumours.
"n investment !an be distinguished from spe!ulation in three ways ? Risk, capital gain and
time period. Investment involves limited ris+ while spe!ulation is !onsidered as an investment
of funds with high ris+. 0he pur!hase of a se!urity for earning a stable return over a period of
time is an investment whereas the primary motive is to earn high profits through pri!e !hanges is
termed as spe!ulation. 0hus% spe!ulation involves buying a se!urity at low pri!e and selling at a
high pri!e to ma+e a !apital gain.
0he truth is that any investment is a spe!ulation if the investor uses his Iudgement and
fore!ast the probable !ourse of events in order to reap the returns on his investment.
ELEMENTS OF INVESTMENTS
(a) Return: Investors buy or sell finan!ial instruments in order to earn return on them. 0he
return on investment is the reward to the investors. 0he return in!ludes both !urrent
in!ome and !apital gains or losses% whi!h arises by the in!rease or de!rease of the
se!urity pri!e.
(b) Risk: $is+ is the !han!e of loss due to variability of returns on an investment. In !ase of
every investment% there is a !han!e of loss. It may be loss of interest% dividend or
prin!ipal amount of investment. However% ris+ and return are inseparable. $eturn is a
pre!ise statisti!al term and it is measurable. 8ut the ris+ is not pre!ise statisti!al term.
However% the ris+ !an be *uantified; 0he investment pro!ess should be !onsidered in
terms of both ris+ and return.
87
(c) Time: 0ime is an important fa!tor in investment. It offers several different !ourses of
a!tion. 0ime period depends on the attitude of the investor who follows a >buy and hold/
poli!y. "s time moves on% analysts believe that !onditions may !hange and investors may
revaluate e(pe!ted return and ris+ for ea!h investment.
FINANCIAL ANALYSIS:
"n analysis of finan!ial for the past few years would help the investment manager in
understanding the finan!ial solven!y and li*uidity% the effi!ien!y with whi!h the funds are used%
the profitability% the operating effi!ien!y and operating leverages of the !ompany. ,or this
purpose !ertain fundamental ratios have to be !al!ulated.
Quality of Management: 0his is an intangible fa!tor. 7et it has a very important bearing
on the value of the shares. =very investment manager +nows that the shares of !ertain
business houses !ommand a higher premium than those of similar !ompanies managed by
other business houses. 0his is be!ause of the *uality of management% the !onfiden!e that
the investors have in a parti!ular business house% its poli!y visSvis its relationship with
the investors% dividend and finan!ial performan!e re!ord of other !ompanies in the same
group% et!. 0his is perhaps the reason that an investment manager always gives a !lose
loo+ to the management of the !ompany whose shares he is to invest. Nuality of
management has to be seen with referen!e to the e(perien!e% s+ill and integrity of the
persons at the helm of the affairs of the !ompany. 0he poli!y of the management
regarding relationship with the share holders is an important fa!tor sin!e !ertain business
houses believe in generous dividend and bonus distributions while others are rather
!onservative.
88
Location and labour management relations: 0he lo!ations of the !ompany/s
manufa!turing fa!ilities determine its e!onomi! viability whi!h depends on the
availability of !ru!ial inputs li+e power% s+illed labour and raw materials et!. Fearness to
mar+et is also a fa!tor to be !onsidered.
In the past few years% the investment manager has begun loo+ing into the state of labor
management relations in the !ompany under !onsideration and the area where it is
lo!ated.
89
CHAPTER - 8
ASSEST ALLOCATION
INTRODUCTION
0he portfolio manager has to invest in these se!urities that form the optimal portfolio. 1n!e a
portfolio is sele!ted the ne(t step is the sele!tion of the spe!ifi! assets to be in!luded in the
portfolio. "ssets in this respe!t means group of se!urity or type of investment. 9hile sele!ting
the assets the portfolio manager has to ma+e asset allo!ation. It is the pro!ess of dividing the
funds among different asset !lass portfolios.
ASSET ALLOCATION
0he different asset !lass definitions are widely debated% but four !ommon divisions are
sto!+s% bonds% realestate and !ommodities. 0he e(er!ise of allo!ating funds among these assets
Gand among individual se!urities within ea!h asset !lassH is what investment management firms
are paid for.
"sset !lasses e(hibit different mar+et dynami!s% and different intera!tion effe!tsP thus% the
allo!ation of monies among asset !lasses will have a signifi!ant effe!t on the performan!e of the
fund. )ome resear!h suggests that allo!ation among asset !lasses has more predi!tive power than
the !hoi!e of individual holdings in determining portfolio return. "rguably% the s+ill of a
90
su!!essful investment manager resides in !onstru!ting the asset allo!ation% and separately the
individual holdings% so as to outperform !ertain ben!hmar+s Ge.g.% the peer group of !ompeting
funds% bond and sto!+ indi!esH.
In order to a!hieve long term su!!ess% individual investors should !on!entrate on the
allo!ation of their money among sto!+s% bonds and !ash. It means how mu!h to invest in sto!+sO
How mu!h to invest in bondsO "nd how mu!h to +eep in !ash reservesO 0hus% the asset
allo!ation de!ision is the most important determinant of investment performan!e.
0he basi! long term obIe!tive of any investor should be to ma(imi#e his real overall return
on initial investment after investment. 0o a!hieve this obIe!tive% the investor should loo+ where
the best bargains lie.
"sset allo!ation means different things to different people. 0he portfolio manager has to
!omplete the following stages before ma+ing asset allo!ation.
(a) SECURITY SELECTION: 0his means identifying groups of se!urities in ea!h asset !lass
and de!ides the optimal portfolio. 0he following are the different asset !lasses;
(1) =*uity sharesnew issues
(2) =*uity sharesold issues
(3) -referen!e )hares
(4) .ebentures
(5) -)@ bonds
(6) Jovernment )e!urities
(7) Company ,i(ed .eposits
-ortfolio management is handling the fund on behalf of the !ompany or institution in order to
determine the suitable !ombination of different assets so that the total ris+ !an be redu!ed to the
minimum while the return !an be a!hieved to the ma(imum e(tent. 0his is a tri!+y Iob whi!h
needs effi!ien!y of high !aliber. 0herefore% the portfolio manager has to +eep in mind the
following fa!tors while ma+ing asset allo!ation and design an effi!ient portfolio.
a) Li*uidity or mar+etability
b) )afety of investment
c) 0a( )aving
d) Ba(imi#ation of return
e) Binimi#ation of return
f) Capital appre!iation or gain
91
g) ,unds re*uirements
(b) BASIS OF SELECTION OF EQUITY PORTFOLIO:
" portfolio is a !olle!tion of se!urities. It is essential that every se!urity be viewed in a
portfolio !onte(t. It is logi!al that the e(pe!ted return of a portfolio should depend on the
e(pe!ted return of ea!h of the se!urity !ontained in it. Boreover% the amounts invested in ea!h
se!urity should also be important.
0here are two approa!hes to the sele!tion of e*uity portfolio. 1ne is te!hni!al analysis and
the other is fundamental analysis. 0e!hni!al analysis assumes that the pri!e of a sto!+ depends
on supply and demand in the !apital mar+et. "ll finan!ial and mar+et information of given
se!urity is already refle!ted in the mar+et pri!e. Charts are drawn to identify pri!e movements of
a given se!urity over a period of time. 0hese !harts enable us to predi!t the future movement of
the se!urity.
0he fundamental analysis in!ludes the study of ratio analysis% past and present tra!+ re!ord of
the !ompany% *uality of management% government poli!ies et!U an effi!ient portfolio manager
!an obviously give more weight to fundamental analysis than te!hni!al analysis.
DIVERSIFICATION
Investing funds in a single se!urity is advisable only if the se!urity/s performan!e is rewarding.
0o redu!e ris+ of a portfolio investors resort to diversifi!ation. .iversifi!ation means shifting
form one se!urity to another se!urity. 0he ma(imum benefits of ris+ redu!tion !an be a!hieved
by Iust having of 1' to 1& !arefully sele!ted se!urities.
-ortfolio ris+ !an be divided into two groups diversible ris+ and nondiversible ris+. .iversible
ris+ arises from !ompany/s spe!ifi! fa!tors. Hen!e% su!h ris+ !an be diversified by in!luding
sto!+s of other !ompanies in the portfolio. Fondiversible ris+ arises from the influen!e of
e!onomy wide fa!tors whi!h affe!t returns of all !ompaniesP investors !annot avoid the ris+
arising from them. 1ften investors tend to buy or sell se!urities on !asual tips% prevailing mood
in the mar+et% sudden impulse% or to follow others. "n investor should investigate the following
fa!tors about the sto!+ to be in!luded in his portfolio;
92
GaH =arnings per share GbH Jrowth potential G!H .ividend and bonus re!ords GdH 8usiness%
finan!ial and mar+et ris+s GeH 8ehavior of pri!eearnings ratio GfH High and low pri!es of the
sto!+ GgH 0rend of share pri!es over the few months or wee+s.
Y C
--------------------------------------- B HIGH RISK (SHARES)
A (DEBENT) MEDIUM
RISK
O X
Risk free (Bank Deposits)
9e !an observe from the above diagram that the strategy of an investor should be at "% 8 or
C respe!tively% depending upon his preferen!es and in!ome re*uirements. If he ta+es some ris+
at 8 or C% the ris+ !an be redu!ed if it is !on!erned with a spe!ifi! !ompany ris+% but the mar+et
ris+ is outside his !ontrol. 0he ris+ !an be redu!ed by a proper diversifi!ation of s!ripts in the
portfolio. 0here may be a !ombination of "% 8 and C positions in his portfolio so that he !an
have a diversified ris+return pattern. 0his diversifi!ation !an help to minimi#e ris+ and
ma(imum the returns.
93
1+estionnaire
Name of the customer/nvestor 222222222222222222222222
Address 222222222222222222222222
Cty 222222222222222222222222
Teephone No 222222222222222222222222

1. Occupaton:
a) Saared
b) Retred
c) Sef-empoyed
d) Professona
2. What s the man ob|ectve wth whch you make nvestment?
a) Savngs
b) Return
c) Safety
d) Tax beneft
3. Where woud you ke to nvest?
a) Mutua fund
b) Rea estate
c) Insurance
94
d) Share market
4. Are you aware of mutua fund?
a) Yes
b) No
5. Have you nvested n mutua fund?
a) Yes
b) No
6. In whch fund woud you ke to nvest?
a) Equty Fund
b) Debt Fund
c) Baanced Fund(debt + equty)
7. In whch scheme woud you ke to nvest?
a) Bue chp fund
b) Sectora fund
c) Tax gan fund
d) Debt fund
8. How woud you rate the mportance of Entry and Ext oad as a factor
whe
Investng n Mutua Funds?
a) Very Important
95
b) Important
c) Somewhat Important
d) Not Important
9. Have you ever avaed the servces of KARVY?
a) Yes
b) No
10. Are you satsfed by the servces provded by the KARVY?
a) Yes
b) No. If No, gve suggestons for mprovement, f any
(&3,&34S
1. Occ+pation
45%
11%
33%
11%
salaried
retired
self employed
professional
45% peope are saared empoyees, 11% peope are retred, 33% peope are sef-
empoyed and 11% are professona.
96
2. What s the man ob|ectve wth whch you make nvestment?
40%
25%
15%
20%
Savings
Return
Safety
Tax benefit
40% peope had the ob|ectve of savngs, 25% of returns, 15% of safety and 20%
had the ob|ectve of avang tax benefts
3. Where woud you ke to nvest?
40%
10%
30%
20%
Mutual fund
Real estate
nsuran!e
S"are mar#et
97
Fndngs revea that 40% peope woud ke to nvest n mutua fund,10% n rea
estate, 30% n nsurance and 20% n share market.
4. Are you aware of mutua fund?
$5%
35%
%es
&o
65% peope were aware of mutua fund and 35% were not aware
5. Have you nvested n mutua fund?
98
'5%
25%
%es
&o
75% peope had nvested n mutua fund whe 25% had not nvested n mutua
fund.
6. In whch fund woud you ke to nvest?
$5%
15%
20%
()uity fund
*ebt fund
+alan!ed fund
99
65% peope showed nterest n Equty fund, 15% n Debt fund, 20% n Baanced
fund
7. In whch scheme woud you ke to nvest?
45%
15%
30%
10%
+lue !"ip fund
Se!toral fund
Tax gain fund
*ebt fund
45% peope showed nterest n bue chp fund, 15% n sectora fund, 30% n tax gan
fund and 10% n debt fund.
8. How woud you rate the mportance of Entry and Ext oad as a factor
whe
Investng n Mutua Funds?
100
$0%
25%
15%
,ery important
mportant
&ot important
Answerng to ths queston, most (60%) of the respondents sad that t s a very
mportant factor, whe 25% respondents sad that t s an mportant factor and 15%
dd not consdered t as an mportant factor.
9. Have you ever avaed the servces of KARVY?
55%
45%
%es
&o
55% peope were aware of karvy whe 45% were not aware.
101
10. Are you satsfed by the servces provded by the KARVY?
'5%
25%
%es
&o
75% of the respondents were found to be satsfed by the servces provded by
KARVY whe 25% were unsatsfed.
CONCLUSION
,rom the above dis!ussion it is !lear that portfolio fun!tioning is based on mar+et ris+% so one
!an get the help from the professional portfolio manager or the Ber!hant ban+er if re*uired
before investment be!ause appli!ability of pra!ti!al +nowledge through te!hni!al analysis !an
help an investor to redu!e ris+. In other words )e!urity pri!es are determined by money manager
and home managers% students and stri+ers% do!tors and dog !at!hers% lawyers and lands!apers%
the wealthy and the wanting. 0his breadth of mar+et parti!ipants guarantees an element of
unpredi!tability and e(!itement. If we were all totally logi!al and !ould separate our emotions
from our investment de!isions then% the determination of pri!e based on future earnings would
102
wor+ magnifi!ently. "nd sin!e we would all have the same !ompletely logi!al e(pe!tations%
pri!e would only !hange when *uarterly reports or relevant news was released.
DI believe the future is only the past again% entered through another gateE ?)ir "rthur wing
-inero. 1893.
If pri!e are based on investors/ e(pe!tations% then +nowing what a se!urity should sell for
be!ome less important than +nowing what other investors e(pe!t it to sell for. D0here are two
times of a man/s life when he should not spe!ulateP when he !an/t afford it and when he !anE ?
Bar+ 0win% 189A.
" Casino ma+e money on a roulette wheel% not by +nowing what number will !ome up ne(t%
but by slightly improving their odds with the addition of a D'E and D''E. 7et many investors buy
se!urities without attempting to !ontrol the odds. If we believe that this dealings is not a
>JamblingE we have to start up it with intelligent way.
103
I !an !on!lude from this proIe!t that portfolio management has be!ome an important servi!e
for the investors to identify the !ompanies with growth potential. -ortfolio managers !an provide
the professional advi!e to the investors to ma+e an intelligent and informed investment.
-ortfolio management role is still not identified in the re!ent time but due it e(pansion of
investors mar+et and growing !omple(ities of the investors the servi!es of the portfolio
managers will be in great demand in the near future.
0oday the individual investors do not show interest in ta+ing professional help but surely
with the growing importan!e and awareness regarding portfolio/s manager/s people will
definitely prefer to ta+e professional help.
104
BIBLIOGRAPHY
REFERENCE BOOKS:
Security Analysis and Portfolio Management - Dr. P.K.BANDGAR
Investment Analysis and Portfolio Management
WEBLIOGRAPHY
SOURCES:
www.google.com
www.yahoo.com
www.wikipedia.com
105